Procedure to obtain an understanding of Internal Control Structure
Internal control is an efficient system of control is established by the management in the conduct of mousiness including internal cheek, internal audit, and other forms of control.
The whole system of internal check, internal audit and other forms of control, financial and otherwise established by management in order to carry on the business of the company in an orderly manner that safeguards its assets and secures as far as possible the accuracy and reliability of its records are called internal control.
The procedure to obtain an understanding consists of –
(a) Reviewing previous experience with the client: When the auditor has previous experience with the client, the previous year’s working papers should contain a great deal of information relevant to the current year’s audit.
(b) Inquiring of appropriate management and supervisory and staff personnel: Management and staff personnel with whom the auditor will perform auditing activities must gather sufficient and computes information about them.
(c) Inspecting documents and records: Relevant documents and records of the entity should be inspected. Examples include organization charts, policy manuals, the chart of accounts, accounting ledgers, journals and source documents, transaction flowcharts and reports used by management in performance reviews such as comparative reports showing actual and budgeted data and variances.
(d) Observing entity activities and operations: To reinforce the understanding of some aspects of the accounting system and certain control activities, some auditors perform a transaction walk-through review.