Explain the factors an auditor should consider when determining the adequacy of a client‘s internal control system

Factors to consider when determining adequacy of the internal control system
i) Segregation of duties
– No one person should be responsible for recording and processing of a complete transaction. There should be different staff for recording, processing, authorisation and approval of the transactions.
– Involvement of several people reduces risk of intentional manipulation of accidental error and increases the element of checking of work

ii) Physical control
Concerns physical custody of assets and involves procedures designed to limit access to authorized personnel only

iii) Authorisation and approval
All transactions should require authorisation or approval by an appropriate person. Limits to authorisation should be specified.

iv) Organisation controls An enterprise should have
– Plan of organisation that defines and allocates responsibly.
– Every function should be in charge of a specified person – the responsible official

v) Delegation of authority and responsibility clearly defined. An employee should always know the precise powers delegated to him, the extent of his authority and to whom he should report to.

vi) Supervision.
All actions by all levels of staff should be supervised. The responsibility for supervision should be clearly laid down and communicated to person being supervised.

vii) Management
These are controls exercised by management which are outside and over and above the day to day routine of the system. They include overall supervisory controls, review of management accounts, internal audit and budgeting.

viii) Control of Documents
Sensitive documents i.e. receipts, local purchase orders etc should be handled by reliable person. They should be pre-numbered to ensure control.

ix) Personnel
Company should employ qualified and experienced people

x) Arithmetic and accounting accuracy
This ensures that accuracy of transactions through paper recording by use of calculators and computers. These are controls in recording function which check that the transactions have been authorized, that they are all included and that they are correctly recorded and accurately processed.

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