Chapter 10 - Test of controls Flashcards
Test of Controls - What is it about?
Audit procedures designed to evaluate
effectiveness of controls in preventing,
detecting and correcting material misstatement at the assertion level.
Test of Controls - Why do we need it?
1. Risk assessment is BASED on the assumption that controls are operating effectively. 2. Substantive testing may NOT be enough.
Methods to test controls?
- Observe
- Inspect
- Inquire
- Re-perform
Control OBJECTIVE?
What the control aims to achieve.
Control Activity?
Actions to take to achieve those control objectives!
Control Objectives for different systems?
- Sales
- Purchase
- Payroll
- Inventory
- Cash and bank
- Capital and revenue (Non-current assets)
Sales process?
Provide an example of control procedure and test of control?
Order received (from credit worthy customers), order processed, goods dispatched, invoice raised , recorded in accounts (Information is complete, accurate and upto date), payment received (must be banked promptly).
Additional :
Cut- off should be applied correctly to receivables.
Control procedure : AGREE GDN back to the
Sales order.
Check for the quality if it’s matching with the standard.
Control TEST : Check for signatures showing someone checked it back to sales.
Check for signature from quality control department.
Purchase process?
Provide an example of control procedure and test of control?
AUTHORITY to order (ONLY for necessary business expenses), order (Only to authorized suppliers at competitive prices), goods received (Should be NOT damaged),
invoice received (Did suppliers over charge?), invoice recorded, payment
made. (To correct suppliers)
Additional :
Cut-off must be applied to the correct payable ledger.
Control procedure:
Authorized by manager to confirm for business purpose.
All requisitions on standard forms.
Test of control:
INSPECT copies of requisition forms for signature of authorization by the manager.
Observe staff taking orders to assess whether they are following the controls.
Goods received :
Agree GRN back to purchase order!
Quality checks.
Test of control :
Inspect GRN showing the signature of someone checked them back to PO.
Inspect GRN for quality control department
Payroll process?
- Clock cards submitted and input (Only paid for bona fide employees for work done)
- Gross pay deductions and net pay calculated (Accurate calculations)
- Other amendments input, final payroll calculated and payslips produced (Deductions for income tax, etc are accurate)
- Payments to employees and tax authorities (payments made ONLY to those who are entitled to recieve them)
- Payroll costs and payments recorded. (Correctly must be posted to GL)
Inventory steps?
What things should we consider?
- Goods recieved
- Receipt recorded
- Movements posted to nominal
ledger
OR - Goods dispatched.
- Dispatch recorded
- Movements posted to nominal
ledger
Damaged foods must not be accepted. Movements should be accurately recorded. Management should have timely information about inventory levels.
Cash and bank process?
Give a control procedure and a related test of control?
- Request for payment
- Payment authorization
- Payment made
- Payments recorded.
OR - Receipts
- Receipts recorded.
Payments are only for valid business
expenses. Accurate and take advantage
of credit terms. Cash and cheques are NOT
MISAPPROPRIATED. Does the management know about the cash position
Control procedure:
Standardized cheque requisition form should be used.
Monthly bank statement should be prepared and reviwed.
Test of control : EXAMINE the supporting documents to verify the use of the standard req form. Inspect bank reconciliation and verify independent review.
Capital and revenue - What should be approved by the management and board?
ALL the material capital acquisition and disposals are approved by management and/or the board.
Non-current assets and current assets
must be properly depreciated or amortized.
Capital expenditure must be recognized
as an asset.
Key points for cash?
KEY POINTS
CASH : Ensuring cash is SAFE from THEFT. Must be banked promptly to gain interest. Ensuring that entries in cash book should be CORRECT and employees do NOT claim for expenses not incurred.
Key points for wages?
KEY POINTS
WAGES : Ensuring cash wages cannot be stolen, people paid for overtime ONLY when
necessary and approved, NO ghost employees exist!
Key points for purchases?
KEY POINTS
PURCHASING : Goods must be in good condition and payments made for goods that has been recieved. Correct amount should be charged by supplier at the BEST price.
