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Audit > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

Define Internal Controls.

A

Means policies and procedures designed, implemented and operated by MGT and TCWG to provide reasonable assurance about achievement of entity’s objectives with regard to:

  1. Effectiveness and efficiency of its operations.
  2. Compliance with laws or regulations.
  3. Reliability of entity’s financial reporting.
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2
Q

Inherent Limitations of Internal Control system of client.

A
  1. Breakdown by human errors.
  2. MGT override of control.
  3. Lack of segregation of duties.
  4. Collusion (internal controls are bypassed by more than one persons through collusions).
  5. Cost of some controls may be greater than their benefits.
  6. Often non-routine transactions are not subject to internal controls.
  7. Often judgments are involved in risk assessment and implementation of internal controls which may be faulty.
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3
Q

Responsibilities of MGT about internal controls.

A

To design, implement and operate internal controls for the preparation of F/S.

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4
Q

Auditor’s responsibilities for Internal Controls.

A
  1. To obtain understanding of controls.
  2. To perform test of controls (if controls are operating effectively).
  3. To communicate significant deficiencies to MGT and TCWG.

Auditor is not responsible to express opinion on Internal Controls.

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5
Q

Main elements of an Internal Control system of client.

A
  1. Control Environment.
  2. Information system relevant to F/S and communications.
  3. Entity’s Risk Assessment Process.
  4. Control Activities relevant to audit.
  5. Monitoring of controls.
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6
Q

Control Activities of a Sales Order Function.

A
  1. Segregation of Duties (order, and credit limit)
  2. Authorization of credit limit (by separate dept.)
  3. Check credit limit.
  4. Check inventory balance.
  5. Prenumbered orders.
  6. Use authorized rates.
  7. Dispatch every sales order
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7
Q

Control Activities of a Dispatch Function.

A
  1. Prenumbered GDN for every dispatch.
  2. Cross-check with sales order and Sign GDN.
  3. Acknowledgement of customer.
  4. Daily transfer of GDN to record in accounts.
  5. Segregation of duties.
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8
Q

Control Activities of a Sales Invoicing Function.

A
  1. Segregation of duties (order, dispatch, invoice).
  2. Prenumbered Invoice.
  3. Recalculation/Cross checking of invoice with Order & GDN.
  4. Prenumbered and authorized credit notes(cross check with invoice)
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8
Q

Control Activities of a Sales Accounts Function.

A
  1. Segregation of duties(invoice, recording, collection).
  2. Batch Totals.
  3. Control A/C reconciliation
  4. Monthly Account statements.
  5. Aging analysis to identify overdue & follow up.
  6. Authorization of bad debts.
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9
Q

Control Activities of Purchase Order Function.

A
  1. Segregation of Duties(user and order dept.).
  2. List of approved suppliers, with Access controls.
  3. Order only to approved suppliers at lowest quotation.
  4. Authorization of all purchase order.
  5. Prenumbered orders
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10
Q

Control Activities of Purchase Receiving Function.

A
  1. Segregation of duties.
  2. Prenumbered GRN for every receipt.
  3. Cross-check with purchase order and Sign GRN.
  4. Daily transfer of GRN to record in accounts
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11
Q

Control Activities of Purchase Invoicing Department.

A
  1. Segregation of duties (order, receiving, invoice).
  2. Recalculation/Cross checking of invoice with Order & GRN.
  3. Check discount allowed by suppliers.
  4. Prenumbered and authorized of debit notes.
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12
Q

Control activities of Purchase Accounts Function

A
  1. Check complete audit trail is available (PO, GRN, Invoice).
  2. Batch Totals.
  3. Control A/C reconciliation
  4. Monthly Account statements.
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13
Q

Control activities for addition or deletion to Non-current assets.

A
  1. Authorization of purchases and disposal.
  2. Supplier invoices should be approved by the person who authorized the purchase..
  3. Sequential numbering on fixed assets.
  4. Updated fixed assets’ register.
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14
Q

Control activities for recording expenditure over non-current assets.

