## Evaluation of Internal Control — Methods
### Why Evaluate Internal Controls? (Benefits to the Auditor)
Evaluation enables the auditor to determine:
1. Whether errors and frauds are likely to be located in ordinary operations
2. Whether an adequate ICS is in use and operating as planned
3. Whether an effective internal audit department is functioning
4. Whether controls adequately safeguard assets
5. How reliably management is discharging its recording function
6. How reliable reports, records, and certificates to management are
7. The extent and depth of examination needed in different accounting areas
8. The appropriate audit technique and procedure for the circumstances
9. Where control is weak or excessive
10. Whether worthwhile suggestions can be offered to improve the control system
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### Four Methods of Evaluating Internal Control
```
Narrative Record | Check List | ICQ | Flow Chart
```
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### Method 1: Narrative Record
- A complete and exhaustive written description of the system as found in operation
- Requires actual testing and observation before it can be developed
- Best suited to small businesses or where no formal control system exists
Disadvantages:
- Difficult to comprehend the system from a written description
- Hard to identify weaknesses or gaps
- Difficult to incorporate changes (e.g., reshuffling of staff)
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### Method 2: Check List
- A series of instructions and/or questions that audit staff must follow/answer
- Staff initials the space against each instruction upon completion
- Answers: Yes / No / Not Applicable
Sample Check List Questions (Purchases):
1. Are tenders called before placing orders?
2. Are purchases made on the basis of a written order?
3. Is the purchase order form standardised?
4. Are purchase order forms pre-numbered?
Key distinction from ICQ: Check lists are instructions for the auditor's staff; ICQ is issued to the client.
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### Method 3: Internal Control Questionnaire (ICQ)
- A comprehensive series of questions about existence, operation, and efficiency of ICS
- Most widely used method for collecting internal control information
- Yes = satisfactory; No = weakness; N/A = not applicable
- Provision made for explanation of "No" answers
- Issued to the client to be filled by concerned executives and employees
Sample ICQ Areas:
| Area | Key Questions |
|---|---|
| Purchases | Are purchases centralised? Are purchase orders pre-numbered and signed by authorised officials only? |
| Creditors | Are supplier invoices routed to Accounts Department? Are supplier statements compared with ledger accounts? |
| Inventories | Are perpetual stock records maintained? Are stock records reconciled with accounting records periodically? |
| Fixed Assets | Are capital expenditure budgets approved? Are fixed assets physically verified periodically? Are discrepancies investigated? |
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### Method 4: Flow Chart
- A graphic presentation of each part of the internal control system
- The most concise method of recording the auditor's review
- Minimises narrative — achieves a level of presentation not possible in other forms
- Provides a bird's eye view of the system, transaction flow, and integration
- Gaps in documentation can be easily spotted and improvements suggested
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### Comparison Summary
| Method | Best For | Key Feature |
|---|---|---|
| Narrative Record | Small businesses, no formal system | Exhaustive written description |
| Check List | Routine audit programme | Initials-based instruction following |
| ICQ | Most entities | Most widely used; Yes/No/NA |
| Flow Chart | Complex systems | Most concise; visual; bird's eye view |