Internal Controls Section B (Risks and Recommendations) Flashcards
What is the test of control?
To ensure the control is operating effectively
What is meant by a direct control?
Prevent, detect and correct mistakes in the accounts
What is meant by a key control?
Action management have taken to reduce risk of fraud and error
Risk of production of goods not being stopped for an inventory count?
Goods could be included in count when they shouldn’t be, resulting in double counting
Control recommendation of production of goods not being stopped for an inventory count?
Company should minimise planned dispatches for day of count. Goods to be dispatched to customers should be excluded from inventory by being set aside
Risk of production of inventory count being undertaken by 20 teams from the warehouse and is overseen by warehouse supervisor
Represents lack of segragation as they are not independent
Control recommendation of production of inventory count being undertaken by 20 teams from the warehouse and is overseen by warehouse supervisor
Different department should do count to ensure segragation of roles. Make financial controller oversee count, not warehouse supervisor
Risk of inventory sheets detail quantities held at date of the count?
Counters may rely on sheet instead of counting themselves. This could result in overstatement or understatement
Control recommendation of inventory sheets detail quantities held at date of the count?
Count sheets shouldn’t contain quanities just product codes. Ensures counters have to physically count inventory
Risk of 20 teams comprising two individuals with no clear division of responsibility?
Two members could be counted, meaning errors could go unnoticed
Control recommendation of 20 teams comprising two individuals with no clear division of responsibility?
Role of teams should be defined in count instructions (e.g. one individual doing counting and another one recording)
Risk of when an area is counted it is marked off on warehouse map in the office instead of marking it?
If map not updated properly, items of inventory could be incorrectly recorded
Control recommendation of when an area is counted it is marked off on warehouse map in the office instead of marking it?
Warehouse bays should be inspected at end of count to ensure completeness of the count
Risk of when inventory is only counted by one team?
Difficult if any omissions are due to counting errors or genuine adjustments
Control recommendation for when inventory is only counted by one team?
Do a second count not done by a team involved in the first count. Differences are then compared
Risk of when large quantity of spare parts are not being counted as they are unusable?
Items not being counted as all items should be included no matter if they’re old or obsolete
Control recommendation of when large quantity of spare parts are not being counted as they are unusable?
Obsolete items should be flagged on inventoruy count for valuation, not omitted
Risk of when completed inventory sheets are passed to warehouse assistant for an immediate update?
There is no investigation of differences between physically and what’s been recorded. Meaning understatement or overstatement is possible
Control recommendation of when completed inventory sheets are passed to warehouse assistant for an immediate update?
All differences should be investigated to estbalish whether inventory records are incorrect
Risk of when warehouse supervisor is going to undertake valuation of work in progress at year end when previously done by expert?
Warehouse supervisor may not have necessary expertise to determine stage of completion
Control recomenndation of when warehouse supervisor is going to undertake valuation of work in progress at year end when previously done by expert?
A specialist should continue to value work in progress or if that’s not possible, specialsit should check supervisor’s work
Risk of when cred it check performed on all customers after which finance director sets the limit and this remains unchanged
If credit limits aren’t reviewed regularly, they could be too high (customers with bad credit) or too low (lose of revenue)
Control recommendation of when credit check performed on all customers after which finance director sets the limit and this remains unchanged
Credit limits should be reviewed regularly and amended when approprate
Risk of when no copy of sales order is kept by the sales department?
If orders are not fulfilled on a timely basis, this reduces customer goodwill
Control recommendation of when no copy of sales order is kept by the sales department?
Sales order form should become four part instead of three part, so the form is sent to the sales department
Risk of when discounts aren’t reviewed and are being set by sales staff?
No check if the discount is reasonable, loss of revenue doesn’t meet business targets
Control recommendation of when discounts aren’t reviewed and are being set by sales staff?
All sales discounts should be authorised in advance by an appropriate official. Master file data system should be amended to stop a higher discount fromb eing entered
Risk of when master data access for the sales department is available for everyone in purchasing department?
If anyone can add new suppliers to purchase ledger system, fraudulent payments can occur
Control recommendation of when master data access for the sales department is available for everyone in purchasing department?
Amendments to master file data should only be done by authorised members of the department
Risk of when GRNs not received by finance department for purchase invoices?
Could result in invoices being paid when they haven’t been received
Control recommendation of when GRNs not received by finance department for purchase invoices?
GRN should be sent to finance department on a timely basis for matching to purchase invoices
Risk of when payables clerk only ultilises count controls when inputting invoices into payables ledger?
Suppliers may not be paid on time or incorrect amounts. Losing supplier goodwill
Control recomendation of when payables clerk only ultilises count controls when inputting invoices into payables ledger?
Apply information processing controls (e.g. control totals) rather than just completeness checks to ensure purchase invoices are inputted correctly
Risk of when no checks are performed on an automated system?
Errors and overpayments could be made resulting in a loss of employee goodwill
Control recommendation of when no checks are performed on an automated system?
Senior official should check data and this should be evidenced by a signature
Risk of when payroll clerk can edit payroll data without this being reviewed?
Payroll data can be adjusted to inflate pay of family and deductions being made resulting in loss of employee goodwill
Control recommendation of when payroll clerk can edit payroll data without this being reviewed?
Adjustments made to the reports should be reviewed by a senior offical and evidenced by a signature
Risk of when non-current register is not being physically verified on a frequent basis?
Increased risk of assets being misappropriated and obsolete assets may not be identified on a timely basis
Control recommendation of when non-current register is not being physically verified on a frequent basis?
Devote more resources to ensure checking is done accurately. Write off assets that can’t be located and investigate where such assets could be
Risk of when financial policy is adjusted so items only capitalised if they exceed £20000 (a significant change)
A high threshold will mean significant costs are expensed to SPL and understatement of PPE
Control recommendation of when financial policy is adjusted so items only capitalised if they exceed £20000 (a significant change)
Any significant changes to accounting policies must be discussed at the board level
Risk of when finance director authorises monthly supplier payments but only views total amount of payments to be made?
Without looking at details of payment list, suppliers may be paid an incorrect amount or paid to ficticious suppliers
Control recommendation of when finance director authorises monthly supplier payments but only views total amount of payments to be made?
Finance director should review whole payment listing prior to authorising as well as identify any duplicates or unfamilar names
Risk of when there are no petty cash receipts?
This could mean sundry expenses are being made for non0-business purposes
Control recommendation of when there are no petty cash receipts?
Employees should be required to promptly return a receipt for sundry purchases. The petty cash book should be updated
Risk of when bank reconciliations are done on a quarterly basis?
Error or fraud may not be recognised quickly when done on a timely basis
Control recommendation of when bank reconciliations are done on a quarterly basis?
All bank accounts should be reconciled each month and statements should be investigated and corrected
Risk of when no joiners’ forms are not completed?
Production supervisor may not include all relevant details on email to payroll
Control recommendation of when no joiners’ forms are not completed?
Joiner form should be completed for all new employees. Authorised joiner form should be sent to pauroll on day employee commences employment
Risk of when overtime reviewed quarterly?
Reviewing overtime worked reports quarterly after employees been paid too infrequent. Employees could be paid for hours not worked
Control recommendation of when overtime reviewed quarterly?
Implement a weekly or bi-weekly review of overtime logs by supervisors to ensure accuracy and compliance with policies
Risk of Cawhen calculations not checked in payroll?
Risk system errors which occur won’t be identified. This could result in wages being over or under calculated
Control recommendation of when calculations not checked in payroll?
For a sample of employee, senior member should recalculate workings and compare their results to output from payroll system
Risk of when one manager decides on who receives bonuses for performance?
There are no approved parameters for bonus level as it’s purely based on discretion of one individual
Control recommendation of when one manager decides on who receives bonuses for performance?
Bonus payments should be determined in line with specified and documented criteria and approved by the board
Risk of when bonuses input into system are error and employees spot the error?
Increases payroll cost as if one employee is underpaid, it’s more than likely other employees have been overpaid
Control recommendation of when bonuses input into system are error and employees spot the error?
Bonuses should be reviewed to agree they are in line with documentation provided by HR
Risk of when internet banking detauls are saved in a central location to all payables ledger?
