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2 methods commonly used by auditors to obtain document their
understanding of the design of
internal control are:
i) Narrative
Narrative is a written description of a client's internal
controls. A proper narrative of an accounting
system and related controls includes 4 characteristics which are
the origin of every document and
record in the system, all processing that takes place, the
disposition of every document and record in
the system, and an indication of the controls relevant to the
assessment of control risk.
ii) Flowchart
Flowchart is a diagram of the clients documents and their
sequential flow in the organisation. An
adequate flowchart includes the same four characteristics
identified for narratives.
3 broad objectives in designing an effective internal controls
system are:
i) Reliability of financial reportingThe objective of effective
internal control over financial reporting is to fulfil these
financial reporting responsibilities.
ii) Efficiency and effectiveness of operationsAn important
objective of these controls is accurate financial and
non-financial
information about the entitys operations for decision
making.
iii) Compliance with laws and regulationsAll public companies to
issue a report about the operating effectiveness of internal
control over financial reporting.
5 types of specific control activities (policies and procedures)
in the internal control are:
i) Adequate separation of dutiesThere are 4 general guidelines
for adequate separation of duties to prevent both fraud and
errors are of special significance to auditors which are
separation of the custody of assets
from accounting, separation of the authorisation of transactions
from the custody of related
assets, separation of operational responsibility from
record-keeping responsibilities, and
separation of IT duties from user departments.
ii) Proper authorisation of transactions and
activitiesAuthorisation can be either general or specific. General
authorisation, management
establishes policies for the organisation to follow, and
subordinates are instructed. In
specific authorisation, it is applies to individual
transactions.
iii) Adequate documents and recordsDocuments and records are the
physical objects upon which transactions are entered and
summarised.
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iv) Physical control over assets and recordsTo maintain adequate
internal control, it is essential to protect assets and records. If
assets
are left unprotected, they can be stolen. If records are not
adequately protected, they can
be stolen, damaged or lost.
v) Independent checks on performanceThe last category of control
activities is the careful and continuous review of the other
four,
often called independent checks or internal verification. The
need for independent checks
arises because internal control tends to change over time unless
there is a mechanism for
frequent review.
