Week 7 | Controls systems and sampling Flashcards
What are the objective of internal controls?
(7 objectives for management)
- Real: no fictitious or duplicated transactions
- occurrence, rights and obligations and existence - Recorded: that is to prevent or detect omissions of transactions.
- accuracy completeness, valuation and allocation - Valued: Correct amounts assigned to transactions
- accuracy, valuation and allocation - Classified: Transaction are charged to the correct account
- Summarised: transactions must be summarised and totalled correclty
- accuracy, valuation and allocation - Posted: accumulated totals in transaction file are correctly transferred to general and subsidiary ledgers
- Timely: transactions are recorded in the correct accountign period
- cut off and completeness
In reality, which entity internal level control is most emphasised?
Control activities
What some transactional level internal controls?
These controls impact a particular transaction or group of transactions.
Aimed at preventing an error from entering records or detecting errors that do enter the records.
Controls are considered for transaction processes or flows.
How do auditors gain an understanding of the transaction process?
- Identifies major events and transactions in the process
- Identifies risks to correct processing of the transactions: What can go wrong
- For each WCGW, auditor identifies one or more controls
What are stages in the sales process?
Sales transactions
* Processing customer orders
* Approving credit
* Filling and dispatching orders
* Invoicing customers
* Recording the sale and receivable
Receipt transactions:
* Receiving cash
* Depositing cash in bank
* Recording receipt and allocating to receivable
Adjustments:
* Sales returns and allowances
* Bad and Doubtful debts
What are some risks when processing customer orders and their relevant controls
Processing customer orders:
- orders processed to wrong customer: (review of orders processed each day by an independent staff member –> occurrence and accuracy)
- orders taken from customers with no credit history or credit limit:
(application control only allowing orders to be processed against existing approved customer with enough unused credit limit –> occurrence and accuracy) - orders incorrectly input (requirement for acknowledgement of order by customer for any orders placed over $5000 –> accuracy)
What are some risks and their relevant controls when approving credit
- Credit is approved for customers unable to pay (credit committee review and approve all applications for credit over $1000–> accuracy)
- Credit limits are set too high or too low (credit committee review of credit limits on a quarterly basis –> accuracy)
- Credit limits are exceeded (application control requires approval for exceeding credit limits exception report is generated, reviewed and approved –> accuracy)
What are some risks that could occur when filling and dispatching orders and their controls?
- Products are shipped without shipping documents being generated.
Control: Application control generating picking slip and delivery documentation when order is processed
Assertion: completeness, accuracy and cut-off
- Invoices are not raised when goods are shipped
Control: Monthly reconciliation of picking slips generated with no invoice generated. 3 way match of order, dispatch document and invoice. Regular stocktake
Assertion: Accuracy, completeness
- Goods are shipped to the wrong customer
Control: review of delivery address against customer master file by warehouse staff. Three way match of order, dispatch document and invoice
Assertion: accuracy and occurrence
What are types of transactions in the purchase cycle?
Purchase transaction:
- requisitioning goods and services
- preparing purchase orders
- receiving the goods
- storing goods received for inventory
Payment transaction:
- checking and approving the supplier’s invoice
- recording the liability
- paying the liability
- recording the payments
What is audit plan based on?
Audit strategy
How is audit strategy developed?
After gaining an understanding of the client’s business (inherent risk) and internal control structures (control risk)
What does audit strategy provide the basis for?
A detailed audit program
What does audit sampling mean?
Application of audit procedures to <100% of items in population of audit relevance.
All sampling units will have a chance of selection in order to provide auditor ith reasonable basis on which to draw conclusions about entire population.
What is the objective of audit sampling?
The objective of the auditor, when using audit sampling, is to provide a reasonable basis for the auditor to
draw conclusions about the population from which the sample is selected.
What is statistical and non-statistical sampling?
Statistical sampling is an approach to sampling that has following features:
- random selection of sample items
- use of probability theory to evaluate sample results, including measurement of sampling risk
Non statistical sampling:
Does not have characteristics of statistical sampling
