Chapter 11 - Appedix: systems risks and controls

Question 1

Sales + distribution systems - risks associated with sales systems:

Answer 1

• Customers being allowed credits that are not genuine
• Goods being supplied to a poor credit risk
• Customers being invoiced for wrong amounts
• Failure to record sales completely in accounting records
• Goods being supplied to a fraudulent comp or location
• Debts being written off for inappropriate reasons

Question 2

Sales + distribution systems - controls for ordering and granting of credit:

Answer 2

• Segregation of duties between granting of credit and ordering functions
• Procedures for granting credit - obtaining trade references, credit checks, authorisation of terms by staff and regular review
• Controls for manual system orders - pre-numbered order forms, matching of order and dispatch notes

Question 3

Sales + distribution systems - controls over dispatching and invoiving:

Answer 3

• Dispatch only on sales order and examination and recording of goods outwards
• Customers should sign for deliveries on delivery notes
• Checks on goods returned
• Dispatch notes should be matched to invoices
• Other checks on invoicing = price lists, checks of pricing on individual invoices sequential numbering

Question 4

Sales + distribution systems - controls over recording, accounting and credit control:

Answer 4

• Different staff should be responsible for recording sales and dealing with issue of customer statements
• Cash receipts and remittance advices should be matched to sales invoices
• Review of dates of sales should take place to ensure cut-off is maintained and sales are recorded in the correct period
• Credit control = send statements to customers, reconcile sales ledger control account, review and follow-up on overdue accounts
• Bad debts to be written off should be authorised by senior managers

Question 5

Purchase + expenses system - Risks associated with purchases system:

Answer 5

• Payments being made without being properly authorised
• Payments being made for goods that are not received/ wrongly valued
• Goods being received without liabilities being recorded
• Suppliers’ accounts being improperly debited/ credited
• Goods being returned or credit being claimed and not being recorded
• Payments being made for duplicate/ inflated invoices
• Payments being made on basis of falsified documentation
• Suppliers being chosen for inappropriate reasons

Question 6

Purchase + expenses system - controls for ordering:

Answer 6

• Segregation of duties between requisitions and ordering
• Choice of suppliers determined by central purchasing policy
• Require evidence of requirements for purchase
• Orders only made on receipt of official order form
• Pre-numbering and safeguarding of order forms
• Orders not received should be followed up

Question 7

Purchase + expenses system - Controls for receipt of goods and invoices:

Answer 7

• Checking quality, quantity and condition
• Receipts should be recorded on pre-numbered GRN
• GRN’s should be compared with purchase orders
• Suppliers invoices should be checked to earlier documentation
• Procedures for returning goods to suppliers and obtaining credit notes

Question 8

Purchase + expenses system - controls for accounting for purchases

Answer 8

• Segregation of duties between accounting and other functions
• Maintenance of purchase ledger
• Statements received from suppliers should be reconciled with purchase ledger balances
• Purchase ledger balances should be reconciled with purchase ledger account
• Should be cut-off procedures to ensure purchases are recorded in right year

Question 9

The wages system - Risks associated with wages system:

Answer 9

• Payroll including invalid entries
• Payments being made to individuals which differ from names or amounts shown on payroll
• Failure to account for statutory tax deductions correctly

Question 10

What is zero-hours contracts?

Answer 10

People only working when they are required

Question 11

What is gig economy?

Answer 11

People only being paid for a specific job

Question 12

The wages system - controls for setting of wages and salaries:

Answer 12

• Maintenance of personnel records independent of payroll system
• Wages + salaries should be regularly reconciled to personnel records
• Records of hours worked should be regularly reviewed
• Changes and special arrangements should be fully recorded and changes authorised (e.g. engagement and discharge of employees, amendments to pay rates, overtime etc.)

Question 13

The wages system - controls over payment of wages/ salaries and deductions:

Answer 13

• Cash wages requires security arrangements which covers custody of pay packets and arrangements for safe transit to place of distribution
• Employees may only collect their own wages and must provide verification of identity
• Bank transfers should be compared to payroll and between payroll and wages and salaries ledger account
• Even small discrepancies should be investigated
• Establishment of adequate controls over calculations and authorising deductions
• Reconcile deductions

Question 14

The wages system - controls for recording of wages and salaries:

