# Methods of Evaluation of Internal Control
Four widely used methods of evaluating Internal Control:
## A. Narrative Record
A complete & exhaustive description of the system as found in operation by the auditor.
Best suited for: Small & trading businesses.
Disadvantages:
- Difficult to comprehend (summarize) system in operation
- Difficult to identify weaknesses in the system
- Difficult to incorporate changes
## B. Check List
A series of instructions or questions which the audit team member must follow or answer.
Format of answers: Yes / No / Not Applicable
## C. Internal Control Questionnaire (ICQ)
A comprehensive series of questions on IC — the most widely used form for collecting information about IC.
Interpretation of answers:
| Answer | Meaning |
|---|---|
| Yes | Satisfactory position |
| No | Suggests weakness (explanation required) |
| Not Applicable | Not relevant |
Process: Questionnaire is issued to client to be filled by employees. There is discussion to get a clear picture.
## D. Flow Chart
A graphic presentation of the ICS.
- Most concise way of recording the auditor's review of ICS
- Gives a bird's eye view of the system
## Benefits of Evaluation of IC to Auditor
Review of IC enables auditor to know:
- Whether any administrative control has bearing on his work
- Extent & depth of examination needed
- Whether controls adequately safeguard assets
- How adequately Mgt is discharging its function for correct recording of transactions
- How reliable reports to Mgt can be
- Whether errors & frauds are likely to be located
- Areas where control is weak & where it is excessive
- Whether effective Internal Audit Department is operating
- Whether suggestions can be given to improve ICS
- Appropriate audit technique & procedure
- Whether adequate ICS is in use & operating as planned by Mgt
## Testing of Internal Controls (TOC)
### Purpose
To obtain audit evidence about effectiveness of Design and Operation of ICS.
### TOC Include
- Testing of IC operating on specific computerized applications
- Inquiries & observation of IC that leave no audit trail
- Inspection of documents supporting transactions to gain evidence that controls operated properly
- Reperformance (SA 500)
### Considerations While Obtaining Evidence about Effective Operation
- How controls were applied
- Consistency with which they were applied during the period
- By whom they were applied
### Action on Detecting Deviations
When deviations are detected:
- Auditor makes specific inquiries regarding timing of staff changes in key IC functions
- Based on results of TOC, auditor evaluates whether IC are designed & operating as in preliminary assessment
- If assessed level of control risk needs revision → modify NTE of planned substantive procedures