1. Chapter 8: Preliminary Survey & Internal Control Review
ACCT620: Internal Auditing
Otto Chang
Professor of Accounting

2. Steps for Preliminary Survey
The opening conference
On-site tour
Study of documents on site.
Written description of the auditee
Analytical procedures

3. The Opening Conference
Objectives of the opening conference:
Elicit a spirit of cooperation
Convey information that will help the audit
Obtain information needed for the audit
Promote a feeling of credibility

4. Planning the Opening Conference
Preparing a written agenda:
Introduction of those present at the conference
An outline of the audit assignment
Addressing any audit concerns
Coordination of the audit with auditee operations
Discussion of the kind of information needed for the audit and the extent of assistance
Timing and form of the audit report

5. Establishing an Appropriate Conference Climate
Foster a professional courtesy
Setting a specific time and place
Conducting it in a quiet setting
Distributing a written agenda before meeting
Taking a confident but respectful manner
Maintaining a relaxed tone of conversation
Projecting an open and cooperative attitude
Keeping the meeting within reasonable time

6. Building a Feeling of Credibility
Auditor gains credibility from
being associated with the IA profession
their reporting line within the organization
their own demonstration of professionalism
Personal sources of credibility
appropriate dress and grooming, manners
composure, preparation, respect for auditee
Documenting the opening conference

7. On-site Tour
The objective of the tour is to obtain an overview of operations
Scan operations for unusual activities, indication of inefficiency, unused facilities, idle workers, poor maintenance of machines
Observe the employees’ attitudes toward their jobs and how they relate to each other and to management

8. Study of Documents
On-site perusal provides updated information that indicates changes in the organizational structure, responsibilities, and operations
Documents studied: description of current policies and procedures, organizational charts, operational flow-charts, job descriptions, performance reports

9. Written Description of the Auditee
The descriptions should include:
Objectives of auditee operations
Environmental restrictions such as corporate policy imposed by top management
Functional components of the organization
Resources (# and classification of employees, cash flow, PPE, information systems etc..)
Management

10. Analytical Procedures
Compare current totals with previous period
Compare operating results with budgets
Compare with industry average
Relate financial information to operating data
Compare with similar divisions or department
Compare performance to economic data
Scan for unusual items

11. Review of Internal Control
The review of internal control includes
A description and analysis
An evaluation
A risk assessment

12. Description of Control System
Internal Control Questionnaire (ICQ)
Pros: less likely to omit important questions
Cons: tiring, lengthy, response bias toward “yes” answer, indirect evidence
Flow charts with narrative descriptions
Two types: horizontal and vertical flowcharts
Running narrative usually included in vertical flowcharts to describe the other related controls

13. Procedural Walk-Through
An auditor “walks” through a process by
Listing the steps to be performed in the process
Providing a check-off column indicating whether each step has been performed
commenting on what’s observed
Advantage of walking through is to obtain firsthand, comprehensive knowledge of how a particular process is performed

14. Documentation Walk-Through
An auditor follows particular operation or transaction from beginning to end through documentation
It is one form of vouching transactions to check whether specific controls are present in a system
usually limited to only one or two transactions

15. Limited Testing of the System
Purpose: to understand how well the system is operating and if controls are functioning at various parts of the system
Select a few items (25-30) for examination
Maybe combined with a walk-through
The results are written up as a “Memo to the File” and included in the working paper

16. Extended Testing of the Information System
If an auditor has any reason to suspect problems with the information system, extended testing is justified
Some auditors prefer to prove the integrity of the system before going further
Normally involves with statistical sampling so that a certain level of confidence (e.g.., 95%) can be achieved.

17. Preliminary Evaluation of Internal Control System
Auditors use internal control matrices to organize audit results up to this point. It contains the following columns:
Specific audit objectives
Important results from preliminary survey and review of internal control
The risks associated with each result
Appropriate controls relevant to each result
Auditor’s evaluation

18. Risk Assessment
After internal control evaluation, auditors reassess the level of risk associated with the auditee’s operation. Three things are likely:
The revised risk is low. Auditors should write a report and go on to higher-risk areas.
Little to gain from further audit. Wrap up and go to next audit project.
The risk remain high. Expand test of controls.