Recording Internal Control System Flashcards

Question 1

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Recording internal control system

Answer

A

Recording internal control systems is crucial for auditors to understand and evaluate a client’s internal controls, which helps in assessing audit risk and determining the audit approach. Here are the key points and methods for recording internal control systems:

Understanding Internal Controls: Auditors need to understand the five elements of a client’s internal control system to evaluate and assess audit risk.
Audit Approach: The evaluation determines whether the audit will be systems-based or transactions-based.
Audit Evidence: Proper documentation of internal controls is essential for gathering audit evidence and influences the direction of the audit work.

Narrative Notes:
- Description: Written descriptions of the control system and controls in place.
- Usage: Mainly for recording control activities in transaction processing.
- Pros: Simple to prepare and understand.
- Cons: Can become lengthy and time-consuming to update.
Questionnaires:
- Description: Lists of questions about controls in specific areas.
- Types:
  - Internal Control Questionnaire (ICQ): Focuses on whether controls exist.
  - Internal Control Evaluation Questionnaire (ICEQ): Evaluates the effectiveness of controls.
- Pros: Can be prepared in advance, suitable for electronic use, and ensures comprehensive coverage.
- Cons: May miss unusual controls and can be overstated by staff.
Systems Flowcharts:
- Description: Diagrammatic representations of the internal control system.
- Usage: Illustrates the sequence of events and controls.
- Pros: Easy to view the system as a whole and identify missing controls.
- Cons: Time-consuming to update and may require narrative notes for explanation.

These methods help auditors document and evaluate internal control systems effectively, ensuring a thorough understanding and proper audit planning¹²³.

An Internal Control Questionnaire (ICQ) is a tool used by auditors to determine whether appropriate controls are in place to meet specific control objectives. Each question in an ICQ requires a ‘Yes’ or ‘No’ answer, where:

A ‘Yes’ answer indicates a control strength.
A ‘No’ answer indicates a control weakness.

For assessing the credit-worthiness of potential new customers:
- Are credit references taken on all potential new customers? YES/NO
- Are credit limits set for customers? YES/NO

Ensuring correct product prices on sales invoices:
- Is a check carried out to match the price on a sales invoice to the official price list? YES/NO
Verifying raw materials delivered are correct:
- Are raw materials counted and checked against the purchase order when the materials are delivered? YES/NO

Simplicity: Easy for auditors to complete, often by junior team members.
Comprehensive: Provides a clear picture of the control environment through straightforward questions.

Length: Can become lengthy and time-consuming to complete due to the number of questions.
Detail: May require additional documentation or follow-up for complex controls.

ICQs are valuable for documenting and evaluating internal controls, helping auditors to assess the reliability of the system under review. If you have any further questions or need more examples,

Certainly! Here’s an example of how auditors might use an Internal Control Questionnaire (ICQ) to evaluate specific control objectives within a company:

Is a check carried out to match the price on a sales invoice to the official price list? YES/NO
Are sales invoices reviewed and approved by a supervisor before being sent to customers? YES/NO
Is there a system in place to update the price list regularly and communicate changes to relevant staff? YES/NO

Are raw materials counted and checked against the purchase order when the materials are delivered? YES/NO
Is there a process for documenting discrepancies between the purchase order and the actual delivery? YES/NO
Are quality checks performed on raw materials upon delivery to ensure they meet specifications? YES/NO

Obtain Previous ICQs:
- Retrieve the ICQs from the previous year’s audit file.
Review Control Weaknesses:
- Identify any control weaknesses noted in the previous ICQs.
- Determine if the client has taken actions to address these weaknesses during the year.
Verify Accuracy:
- Conduct a series of checks and enquiries to verify the accuracy of each ICQ:
  - Review System Documentation: Examine the documentation of the control systems.
  - Interview Staff: Speak with the staff responsible for the controls.
  - Walk-through Tests: Perform walk-through tests to observe the controls in action.
- Compare the current controls with the findings in the ICQ and make necessary updates.
Assess Control Weaknesses:
- After updating the ICQs, assess whether any control weaknesses still exist.