A
  1. Invoices should be marked with appropriate account head.
  2. Fixed asset register should be reconciled with GL.
  3. MGT should review the classification of capital and revenue expenditures to ensure compliance with standards.
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15
Q

Control activities of recording inventory.

A
  1. Segregation of duties (ordering, custody, recording)
  2. Inventory records.
  3. Accurate and timely recording of receipts
  4. Accurate and timely recording of issue
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16
Q

Control activities over physical safeguarding of inventory.

A
  1. Restricted physical access.

2. Inventory count and reconciliation

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17
Q

Control activities over valuation of inventory.

A
  1. Updated Standard Costing.

2. Identification of slow moving item

18
Q

Control activities over management of inventory levels.

A
  1. There should be minimum or maximum Inventory levels for all items.
19
Q

Instructions for conducting inventory count.

A

Auditor should that following instructions are followed.

  1. movement of inventory should be stopped.
  2. Inventory count sheets should be pre-numbered but inventory balance should not be included in list.
  3. Count team should be independent of warehouse department,
  4. Clear instructions should be given to all teams about which area is to counted by which team and when.
  5. Inventory count sheets should not be filled by pencils.
  6. Count sheets are signed by members of count team to ensure accountability.
  7. Counted inventory should be marked to avoid duplication.
  8. Damaged inventory or inventory held by third party should be identified.
20
Q

What are the methods of documentation of an internal control system.

A
  1. Narrative Notes.
  2. Questionnaires’.
  3. System Flowchart.
21
Q

Define Narrative Notes.

A

Narrative notes is a written description of accounting system and control activities invloved in processing transactions.

22
Q

Define Questionaries.

A

They consist of list of questions to record and evaluate controls in a particular aspect of accounting system.

23
Q

Define Flowcharts.

A

Flowchart provide a documentation of accounting system in the form of a diagram using standardized symbols.

24
Q

Advantages And Disadvantages of Narrative Notes.

A

Advantages:

  1. Simple and easy to prepare.
  2. Easy to understand for whole team especially for juniors.

Disadvantages:

  1. Lengthy and time consuming.
  2. Difficult to identify missing controls.
25
Q

Advantages And Disadvantages of Questionnaries.

A

Advantages:

  1. Quick to prepare.
  2. Deficiencies are identified easily.

Disadvantages:

  1. Standard list may miss unusual controls.
  2. Client can overstate level of control easily.
26
Q

Advantages And Disadvantages of Flowchart.

A

Advantages;

  1. Information is presented in a logical sequence.
  2. Entire system can be viewed from one diagram.

Disadvantages;

  1. Difficult to amend.
  2. Requires expertise to draw and use flowchart.
27
Q

Define Internal Control Questionnaires (ICQ).

A

ICQ is a list of questions designed to establish whether or not specific controls exists. Questions are designed in such a way that Yes indicates a good control and No indicate a poor control.
Examples:
1. Are credit limits checked before approval of sales order.
2. Are purchase invoices are compared with goods receipt note before recording.

28
Q

Define Internal Control Evaluation questionnaires.

A

ICEQ is a list of small number of key control questions designed to establish whether there are controls which prevent or detect specific errors or omissions. A list of control objectives are compiled and client is asked about what controls are placed to address them.
Examples:
1. How do you ensure that goods are sold to only those customers who can pay.
2. How do you ensure that payable is recorded only for those goods actually received.

29
Q

Whether an ICQ of a previous year can be used after modifications.

A

instead of preparing a new ICQ each year, it is better to use ICQ of previous year after certain modifications.
Following procedures are performed to do this:
1. Obtain ICQ from pervious year’s audit file.
2. Check accuracy of ICQ by:
_ Inquiring the client (about any changes in system or any deficiencies are removed).
_ Inspecting client’s system documentation.
_ Walk through test.

30
Q

Define Walk Through Test.

A

It is a procedure in which auditor select a transaction and traces it through the various stages of system to establish whether his understanding about accounting system and control system is correct or not,

31
Q

Auditor’s course of action if a deficiency is identified in internal control system.

