Internal controls

The auditor’s reliance on client internal controls has always been a contentious issue. If clients have high quality internal controls, auditors should be able to rely on these controls, making the audit more efficient. However, what constitutes a “good” internal control system is unclear, which makes it difficult for the auditor to determine how to integrate a client’s internal control system into the auditing procedures.

Research suggests that the quality of a client’s internal control system very much depends on the context of the firm, and no clear guidelines exist. This is worrisome, given that a high proportion of audit clients shows significant shortcomings in their internal control over financial reporting. Clear evaluation criteria are lacking and necessary, but the rise of data analytics is likely to partially solve this issue.

Computer algorithms facilitate large-scale tests by the auditor and may flag suspicious transactions, reducing the need for the auditor to depend on their clients’ internal control systems.