Week 9 Part 1 Flashcards
why is documenting the accounting systems necessary?
allows auditors to understand how the system works
then they can test the controls
then finally, they can test the numbers
what are the 3 main accounting systems?
sales
purchases
payroll
what are the 5 various ways an auditor can document the system?
- speaking to client staff
- observe the system in action
- walk through test (using dummy data)
- inspect source documents
- look at prior year files
what are the 4 methods of documenting the system?
- narrative notes
- flow charts
- internal control questionnaire
- internal control evaluation
pros & cons of narrative notes
pros = simple & easy to understand
cons = time consuming
pros & cons of flow charts
pros = easy to view entire system and spot missing controls
cons = still requires narrative notes and difficult to change
pros & cons of internal control questionnaire
pros = quick to prepare and ensure all controls are present
cons = controls may be overstated and less likely to capture uncommon controls
pros & cons of internal control evaluation
pros = controls less likely to be overstated
cons = may be irrelevant to some clients and unlikely to spot uncommon controls
what must happen after the system is documented?
test the controls
to ensure controls are working effectively
what are the 3 typical tests when testing the system?
- observation
- inspection of documents recording performance of the controls
- using test data (CAATs)
ISA265 communicating deficiencies in internal control to those charged with governance and management requires auditors to do what?
requires auditors to report deficiencies to management
also tells auditors HOW to report deficiencies
how should auditors report deficiencies to management under ISA265?
- 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
what is the flow of the SALES system?
1) order received
2) goods dispatched
3) invoice sent
4) sale recorded
5) payment received
invoice? GDN? GRN? credit check?
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
sales system’s key controls and tests of controls?
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)
what is the flow of the PURCHASES system?
1) order made
2) goods received
3) invoice received
4) purchase recorded
5) payment made
purchases system key controls and test of controls?
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)
supplier statement reconciliation?
suppliers send statements every month
statements should be matched to our purchases system
what is the flow of the PAYROLL system?
1) time sheets/clock cards
2) calculate gross/net pay
3) standing data amendments
4) pay employees & tax authorities
5) record payroll costs
standing data amendments?
e.g., changes to people’s pay (promotion), individuals leaving/joining the company (delete/add to payroll system) etc
what are the key controls and tests of controls for the PAYROLL system?
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)
clearing?
the process of settling a transaction