Answer 14

• Preparation of pay sheets should be delegated to a suitable person
• Segregation of duties
• Subsequent checks should be available where automatic wage-accounting systems are used
• Reconciliations with = previous weeks payroll, clock cards /timesheets /job card and costing analyses and production budgets
• Total of salaries should be reconciled with previous week/month or standard payroll

Question 15

Cash systems and loans - risks associated with cash and loans:

Answer 15

• Misappropriation of cash receipts
• Failure to record cash receipts and payments
• Payments being made without authorisation or supporting documentation
• Payments being made on basis of falsified documentation

Question 16

Cash systems and loans - Controls for cash at bank and in hand (receipts)

Answer 16

• Completeness of recording - without this, insufficient audit evidence will be available
• Segregation of duties - receiving and recording cash when it arrives in the post should not be same person responsible for banking it
• Recording of receipts by post - listing amounts received when post is opened and protection of cash and cheques (restrictive crossing)
• Restrictions on receipts of cash - only by cashiers or salespersons etc.
• Evidencing of receipt of cash - serially numbered receipt forms
• Reconciliations - especially agreement of cash collections with till rolls and receipts
• Any cash shortages and surpluses should be investigated
• Receipts should be banked daily and make-up and comparison of paying-in slips checked against initial receipt records and cash book
• EFTPOS (electronic funds transfer point of sale technology) could be used to decrease volume of cash and provide a permanent record of sales

Question 17

Cash systems and loans - controls for safeguarding bank accounts:

Answer 17

• Controls should cover supply and issue, restricting staff allowed to prepare cheques
• Safeguards over mechanically signed cheques/cheques carrying printed signatures
• Restrictions on issue of blank or bearer cheques
• Signed cheques should be dispatched promptly

Question 18

Cash systems and loans - controls for safeguarding cash accounts:

Answer 18

• Limitations on cash floats held
• Restrictions on access to cash registers and offices
• Custody of cash outside office hours
• Surprise cash counts and independent checks on cash floats

Question 19

Cash systems and loans - controls over cash at bank and in hand (payments)

Answer 19

• Segregation of duties - cashier should not be concerned with keeping or writing up books of account
• Cheque requisitions should be raised, supported by appropriate documentation and approved by senior staff
• Documentation should be cancelled by crossing/recording cheque number on requisition
• Signatories should have limitations on authority to specific amounts
• Payments should be recorded promptly in cash book and general and purchase ledgers
• Authorisation of expenditure, cancellation of vouchers and limits on cash disbursements
• Strict controls over cash advances to employees, IOU’s or cheque cashing

Question 20

Inventory system - Risks:

Answer 20

• Misappropriation of inventory
• Failure to record inventory movements
• Deterioration in condition and value of inventory due to age, obsolescence or poor inventory holding conditions

Question 21

Inventory system - controls over recording:

Answer 21

• Segregation of duties - responsibilities between those responsible for recording and those responsible for its custody
• Detailed record held and inventory receipts and issues

Question 22

Inventory system - controls over protection of inventory:

Answer 22

• Restriction of access to stores and controls over temperature etc. in which inventory is held
• Regular counts of inventory - carried out by persons other that stores function
• Reconciliation of inventory count record to book records and control accounts

Question 23

Inventory system - control over valuation of inventory:

Answer 23

• Check that calculations are correct

* Procedures to deal with writing down slow moving, damaged and obsolete inventory

Question 24

Inventory system - controls for inventory holding:

Answer 24

• Maximum and minimum inventory levels

* Reorder quantities and levels

Question 25

Revenue and capital expenditure - risks:

Answer 25

• Asset acquisitions and disposals not being authorised
• Asset acquisitions and disposals not being recorded
• Asset records including items which have been disposed of, are of negligible value or do not exist
• Misappropriation of assets
• Assets being used for private benefit
• Deterioration in condition or obsolescence of assets
• Depreciation being charged at too high or too low a rate
• Depreciation being calculated incorrectly
• Income form assets not being received or recorded
• Revenue and capital expenditure being accounted for incorrectly

Question 26

Revenue and capital expenditure - controls over authorisation:

Answer 26

• Controls over purchases also relevant here

* Authorisation of orders and checking of condition when goods received

Question 27

Revenue and capital expenditure - controls over security:

Answer 27

• Restriction of access
• Controls over environmental conditions
• Marking ownership of assets
• Maintain a non-current asset register
• Non-current asset register should be regularly reconciled to general ledger

Question 28

Revenue and capital expenditure - controls over valuations:

