Flow Charts and Internal Control Questionnaires

<< Benefits of Internal Control to the entity

Construction of an ICQ >>

Fundamentals of Auditing ACC 311

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.

Fundamentals of Auditing ACC 311

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.

Fundamentals of Auditing ACC 311

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.

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

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

Daybook

Invoice

Sohail posts invoices to the SDB

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.

Fundamentals of Auditing ACC 311

Depicting multi-part sets of documents

Requisition

Note

Purchase

Rauf prepares

purchase order sets

order

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

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.

Fundamentals of Auditing ACC 311

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)

(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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