Risk that staff are fraudulently setting up payees, causing misappropriation of funds
Control recomendation of when internet banking detauls are saved in a central location to all payables ledger?
Banking details should only be known by a few authorised staff. Any changes to payees should be documented on a change report
Risk of when reconciling item on bank rec is only investigated by controller if sum of items is different
If reconciling items aren’t reviewed, this causes lack of assurances that reconciliations are being carried out properly
Control recommendation of when reconciling item on bank rec is only investigated by controller if sum of items is different
Reconciling items should be reviewed by controller on a weekly basis
Risk of GDNs not being received immediately to finance department?
Could result in goods despatched being invoiced late. Cut-off issues for revenue and receivables
Control recommendation of GDNs not being received immediately to finance department?
GDNs should be sent to finance department on a more frequent basis (e.g. daily)
Risk of credit controller being replaced?
No one is responsible for monitoring and chasing ageing receivables. Causing increased irrecoverable receivables
Control recommendation of credit controller not being replaced?
Recruit a temporary credit controller to deal with aged receivables listing
Risk of authorisation is too high for assets
Non-business assets being purchased without authorisation
Control recommendation for authorisation is too high for assets
Authorisation level should be reduced to a more appropriate level
Risk when standard costs in inventory are out-of-date?
Raw materials and wages haven’t been adjusted. Causing inventory and profits to be misstated
Control recommendation when standard costs in inventory are out-of-date?
Actual costs for raw materials and labour should be compared to proposed standard costs to ensure they are a close approximation
Risk when exception report changes are not reviewed?
When an exception is not reviewed, changes aren’t likely to happen. Meaning clerks can commit fraud by placing ficticious suppliers
Control recommendation when exception report changes are not reviewed?
Changes to master file data should be reviewed by an authorised person, and such a review should be evidenced
Risk when holiday requests not authorised?
Result in employees taking unauthorised leave, leading to operational difficulties
Control recommendation when holiday requests not authorised?
Employees should receive written confirmation that their holiday has been removed
Risk when temporary staff not processed by HR and documentation not being included?
Could result in temporary employees not being set up in payroll records correctly
Control recommendation for when temporary staff not processed by HR and documentation not being included?
Payroll department should not be notified to accept any new joiner information unless approved by HR
Risk when cash wages collected without ID?
Increased risk wages are paid to the incorrect employee
Control recommendation when cash wages collected without ID?
Drivers collecting cash pay packets should provide form of identification to finance staff member before pay packet is handed to them
Risk when bonus a manager decides on who pays the bonus?
Manager may award excessive bonuses to friends causing additional payroll costs
Control recommendation when bonus a manager decides on who pays the bonus?
Approved bonus parameters should be established across the board. Only determined by a senior official
Risk when driver’s breaks are not monitored?
Drivers could take longer breaks than authorised, meaning money is given to time not worked
Control recommendation when driver’s breaks are not monitored?
Company should monitor throguh electronic means, such as using tracking devices on vehicles
Risk for when staff shortage for IA department?
An under-staffed department means controls can’t be tested thoroughly
Control recommendation for when staff shortage for IA department?
Senior management should consider recrutiing additional employees to join IA function or outsourcing IA function
Risk for when departments significantly exceed their asset budgets?
Increased costs as lack of control over asset expenditure or more services are being provided
Control recomemndation for when departments significantly exceed their asset budgets?
Purchase orders should be compared to annual department budgets as part of authorisation process
Risk for when physical verification of asset for some factories is only done every 8 years?
Increased risk of assets not being checked if non-current asset reguister is not physically verified
Control recommendation for when physical verification of asset for some factories is only done every 8 years?
Each centre should submit list of assets with serial numbers to IA, which is then compared to non-current asset register. Any significant variations investigated
Risk for when all members of payroll department can amend standing data?
Results in errors being made or unauthorised changes being made
Control recommendation for when all members of payroll department can amend standing data?
Password to amend standing data only changed and only communicated senior members of payroll department
Risk for when senior payroll manager if they can process changes along with authorise payments?
Discrepancies may arise due to payroll records on bank transfer being incorrect
Control recommendation for when senior payroll manager if they can process changes along with authorise payments?
