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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 18
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
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
etc.
moving from one department to another.
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Fundamentals of Auditing ­ACC 311
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The Information flow symbol
Here one document is
prepared from
Sales
another.
order
The movement of
Fauzia prepares an invoice
information to the
from the sales order
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.
This example is wrong because:
Sales
(a) no narrative exists to explain
order
the nature of the operation;
(b) the sales invoice has no
Sales
flow-line, it disappears into
Invoice
thin air.
The Check symbol
Sales
Invoice
Sattar totals the invoice
This example
shows a simple
check on a single
Wajid checks the totals
document.
This shows a check
between two
Delivery
Sales
documents.
Note
Invoice
Note the use of the
Pasha checks that all
information flow-line
goods dispatched have
again and that both the
been invoiced.
delivery note and the
sales invoice continue
with vertical flow-lines
of their own.
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Fundamentals of Auditing ­ACC 311
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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
Note that with the temporary
Order
filing symbol the flow-line of the
document must continue.
Filed awaiting delivery of
goods.
TN
With the permanent filing symbol
the flow-line stops since the
Checked by Zahoor
document has reached its
(weekly) got late delivery
ultimate destination
When goods are received
purchase order initialed by
Safdar
N
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
Sales
Daybook
Invoice
Sohail posts invoices to the SDB
D
Note that the same flow-line principles apply to books as to documents. A vertical flow-
line is needed which ends with the re-filing of the sales day book which will be kept
chronologically.
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Fundamentals of Auditing ­ACC 311
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Depicting multi-part sets of documents
Requisition
Note
Purchase
Rauf prepares
purchase order sets
order
N
To supplier
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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Fundamentals of Auditing ­ACC 311
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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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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT