MVPs KRT Arts, BH Commerce and

AM Science (KTHM) College, Nashik

PowerPoint Presentation
M.Com – II, Sem. III (2021-22)

Name : Nikumbh Manoj Ravindra

Roll No : 25
Subject : Specialized Auditing
Subject Teacher : Prof. Sopan Deshmukh

Topic for Presentation

Evaluation of internal control system
 Points of presentation

 What is an Evaluation of Internal Controls?

 Evaluation of internal control system
1. Understanding the Accounting System and Related Internal Controls
2. Preliminary Evaluation
3. Testing
4. Assessment
 Conclusion
 Evaluation of internal controls system

 Auditors often test a company’s internal controls by reviewing operational information. Testing
internal controls relates to the company’s financial accounting department as a rule. Auditors select a
sample of information and test it against the company’s standard operating procedures or national
accounting standards.
 What is an Evaluation of Internal Controls?

Determine the extent and types of controls being used by the client.
Determine which of these controls the auditor intends to rely upon.
Based on the first two steps, determine which audit procedures should be expanded or reduced.
1. Make recommendations to the client regarding how to improve its system of internal controls.
 Understanding the Accounting System and
Related Internal Controls

 It naturally follows that it would be necessary for the auditor to acquire an uptodate record of the system of
internal control in operation.
 (i) the nature of the client’s business, place of its activities, methods of production, materials used, processes
involved, methods of marketing. Involving possibly an inspection of its physical assets and operations;
 (ii) the system of book keeping and accounting:
 (iii) the duties of the members of staff and the division of responsibilities;
 (iv) the internal check system arrangement
 (v) the internal audit arrangements.
 Preliminary Evaluation

 A review as above will enable the auditor to identify tentatively the particular controls on which it is
reasonable for him to rely for the purpose of his audit. It may be noted in this connection that on the basis of
the review as above the auditor may conclude that it is not reasonable to rely on particular controls because
they are either defective in design and/or operation or that the audit effort required to test compliance would
exceed the reduction in effort that could be achieved by reliance on them.
 Testing

 The next stage in the evaluation process is to carry out a series of compliance tests in
order to gain evidence that those internal controls which the auditor has identified
tentatively as reliable for the purpose of his audit operate generally as identified by him
and that they function effectively throughout the accounting period in an uninterrupted
manner. For instance, changes in key members of staff, significant seasonal
fluctuations in the volume of transactions, etc could cause deviations from prescribed
control
 Assessment

1. the results of the tests already performed;

2. the response to enquiries as to whether the internal control system is still operating in the same manner as
originally reviewed and evaluated;
3. the length of the remaining period;
4. the auditor’s evaluation of the internal control environment, especially supervisory controls;
5. the extent of substantive tests which the auditor intends to perform irrespective of the adequacy of internal
controls.
 Conclusion

 This means that there is evidence that the level of compliance with some of
the controls may put some of the system’s objectives at risk/may leave the
Authority open to risk. Therefore the overall conclusion is that the internal
control environment is graded Satisfactory.
Thank you