Obtaining and Understanding of Internal Controls

Question 1

What is the auditors responsibility for internal During the review phase, what is the auditors responsibility with respect to internal control?

Answer 1

Obtain and initial understanding of the internal controls and document that understanding.

To help determine time, extent of further audit procedures

Question 2

How does an auditor obtain an initial understanding of internal control?

Answer 2

1) Inquiry of appropriate personnel
2) Observation of client activities
3) Review of documentation- The auditor reviews relevant documentation, including the clients accounting manuals, prior-year audit documentation, etc.

Question 3

What is a transaction cycle?

Answer 3

Example of specific transactions cycles:

• Revenue/receipts
• Expenditure/Disbursements
• Payroll
• Others: manufacturing inventory, fixed assets

Question 4

What is the primary focus of the internal control analysis?

Answer 4

Transaction Cycles

Question 5

Are auditors required to document internal controls? Why?

Answer 5

yes, because it is VERY important to designing audit planning.

Question 6

How can you document your understanding of internal controls?

Answer 6

3 basic ways to document that understanding:

1) Flowcharts
2) Internal control questions (ICQS)
3) Narrative write-up (memorandum)- Widely-used

Question 7

What is a walk through?

Answer 7

Auditors have documented their understanding.

A walk through is selecting a small number of transactions from the source documents to the general ledger.