This chapter looks at the internal control systems, but what is internal control? Let's take the example of a fast food outlet. One of their aims is to make sure that the food they sell is sold as soon as possible after it has been prepared so that customers enjoy it and return to buy more, and consequently the outlet makes money. They do not want food sitting behind the counter for too long in case it goes stale and makes customers ill. In addition to this, there are health and safety regulations which they need to adhere to in terms of how long food can be left out before being thrown away, assuming that it's not sold. The fast food outlet wants to make sure that they achieve their aims of selling more food and managing the risks such as selling stale food or not adhering to health and safety regulations. As such, they will design, implement and maintain processes to make sure that the chance of these problems happening are kept to a minimum. These processes and who is responsible for them describes the entity's system of internal controls.
The auditor generally seeks to rely on the internal controls within the entity in order to reduce the amount of substantive procedures they perform. The initial evaluation of a client system is essential as the auditor gains an understanding of the entity, as we outlined in chapter 6. In this chapter, we shall look at some of the detailed requirements of ISA 315 (revised) with regard to internal controls, and also set out control issues that the auditor may come across.
The auditor will assess the risks of material misstatement arising and, as we discuss in chapter 6, may respond to those risks by carrying out test of controls. If they conclude that they can rely on the controls in place, the level of substantive audit testing required can be reduced.
In this chapter, we also look at the ways in which auditors can document the internal control systems using narrative notes, flowcharts, questionnaires, and checklists, focusing particularly on the use of questionnaires.
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