AUDITOR’S INTERESTIN INTERNALCONTROLS Auditing Help

Internal control system means the policies and procedures established to assist in achieving management objectives and comprises of ( a ) control environment and (b) control procedures. The auditor is concerned with those policies and procedures which relate to record, summarize and report financial data consistent with assertions embodied in fmancial statements.

It follows that the auditors need not have to study and evaluate all the internal controls designed by the client. Policies and procedures that relate to, economy and efficiency are generally not relevant in testing fmancial statement assertions.

US auditing standard, SAS 55 has elaborated on this principle: Assertions embodied in the financial statements or that pertain to data the auditor uses to apply auditing procedures to financial statement assertions.”

Matters which are usually not directly relevant in determining whether or not the financial statements will be prepared in accordance with :ognized accounting standards include, for example:

– Selection of suppliers
– Quality control ins}ections
– Economic order quantities
– Buying equipment instead of leasing
– Survey of product demand
– Credit risks
– Training needs
– Idle time
– Pricing policies
– Customer service

 The auditor’s interest in internal control is therefore to:

Identify type of potential misstatements that coulet- occur in the financial statements.
Consider factors which affect material misstatements
Determine nature, timing and extent of substantive tests.

Controls relevant to audit

The interest of auditor is to consider whether a specific control procedure is adequate to prevent, detect and correct material misstatement in the financial statements.

Examples of controls not relevant to audit are:
– Excessive wastage of materials
– Labor inefficiencies

Objectives of Internal Accounting

CONTROLS

Following are the significant objectives of internal accounting controls. After each objective, examples of control activities to achieve specific objectives are given.

Occurrence

ransactions are authorized by management personnel acting within the scope of their authority, and all transactions represent events that have occurred. (i.e no recorded transactions are fictitious)

Authorization may be general or specific. General authorization relates to normal conditions under which transactions are authorized. Specific authorization relates to non-routine transactions on an individual basis. For example, granting of special discount to customer, or unusual credit terms.

Examples of related control activities

Segregation of duties between authorization of transactions and recording.
Documentation and records, e.g.

     Each sale is supported by approved sales order, delivery note and sale invoice.
Each payment is supported by approved documents.
Each purchase is supported by approved requisition and authorized purchase order.
Independent internal verification
For example, ensuring that:
– Hiring, wage rates, and termination are authorized by personnel department.
– Credit terms are authorized,
– Sale prices and terms are authorized,
– Additions and disposals of fixed assets are authorized.

Completeness, cut off, accuracy

All valid transactions are recorded and that the recording is correct a account, amount and period.

Examples of related control activities

Segregation of duties between (i) posting of sales invoices to gene ledger (ii) posting to accounts receivable subsidiary ledger directly sales invoices.

Documents and records e.g., sequential control over cheques issues numbering of documents.

Independent internal verification, e.g.,

independent check of quantities, prices, and arithmetical accuracy of sales invoices.

Independent matching of sales invoices to delivery notes and delivery notes to sales invoices

Sequential control over purchase orders and receiving reports Independent verification of description, quantities and prices of goods received, with purchase order

Independent check of arithmetical accuracy or suppliers invoices

Independent matching of receiving reports to suppliers invoices

Independent check of time records and piece work record with payroll.

Safeguarding of assets

Assets, unused documents and records are stored in secured areas, and access is permitted only in accordance with management’s authorization.

Examples of related control activities

Segregation of duties between functions of recording transactions and safe custody of assets.

Documents and records, e.g.,

– Cheque books kept under lock and key

– Physical control over accounts receivable ledger

– Unused sales invoices and delivery notes stored in secured areas.

– Stores area is physically secured and access is restricted to authorized personnel

– Unclaimed wages are held by an independent responsible official

– pre numbering of documents.

Independent internal verification that accesses to assets and records is permitted only in accordance with management’s authorization.

Limiting direct physical access to assets and records.

Posted on November 3, 2015 in Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

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