Methods of Evaluating Internal Control System

Methods of Evaluating Internal Control System

The following are the methods of evaluating internal control system:

1. Narrative Record or Memorandum Approach: It is a complete and exhaustive description of the system. It is appropriate in circumstances where a formal control system is lacking, like in case of small businesses. Gaps in the control system are difficult to identify using a narrative record.

2. Check List: It is a series of instructions that a member of the audit staff is required to follow. They have to be signed initialed by the audit assistant as proof for having followed the instructions given. A specific statement is required for every weakness area.

3. Flow Chart: It is a pictorial representation of the internal control system depicting its various elements such as operations, processes and controls, which help in giving a concise and comprehensive view of the organization’s working to the auditor. A complete flow chart would depict the process of raising documents, personnel involved in doing so, the flow of documents through various departments, maintenance of records, flow of goods and consideration, and dealing with results. The internal control evaluation process becomes easier through a flow chart as a broad picture of all the controls involved can be gauged in a glimpse.

4. Internal Control Questionnaire: This is the most widely used method for collecting information regarding the internal control system and involves asking questions to various people at different levels in the organization. The questionnaire is in a pre-designed format to ensure collection of complete and all relevant information. The questions are formed in a manner that would facilitate obtaining full information through answers in “Yes” or “No’’.