Para 3.20.12 — MSO (Audit)
Original Rule Text
3.20.12 The review and evaluation should not be based entirely on the replies to audit observations, procedural manuals or flow charts prepared by the entity. The Auditor should independently determine how the operations and transactions are actually processed by testing, through actual observation, a few selected representative transactions or operations. He should evaluate tentatively the effectiveness of the procedures and controls in operation and identify the strengths and weaknesses in key control points. The tentative evaluation in areas of weakness should be confirmed by testing additional operations and transactions. Procedural manuals relating to areas confirmed as being weak should be reviewed to determine whether the procedures are inadequate or whether, though adequate, were not being properly applied.
- Chapter–21 Manpower Audit
- Introduction
What This Means
When reviewing and evaluating a system, the auditor should not just rely on the entity's own replies, manuals, or flowcharts. Instead, the auditor must independently verify how transactions are actually processed by testing a few representative ones through direct observation. Weaknesses identified should be confirmed by testing more transactions. If procedures are found to be weak, the auditor must determine whether the written procedures themselves are inadequate or whether adequate procedures exist but are not being followed.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Do not rely solely on the entity's own documentation or responses
- 2Independently test a sample of actual transactions through direct observation
- 3Identify both strengths and weaknesses at key control points
- 4Confirm weaknesses by testing additional transactions
- 5Distinguish between inadequate procedures and failure to follow adequate procedures
Practical Example
An auditor reviews a department's cash handling procedures. The manual says cash should be counted twice daily with entries in the cash book. Through direct observation, the auditor discovers that daily counting happens only once at close of business, and the cash book is updated two days later. The auditor tests five more days and confirms the pattern, concluding that while the procedure is adequate on paper, it is not being followed in practice.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
Why can't the auditor rely on the entity's own procedural manuals?▼
What is the difference between inadequate procedures and non-compliance?▼
How many transactions should be tested?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.