Authorisation of bank transfer listing should be done by individual outside payroll department
Risk for when invoices are only chased after 90 days when company’s credit terms are 30 days?
Results in irrecoverable balances and reduced profit and cash flows
Control recommendation for when invoices are only chased after 90 days when company’s credit terms are 30 days?
Credit controller should be appointed to chase outstanding invoices more than 3o days old
Risk when website and inventory system not integrated?
Can result in pear accepting customer orders when goods are not available. Damaging goodwill
Control recommendation for website and inventory system not integrated?
Website should be updated to include an interface into the inventory system
Risk when customer signatures not obtained when goods are despatched
Customers can claim they have not received their goods, thereby goods are sent twice
Control recommendation when customer signatures not obtained when goods are despatched
Customer signatures should be obtained as proof of delivery
Risk when unfilled sales orders haven’t been fulfilled in timely manner?
Could lead to a loss of customer goodwill
Control recommendation when unfilled sales orders haven’t been fulfilled in timely manner?
Once goods despatched, they should be matched to sales orders and flagged as fulfilled
Risk when production requisitions are authorised by production supervisors?
Production supervisors aren’t sufficiently independent and could lead to unnecessary cost if best price is not obtain for asset expenditure
Control recommendation when production requisitions are authorised by production supervisors?
Asset expenditure authorisation levels need to established. High level authorised by board, low level by production supervisors
Risk when finance director compares total of list of bank transfers with the total to be paid per payroll records?
Ficticious employees added to payment listing so even if total payment agrres to payroll records, frauds can be made
Control recommendation when finance director compares total of list of bank transfers with the total to be paid per payroll records?
FD should sign payments list as evidence checks have been udnertaken
Control risk if clerks update the standing data to reflect the increase of wages each year?
Apparent lack of authorisation to changes in standing data increases risk of errors, causing over/under statement of wages
Control recommendation if clerks update the standing data to reflect the increase of wages each year?
Payroll clerks should not be allowed to make standing data changes
Tests of control if clerks update the standing data to reflect the increase of wages each year?
Review log of changes made to the standing data for evidence they were made by a senior member of the payroll department
Risk if HR department is responsible for processing joiners and leavers but operations maanger has taken over due to illness?
Operations manager may not carry out all reqyured procedures for processing temporary new drivers
Control recommendation if HR department is responsible for processing joiners and leavers but operations maanger has taken over due to illness?
All staff appointments, including temporary staff, should only be processed by HR department to ensure correct procedures are followed
RIsk if some departments have already significantly exceeded their annual capital expenditure budgets?
Appears purchase orders for capital expenditure are being placed without being agreed back to annual capital budgets, resulting in overspends
Control recommendation if some departments have already significantly exceeded their annual capital expenditure budgets?
Monthly management accounts should include an analysis of capital expenditure against budget and prior year per department
Risk if receivables ledger control account is only reconciled of the end of April to verify year-end balance?
If receivables ledger only reconciled annually, errors won’t be spotted promptly and receivables may be misstated
Control recommendation if receivables ledger control account is only reconciled of the end of April to verify year-end balance?
Receivables ledger control account should be reconciled on a monthly basis to identify any errors which should be investigated and corrected
Control risk if when raising purchase orders, clerks choose whichever supplier can despatch the goods the fastest?
Could result in ordering goods at a much higher price or lower quality than they would like
Control recommendation if when raising purchase orders, clerks choose whichever supplier can despatch the goods the fastest?
Approved supplier list should be compiled, should take into account price of goods, their quality and also the speed of delivery
Control risk if the purchase day book automatically updates with the payables ledger but this ledger is manually psoted to general ledger
Manually posting the amounts to the general ledger increases the risk of errors occurring
Control recommendation if the purchase day book automatically updates with the payables ledger but this ledger is manually psoted to general ledger
Process should be updated so that on a regular basis the payables ledger automatically updates the general ledger
Control risk if company has a policy of delaying payments to their suppliers for as long as possible?
Despite this maximising bank balances, risk that they are missing out on supplier goodwill
Control recommendation if company has a policy of delaying payments to their suppliers for as long as possible?
Policy of delaying payments reviewed and suppliers should be paid in a systematic way
