This refers to the auditor’s attempt to identify and understand the internal controls that management has put in place. This is carried out in the following ways:
- Utilising the clients accounting and control manuals which describe the accounting and internal controls.
- Obtain and rely on systems records and descriptions prepared by internal audit.
- Interview responsible officials as to the nature of their duties, the control procedures they are responsible for.
- Observing procedures being performed in order to perceive clearly the nature of the controls involved.
- Rely on prior year’s system notes.