Answer 28

• Senior, qualified staff should judge what appropriate depreciation rates are
• Revaluations - specification of qualifications of the valuer and scope and objective of valuation
• Need for write down of assets should be supported by evidence of loss in value
• Write-downs should be authorised by managers

Question 29

Revenue and capital expenditure - controls for recording:

Answer 29

• Asset register is key recording control
• General ledger should be regularly reconciled to asset register
• Staff with appropriate knowledge should maintain sensitive codes in general ledger to confirm revenue and capital expenditure is being allocated correctly
• Capital budgets should be prepared, actual expenditure compared with budgets and differences investigated

Question 30

Logistics risk:

Answer 30

• Inventory is not being delivered at the right time to the right place in the right condition
• Inventory is stolen
• Poor-quality products result in lost sales or damage or injury
• Business is interrupted

Question 31

Logistics controls:

Answer 31

• Controls over safeguarding of inventory
• Controls ensuring inventory is available to meet business requirements
• Adequate planning and forecasting systems
• Detailed analysis of volume requirements
• Availability of alternative facilities at short notice
• Sufficient vehicles to transport inventory

Question 32

Procurement risks:

Answer 32

• Goods not available when required
• Org pays too much for goods
• Employees or suppliers defraud the org

Question 33

Procurement controls:

Answer 33

• Rigorous tendering process = Ensure that goods are available when required and that org pays reasonable prices for goods/ services
• Requirements for goods/ service should be put in writing
• Auditor should review adequacy f tendering arrangements and check that invoice details can be traced back to written acquisitions

Question 34

Marketing risks:

Answer 34

• Customer requirements are not taken into account
• Customers do not know about products
• Prices are not competitive
• Goods are prices at too low a level, with promotion considerations resulting in excessive discounts

Question 35

Marketing controls:

Answer 35

• Controls + audit required to ensure process is managed efficiently, info is freely available and risks are being managed correctly
• Should be rigorous requirements for market research
• Monitor competitor prices and activity
• Sales against budget
• Marketing mix should be analysed using return on marketing investment which monitors the success of various media and campaigns
• Auditors should assess whether adequate research appears to have been carried out, adequacy of decision-making processes
• Auditors should also review terms and conditions to ensure they comply with company policy

Question 36

HR risk:

Answer 36

• Inadequate staffing
• Over reliance on certain key personnel
• Excessive staff turnover
• Staff being paid the wrong amounts
• Correct deduction not being made for taxes
• Staff expenses not being properly documented
• Staff expenses being unauthorised or excessive
• Org reimbursing staff for private expenditure
• Industrial action disrupting the org
• Org being subject to actions for wrongful dismissal
• Failing to comply with employment laws

Question 37

HR controls:

Answer 37

• Long-term human requirement plans to ensure long-term succession planning
• Benchmarking salary against market
• Appraising staff performance
• Providing adequate training
• HR managers should receive training in employment law
• Ensure company policies are maintained and info is freely available
• Review all relevant internal records, appraisal and training records and long-term HR plans
• Internal auditors should consider HR issues on range of other operational audits (e.g. whether department is staffed with staff of sufficient experience)

Question 38

R+D risks:

Answer 38

• R+D effort wasted on projects that will provide no benefits or are not in line with corporate strategy
• Org’s do not undertake enough R+D, leaving them at risk of being uncompetitive or irrelevant
• Resources are wasted on duplicated projects
• Projects do not deliver planned benefits,are late or over budget
• Loss of data interrupts R+D

Question 39

R+D controls:

Answer 39

• Controls must ensure R+D is properly planned, budgeted, monitored and reported
• Comply with internal standards and relevant legislation
• R+D strategy must be decided and reviewed by the board
• Activities should be co-ordinated centrally
• Follow common project methodology
• Progress on projects should be reported regularly
• Post-implementation reviews
• Auditors should consider adequacy of org guidelines or R+D projects and test projects to see if they were following guidelines
• Auditors should check that results of R+D have been regularly communicated to management
• Auditors should review results of post-implementation reviews and confirm that points arising have been actioned

Question 40

Post-completion audits risks:

Answer 40

• Capital expenditure on a project is greater than expected
• Project has failed to deliver the anticipated benefits
• Excessive resources have been utilised on developing the project

Question 41

Post-completion audit controls:

Answer 41

• System for approving and developing new investments
• Post-completion auditing is partly an audit of controls including weaknesses in budgeting and forecasting system
• Also examines performance of management, using principles of responsibility accounting