A

Auditor shall:

  1. Increase the risk of Material Misstatement.
  2. Decide not to rely on internal control system of client, if weaknesses are unacceptably high.
  3. Communicate deficiency in internal controls to MGT on timely basis.
  4. If deficiency is significant, auditor shall communicate it to TCWG.
32
Q

Define Management Letter and its main contents.

A

MGT letter is a document prepared by auditor to communicate deficiencies in internal control to MGT and TCWG.
Contents include;
1. Description of internal control deficiency.
2. Potential effect/consequences of deficiency.
3. Suggestion of remedial action.

33
Q

Features of Internal control system of a small entity.

A
  1. There is active involvement of owners in MGT of business. Therefore, entity’s control environment depends on integrity of such persons.
  2. Higher level of MGT oversight.
  3. There may not be formal information system relevant to F/S.
  4. Authorization and performance review by owner-manager
  5. High risk of MGT override of control.
34
Q

Risk/Problems in audit of a small entity

A
  1. MGT may lack expertise to control the entity.
  2. Many control activities are costly or impracticable for small entities and therefore, inappropriate.
  3. Greater potential for MGT override of control.
  4. Adequate audit trail may not be available to obtain sufficient and appropriate evidnece.
35
Q

Audit approach in audit of a small entity.

A
  1. Auditor is unlikely to use CAAT.

2. Auditor shall place less reliance on controls and large amount pf substantive procedures should be performed.

36
Q

Control Activities over Cash Receiving.

A

Controls over cash received through Post:

  1. Monitor mail-opening process.
  2. Listing of cash received by independent person.

Controls over Cash Sales (at counter):

  1. Segregation of duties (receiving & recording
  2. Restricted employees to receive cash.
  3. Till roll or cash receipts for every transaction.
  4. Reconciliation of cash received and recording by independent person.

Controls to ensure all money received is banked:

  1. Prompt banking.
  2. Match deposit in bank with receipts and cash book
37
Q

Control Activities over Cash Payment.

A
  1. Supporting documents
  2. Cancellation of documents
  3. Authorization of payments
  4. Prompt Recording
38
Q

Control Activities over cash balance.

A

Controls over Cash in hand:

  1. Restricted employees to receive cash.
  2. Heavy locked box in secured place

Controls over Bank Balance:

  1. Established procedures for new bank account.
  2. Segregation of duties.
  3. Secure cheque book.
  4. Bank Reconciliation Statement.
  5. Control over devices used to prepare cheques electronically
39
Q

Control Activities over petty cash.

A
  1. Set reasonable limit.
  2. Keep petty cash in a heavy locked box (or locked drawer)in secured place.
  3. Spending on pre-approved expenses only.
  4. Spending should be supported by documents and recorded on petty cash voucher.
  5. Surprise checks of petty cash by independent person.
  6. Petty cash expenses should be periodically recorded in general ledgers, after review by finance manager.
  7. When petty cash is ‘topped up’, the amount of withdrawal from bank should be equal to total of petty expense recorded
40
Q

Control Activities over Calculating Gross Wages and salaries.

A

Only for real employees:

  1. Segregation of duties (HR & Payroll & Payment)
  2. Authorization of Appointment &pay by HR.
  3. Pay authorized by HR.
  4. New employees authorized by HR.
  5. Communication of resigned employees

Only for real work:

  1. Prenumbered and authorized Time Sheets (or clock-card system with monitoring).
  2. Approval of overtime & bonus.

Calculated correctly:

  1. Use authorized time sheet and rates
  2. Range Tests.
  3. Recalculation and approval of payroll by independent person
41
Q

Control Activities over calculation of tax and other deductions.

A
  1. Use latest rates of tax.
  2. Authorization of voluntary deduction by employees
  3. Recalculation and approval of deduction by independent person
42
Q

Control Activities over Payment of wages and salaries.

A
  1. Authorization of payments by CFO (total as well as individual).
  2. Confirmation of identity before payment (for cash, as well as bank transfer)
  3. Reconciliation of salaries payable with salaries paid.
  4. Timely payment of deductions
43
Q

Control activities over recording payroll in acounts.

A
  1. Use authorized payroll.
  2. Timely recording.
  3. Reconciliation of payroll file with general ledger.

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