These comprise a list of questions designed to determine whether the internal control system is designed with desirable controls that cover each of the major transaction cycles. The questions are structured such that the client will be required to respond by giving either a yes or no answer. A yes answer implying that desirable controls have been put in place and a no answer implying a weakness in the internal control system. There are two types of questionnaires
- Internal control questionnaire- ICQ
- Internal control evaluation questionnaire –ICEQ
Internal control questionnaire
This refers to a list of questions that are designed to establish whether the the company has put in place desirable control to ensure that the affairs of the company are carried out in an orderly efficient manner. Examples of questions that may be included in a ICQ over cheque payments
- Are all cheques crossed? Yes/No
- Are unused cheque books kept in safe custody? Yes/No
- Is the function of drawing cheques independent from those of ordering goods?
- Are supporting documents attached and verified before cheques are prepared and presented for signature?
- Are at least two signatures required on all cheques drawn? Yes/No
Internal control evaluation questionnaire
These questions seek to establish whether specific errors or frauds could occur rather than establishing whether certain desirable controls are present. Only few key control questions are used concentrating on the significant errors or omissions that could occur at each phase of a transaction cycle.
E.g. an ICEQ over sales
Is there reasonable assurance that:
- Sales are properly authorised? Yes/No
- All goods despatched are authorised? Yes/No
- All invoices are accurately prepared? Yes/No
- All invoices are recorded? Yes/No
This refers to the recording the accounting system in narrative form. Narrative descriptions are preferable for very simple systems where all the documentation/transactions are handled by only one or two persons or for recording specific aspects of the system in large companies. Narratives could be used to explain procedures recorded on flow charts. Narratives are easy to record but are difficult to change. The purpose is to describe and explain the system, at the same time make any comments or criticisms which will help to demonstrate an intelligent understanding of the system.
Confirming the system
Having recorded the system, the auditor then needs to confirm whether the system recorded exists and is operational and he has the correct understanding of the system. This is done by use of walk through tests. A walk through test consists of tracing a few transactions, in each accounting area from initiation through the final recording.
Evaluating the system
Having documented the accounting and internal control system and confirmed its operation by means of walk through tests the auditor will commence his evaluation. The auditor evaluates the client’s system in order to decide if the system is suitably designed and constitutes a reliable basis for the preparation of the financial statement. The evaluation will normally be carried out concurrently with the recording.
Evaluation will be assisted by the use of documentation designed to help identify the internal controls on which the auditor may wish to place reliance.
The auditor uses internal control evaluation questionnaires in evaluating the system. The questionnaire is based on key control questions. Key control questions seek to establish whether certain desirable controls exist and whether certain errors and frauds could occur.
Examples of key control questions that could be applied in the evaluation of the system of accounting for sales, debtors and receipts:
- Can goods be despatched or leave the premises without being invoiced?
- Can goods be sold to a bad credit risk?
- Can errors occur in raising the invoices?
- Can sales be invoiced but not recorded?
Examples of ICEQ/Key control questions over wages and salaries
- Can employees be paid for work not done?
- Can bonuses or commissions be wrongly paid?
- Can P.A.Y.E, NHIF and other staff deductions be wrongly recorded?
- Can the wages and salaries be inflated by inclusion of ghost workers?
- Can wages and salaries be paid at the wrong rates?
Examples of ICEQ/Key control questions over purchases, creditors and payments
- Can the company incur liabilities for goods/services which are either not authorised or not received?
- Can liabilities be incurred but not recorded?
- Can liabilities be over/under stated?
ICQs and ICEQs are used:
- As a method of ascertaining the system.
- Enabling the auditor to review and assess the adequacy of the system.
- Enabling the auditor to identify areas of weakness.
- Enabling the auditor to design compliance tests/tests of controls and to familiarise themselves with the system quickly and comprehensively.
ICEQ operate on the basis of key control questions, which are designed to cover the principal objectives of any control system. The key control questions seek to determine what errors of frauds could occur if proper controls are not put in place to address the key control objectives.
Performing tests of controls on the system/compliance tests
If the system is evaluated as suitably designed the auditor then plans to carry out tests of controls/compliance tests. Compliance tests are procedures performed to obtain audit evidence about the effectiveness of the:
- Design of the accounting and internal control system i.e. whether it is suitably designed to prevent and correct material misstatements.
- Operation of the internal controls throughout the period.
The auditor carries out tests of controls to determine whether these controls have worked effectively throughout the financial period and can be relied upon to ensure complete, accurate and reliable accounting records.
Some of the procedures performed to obtain an understanding of the accounting and internal control system may not have been specifically planned a tests of controls but may provide audit evidence about the effectiveness of the design and operation of internal controls relevant to certain assertions and consequently serve as tests of control.