By following these steps, auditors can ensure that the ICQs are up-to-date and accurately reflect the current state of the client’s internal control systems¹²³.

An Internal Control Evaluation Questionnaire (ICEQ) is designed to identify potential weaknesses in a control system. Unlike an Internal Control Questionnaire (ICQ), which looks for the presence of controls, an ICEQ focuses on finding areas where controls may be lacking or ineffective. Here’s how it works:

ICQ: Seeks ‘good news’ by confirming the existence of controls.
ICEQ: Seeks ‘bad news’ by identifying potential control weaknesses.

For assessing controls over the creditworthiness of customers, an ICEQ might include a key control question such as:
- Is there reasonable assurance that goods can only be dispatched to authorized customers whose account balance is within their credit limit? YES/NO

Obtain Previous ICEQs:
- Retrieve the ICEQs from the previous year’s audit file.
Review Control Weaknesses:
- Identify any control weaknesses noted in the previous ICEQs.
- Determine if the client has taken actions to address these weaknesses during the year.
Verify Accuracy:
- Conduct a series of checks and enquiries to verify the accuracy of each ICEQ:
  - Review System Documentation: Examine the documentation of the control systems.
  - Interview Staff: Speak with the staff responsible for the controls.
  - Walk-through Tests: Perform walk-through tests to observe the controls in action.
- Compare the current controls with the findings in the ICEQ and make necessary updates.
Assess Control Weaknesses:
- After updating the ICEQs, assess whether any control weaknesses still exist.

#### Scenario: Updating ICEQs for Sales and Inventory Controls

Obtain Previous ICEQs:
- Retrieve the ICEQs from the previous year’s audit file related to sales and inventory controls.
Review Control Weaknesses:
- Identify any control weaknesses noted in the previous ICEQs, such as the lack of regular checks to match sales invoices to the official price list.
- Determine if the client has implemented regular checks to address this weakness.
Verify Accuracy:
- Review System Documentation: Examine the updated documentation for the sales and inventory control systems.
- Interview Staff: Speak with the sales and inventory staff to understand any changes in procedures.
- Walk-through Tests: Perform walk-through tests to observe the new controls in action.
Updated ICEQ Questions:
- Ensuring Correct Product Prices on Sales Invoices:
  - Previous Question: Is a check carried out to match the price on a sales invoice to the official price list? YES/NO
  - Updated Question: Are regular checks now performed to ensure sales invoices match the official price list? YES/NO
- Verifying Raw Materials Delivered are Correct:
  - Previous Question: Are raw materials counted and checked against the purchase order when the materials are delivered? YES/NO
  - Updated Question: Are there now documented procedures for counting and checking raw materials against the purchase order upon delivery? YES/NO
Assess Control Weaknesses:
- Evaluate the updated ICEQs to determine if any control weaknesses still exist.
- Document findings and the effectiveness of the new controls in the audit working papers.

Systems flowcharts provide a visual representation of accounting systems, showing the flow of documents and processes between departments. They help auditors identify weaknesses in controls more easily than narrative notes.

Identify the Process: Choose a process to document, such as the sales order process.
Define the Steps: List all steps involved in the process, from receiving an order to dispatching goods.
Use Standard Symbols: Use flowchart symbols to represent different actions (e.g., documents, processes, decisions).
Draw the Flowchart: Create the flowchart, showing the sequence of steps and the flow of documents between departments.

For a sales order process:
- Start: Customer places an order.
- Process: Sales department receives and verifies the order.
- Decision: Check if the customer’s credit limit is sufficient.
- Yes: Proceed to process the order.
- No: Notify the customer and hold the order.
- End: Goods are dispatched to the customer.

Flowcharts provide an immediate visual impact, making it easier to identify control weaknesses and improve system efficiency¹²³⁴⁵.

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Question 2

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