4915-6-25P

AID: 1825 | 14/06/2013

(a)
Internal Control: It is a process initiated by the board of directors of an entity for the
better performance of the management and achievement of the concerns goals. It is
designed for the following reasons:
It assures the management that all the valuable transactions, which have occurred,
are properly recorded.
It confirms that all the recorded transactions are properly authorized.
It minimizes the risk of fraud and misappropriation of assets, which safeguards
the entitys assets.
It generates reliable information, which helps the management to make important
decisions on product pricing, cost of production, and profit information.
(b)
The following are the purposes for which an auditor understands the internal control
components to be used in planning an audit:

(c)

To control the environment

For the entitys risk assessment process

For control activities

Monitoring of controls

The auditor needs the following documents to understand the internal control
system of the client:

1. Procedure Manuals and Organization Charts: Many organizations publish their

manuals which convey the policies and procedures of the organization. These manuals
help the auditor to gain complete knowledge about the organization and its policies. This
ultimately helps the auditor to understand the internal control system of the client.
2. Narrative Description: Narrative description reveals the simple internal control
system of the entity. When a concern has a simple internal control system, the auditor can
understand the entitys internal system without any difficulties. It helps the auditor to
provide better service to his client.
3. Internal Control Questionnaires: Internal control questionnaires are mostly used by
the concerns which have a complex internal control system. The internal control
questionnaires usually contain various questions about the important factors of internal
control components. These questionnaires help the auditor to investigate and understand
the various areas of internal control.
4. Flowcharts: Flowcharts are the diagrammatic representations of various aspects of the
concern. Most of the entities prepare flowcharts regarding various accounting aspects like
accounting reports, procedures, and functions. These flowcharts help the auditor to
understand the accounting procedures, functions, and the internal control system of his
client.

The auditor needs the following documents to understand the assessed level of
control risk:

1. Structured Working Paper

2. Internal Control Questionnaire
3. Memorandum