Refers to the systems and procedures that management has put in place to ensure that the company maintains proper books of accounts. The auditor should ascertain the client’s system of recording and processing transactions and assess its adequacy as a basis for the preparation of financial statements.
An accounting system provides for the orderly assembly of accounting information and appropriate analysis to facilitate the preparation of financial statements.
The management of an organisation requires complete and accurate accounting and other records to assist in:
- Controlling the business
- Safeguarding the assets
- Preparation of the financial statements
- Complying with legislation
If the auditor wishes to place reliance on any internal controls he should ascertain and evaluate those controls and perform compliance tests on their operation. If the clients system is evaluating as being effective, the auditor can rely on these controls and reduce the level of detailed substantive work.
An internal control systems consists of all the policies and procedures (internal controls) adopted by management of an entity to assist in achieving management’s objective of ensuring, as far as practicable the orderly and efficient conduct of its business, including adherence to management policies, safeguarding of assets, the prevention and detection of fraud and error, the accuracy and completeness of the accounting records and the timely preparation of reliable financial information. The internal control system extends beyond these matters, which relate directly to the functions of the accounting system.
Control environment ISA 400- Paragraph 8
This refers to the overall attitude, awareness and actions of directors and management regarding the internal control system and its importance in the entity. The control environment has an effect on the effectiveness of the specific control procedures. A strong control environment, for example, one with tight budgetary controls and an effective internal audit function can significantly complement specific control procedures. Factors reflected in the control environment include:
- The function of the board of directors and its committees.
- Management’s philosophy and operating style.
- The entity’s organisational structure and methods of assigning authority and responsibility.
- Personnel policies and procedures and segregation of duties.