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Lesson#18
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EVALUATING THE INTERNAL CONTROL SYSTEM
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EVALUATING THE INTERNAL CONTROL SYSTEM
Flow Charts and Internal Control Questionnaires:
Use of the major symbols in flow charts
The Document symbol
Each document in the flowchart should have a vertical flow-line.
Such vertical flow-lines represent a
movement in time within a particular department. When the
document is moved to another
department, this movement in position will be represented by a
horizontal line; departments are
therefore listed across the
page.
Here the document is originated in Dept
A. It is moved to Dept B, then Dept D and then Dept C.
Note that only vertical and horizontal
lines are
used, never diagonal lines.
The Operation symbol
Various operations will be performed on a document.
It will, for instance: be prepared, added up, used to prepare
other documents, etc.
Any operation, other than a check function, is represented by
the cross symbol.
Each operation symbol should be supported by a brief narrative
explaining the nature of the operation.
Invoice
etc.
Kamran totals the invoice
Note that the operation symbol is positioned on a
vertical flow-line. It should never appear on a
horizontal flow-line since that would suggest in this
case that Kamran totals the invoice while it is
moving from one department to another.
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64
The Information flow symbol
Here
one document is
prepared from
another.
The movement of
information to the
sales invoice is shown
by a dotted
line. Such
information flow-lines
are always horizontal,
never vertical.
Note that
flow-lines
then continue for both
the order and the
invoice.
Sales
order
Fauzia prepares an invoice
from the sales order
This example is wrong because:
(a) no
narrative exists to explain
the nature of the operation;
(b) the sales invoice has
no
flow-line, it disappears into
thin air.
Sales
order
Sales
Invoice
The Check symbol
Sales
Invoice
Sattar totals the invoice
Wajid checks the totals
This example
shows a simple
check on a single
document.
Delivery
Note
Sales
Invoice
Pasha checks that all
goods dispatched have
been invoiced.
This shows a check
between two
documents.
Note the use of the
information flow-line
again and that both the
delivery note and the
sales invoice continue
with vertical flow-lines
of their own.
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65
The filing symbol
Once documents have been processed they will often be filed
away.
Such files are either
permanent or temporary.
The two sorts of file are denoted by the same symbol but the
temporary files are marked with a letter ‘T’.
It will often be useful to indicate the order of filing either
numerically,
alphabetically or in
chronological
order. This can be done by
marking the symbol with the letter N, A, or D.
Purchase
Order
Filed awaiting delivery of
goods.
Checked by Zahoor
(weekly) got late delivery
When goods are received
purchase order initialed by
Safdar
TN
N
Note that with the
temporary
filing symbol the flow-line
of the
document must continue.
With the
permanent filing symbol
the flow-line stops since the
document has reached its
ultimate destination
The book of account symbol
The flowchart should use the book symbol to show the
book which is
already in existence. It
should also show the book being re-filed once the
posting is completed.
Sales
Invoice
Sales
Daybook
D
Sohail posts invoices to the SDB
Note that the
same flow-line principles apply to books as to documents.
A vertical flowline
is needed which ends with the re-filing of the sales day book
which will be kept
chronologically.
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66
Depicting multi-part sets of documents
Requisition
Note
Purchase
order
N
To supplier
Rauf prepares
purchase order sets
Note that each part of the set must have a flow-line emanating
from it. In this
example; PO1 is sent to the supplier, PO2 goes off to another
department and PO3
is filed numerically
Preliminary Evaluation of the System
Having
ascertained, confirmed and recorded
the system, the auditor now needs to carry out a preliminary
evaluation of the system in order to make a decision as to
whether he will:
• Rely on internal
controls and adopt a systems audit approach, or,
• Perform extensive
substantive testing. Using a verification approach to the audit.
Internal Control Questionnaire
Features:
• Used in large company
audit
• Used to place reliance
on internal controls
• Used to design audit
approach
Definition:
An ICQ is a formal and usually standardized document which
comprises:
1. A list of internal controls in existence and
2. Highlights any weaknesses.
Objectives:
(i) To ascertain a
clients systems of accounting and
internal control
(ii) To evaluate
the control system thus recorded, and
hence
(iii) To identify
those controls which indicate
strengths in the system upon which the auditor
will seek to place reliance, and
(iv) To identify
those areas over which there are weak
or no controls and which therefore
must be subjected to more extensive substantive testing and
reported by inclusion in the
Management Letter.
Construction of an ICQ
I) It is good practice when designing ICQs to state, as a brief
introduction:
i. A list of control objectives which each sub-system under
consideration should
seek to achieve
ii. Any business considerations specific to the enterprise under
review which
should be taken into account.
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67
The reason for this is essentially to highlight for the audit
staff key areas for their consideration to the audit
staff.
II) The questions in an ICQ should be designed to ascertain
whether the control objectives are being
achieved and should therefore cover such aspects as:
a. Instructions given to staff in the performance of their
duties
b. Authorization procedures
c. Documents and procedures used to originate transactions
d. Recording procedures
e. Sequence of procedures
f. Custody procedures
g. Relative independence of the persons involved at each stage
of a transaction (i.e. segregation of duties).
III) The questions should be framed such that a Yes/No answer is
given, with a No answer usually
indicating a control weakness.
IV) An ICQ should carry such basic information as:
(a) The name of the document (ICQ)
(b) the system to which it relates (e.g. purchasing cycle)
(c) the client to whom it relates
(d) the accounting period under review
(e) evidence of who has prepared and reviewed the document
(f) the provision of columns for:
- Yes and No answers
- comments where neither Yes or No are applicable
- indicating the significance or otherwise of apparent
weaknesses
- references to audit programs
- references to Management Letters.
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68
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