Internal Control Flashcards
1
Q
Documenting IC - Narrative Notes - description
A
- consist in a description of of the system
- they describe what occurs in the system at each stage
- include details of any control which operates at each stage
2
Q
Documenting IC - Narrative Notes - advantages
A
- Simply to record
- discussions with staff members are easily written up as notes
- can facilitate understanding
3
Q
Documenting IC - Narrative Notes - disadvantages
A
- can be time consuming
- awkward to update if written manually
- potential difficulty in identifying missing IC
4
Q
Documenting IC - Flow Charts - description
A
Flow charts are graphic illustration of of the physical flow of information through the accounting system
5
Q
Documenting IC - Flow Charts - advantages
A
- easy to follow and review the system
- can be prepared quickly by an experienced user
- eliminate need for extensive narratives
- it can be effective in identifying missing controls, due to the use of standard symbols
6
Q
Documenting IC - Flow Charts - disadvantages
A
- they more suitable for describing standard systems, as unusual transactions will need to be described in narrative notes
- major amendments are difficult to be done without redrawing the chart
- time can be sometimes wasted by charting areas that do not have audit significance
7
Q
Documenting IC - Questionnaires - description
A
- ICQs or ICEQs contain a list of questions for each major transaction cycle
- ICQs are used to assess whether the controls exists
- ICEQs are used to assess the effectiveness of controls in place
8
Q
Documenting IC - Questionnaires - advantages
A
- quick to prepare
- if drafted thoroughly, they can ensure all controls are considered
- ICEQs are easier to apply as they are drafted in terms of objectives rather than specific controls
- ICEQs can highlight deficiencies where extensive control procedures are required
9
Q
Documenting IC - Questionnaires - disadvantages
A
- can be drafted vaguely, hence misunderstood so important controls can be missed
- may contain a large number of irrelevant controls
- may not include unusual controls which might be effective in particular circumstances
- the client may be able to overstate controls
10
Q
CAATs - Audit procedures (use of audit software)
A
- to cast inventory listing to confirm total is complete and accurate
- to extract a statistical sample of inventory items - to verify their cost and NRV
- to calculation of inventory holding period/inventory T/O could be carried out by audit software - to be used to compare to prior year’s/competitors’ ratios
- to extract aged inventory analysis, to be used to identify any obsolete or slow moving items, which may require a write-down or an allowance
- to perform calculation during testing inventory (eg: recorded cost - weight or quantity by cost per kg or unit)
- to confirm whether the inventory adjustments (during the count) have been correctly recorded in final inventory records
- to verify cut-off - by testing whether the dates of last GRNs or GDNs relate to y/e and any with a date after y/e have been excluded from inventory records.
11
Q
CAATs - advantages
A
- allow audit team to test large volume of inventory date more accurately and more quickly
- reduces the risk of human error during testing
- can test actual inventory transactions within the system
- bring time and cost savings in the long term, if system unchanged, compensating for any set-up costs
- can be used to test program controls as well as general IC associated with computers
- allow auditors to focus on risk areas and issues that require judgement, rather than performing routine calculations
12
Q
CAATs - disadvantages
A
- setting up the software needed for CAATs in the first year is likely to be time consuming and expensive
- auditor will need training so they have a sufficient level of IT knowledge to apply CAATs when auditing the inventory system
- if testing performed on data in the live inventory system, there is a risk that live client data may be corrupted or lost
- if testing is done on data from copies of the live file, there is a risk that these files have been affected by the copying process/tempered with
- if audit client’s inventory system changes, it may be expensive and time consuming to redisign CAATs
- if client’s inventory system is not compatible with auditors’ CAATs then they will need to be tailored to client’s system, which might be expensive
- if there is no adequate system documentation available, it will be difficult to design appropriate CAATs, due to a lack of understanding of the inventory system of the client
13
Q
Limitations of internal controls
A
- risk of management override controls
- risk of employee
