Week 9 Part 1

Question 1

why is documenting the accounting systems necessary?

Answer 1

allows auditors to understand how the system works

then they can test the controls

then finally, they can test the numbers

Question 2

what are the 3 main accounting systems?

Answer 2

sales
purchases
payroll

Question 3

what are the 5 various ways an auditor can document the system?

Answer 3

• speaking to client staff
• observe the system in action
• walk through test (using dummy data)
• inspect source documents
• look at prior year files

Question 4

what are the 4 methods of documenting the system?

Answer 4

• narrative notes
• flow charts
• internal control questionnaire
• internal control evaluation

Question 5

pros & cons of narrative notes

Answer 5

pros = simple & easy to understand

cons = time consuming

Question 6

pros & cons of flow charts

Answer 6

pros = easy to view entire system and spot missing controls

cons = still requires narrative notes and difficult to change

Question 7

pros & cons of internal control questionnaire

Answer 7

pros = quick to prepare and ensure all controls are present

cons = controls may be overstated and less likely to capture uncommon controls

Question 8

pros & cons of internal control evaluation

Answer 8

pros = controls less likely to be overstated

cons = may be irrelevant to some clients and unlikely to spot uncommon controls

Question 9

what must happen after the system is documented?

Answer 9

test the controls

to ensure controls are working effectively

Question 10

what are the 3 typical tests when testing the system?

Answer 10

• observation
• inspection of documents recording performance of the controls
• using test data (CAATs)

Question 11

ISA265 communicating deficiencies in internal control to those charged with governance and management requires auditors to do what?

Answer 11

requires auditors to report deficiencies to management

also tells auditors HOW to report deficiencies

Question 12

how should auditors report deficiencies to management under ISA265?

Answer 12

• report deficiency
• report consequence
• provide recommendation

e.g., deficiency = credit checks aren’t being performed,
consequence = irrecoverable debts and less profits,
recommendation = perform credit checks

Question 13

what is the flow of the SALES system?

Answer 13

1) order received
2) goods dispatched
3) invoice sent
4) sale recorded
5) payment received

Question 14

invoice? GDN? GRN? credit check?

Answer 14

invoice = document from seller to buyer showing quantity, price, product etc

GDN = proof that goods have been delivered

GRN = proof that goods have been received

credit check = checking someone’s credit score/credit history

Question 15

sales system’s key controls and tests of controls?

Answer 15

1) credit checks are performed (inspect to make sure)

2) customer signs GRN (inspect sample of GRNs)

3) match invoices to GRNs (match sample of invoices to GRNs)

4) discounts must be authorised (check sample’s authorised)

5) sales invoices use authorised price list (check with sample)

6) monthly customer statements are sent (check sample of customers)

7) sales ledger receipts are matched to invoice before processing (check sample matches)

Question 16

what is the flow of the PURCHASES system?

Answer 16

1) order made
2) goods received
3) invoice received
4) purchase recorded
5) payment made

Question 17

purchases system key controls and test of controls?

Answer 17

1) ensure only appropriate goods are bought (inspect sample)

2) sequential purchase orders are made & pre numbered (inspect the list to ensure weekly sequence checks)

3) approved supplier list is bought from ONLY (match sample)

4) inspect GRN for quantity & condition (inspect sample)

5) inventory check’s done before ordering (inspect sample)

6) match invoice to GRN before processing (inspect sample)

7) supplier statement reconciliation is performed (check sample)

Question 18

supplier statement reconciliation?

Answer 18

suppliers send statements every month

statements should be matched to our purchases system

Question 19

what is the flow of the PAYROLL system?

Answer 19

1) time sheets/clock cards
2) calculate gross/net pay
3) standing data amendments
4) pay employees & tax authorities
5) record payroll costs

Question 20

standing data amendments?

Answer 20

e.g., changes to people’s pay (promotion), individuals leaving/joining the company (delete/add to payroll system) etc

Question 21

what are the key controls and tests of controls for the PAYROLL system?

Answer 21

1) supervision of clock card use (observe)

2) system calculates wages, payroll manager checks to ensure accuracy (check sample of weeks have been checked by payroll manager)

3) company accountant reviews payroll to ensure reasonable figures (check sample of weeks)

4) payroll payments are signed by 2 directors (check sample of weeks)

5) check bank statements for wages that haven’t cleared (check bank statement for anomalies)

6) authorisation of standing data forms (check sample has been authorised)

Question 22

clearing?

Answer 22

the process of settling a transaction