Transcript Internal controls and control testing: Part 3

Internal controls and control
testing: Part 3
Chapter 10 – BPP SET TEXT
Aims
• Understand the internal controls, internal
control objectives, audit tests and audit
assertions for: purchases, sales, inventory,
cash/bank, wages/salaries, capital/revenue
expenditure.
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Objectives
You should be able to:
• Analyse the quality of system controls by
considering internal control objectives ,
assertions & actual controls.
• Suggest internal control improvements for a
particular cycle.
• Discuss assertions, control objectives, controls
and tests of controls for a particular cycle.
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We’ve got the auditor examining the
business
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Sales system
• 3 main areas in a sales system:
1. Sell (authorisation)
2. Send goods outwards (custody)
3. Account for the transaction (recording)
• 4 things to consider: audit assertion (auditor),
control objectives (business), controls (business),
test of controls (auditor).
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ASSERTION
CONTROL
OBJECTIVE
Occurrence &
existence (sales
actually took
place & the sales
amount in the
statement of
comprehensive
income is a true
reflection of sales
income)
Taking orders,
Segregation of duties.
recording sales
and sending out
the goods to the
customer are
separate functions
performed by
different
individuals.
Observe the
segregation of duties
and evaluate whether
this is sufficient.
Sales are made to
a valid customer
within his/her
credit limit
(customers have
good credit rating)
Review the
policy/procedure for
customer approval and
setting of credit limits.
Compare customer
balances at different
times of the year to
the pre-approved
credit limits (& test
other application
controls of cr limits). 6
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CONTROLS
Customers who buy
on credit must be preapproved (according
to customer policy &
regular review of cr
terms) by
management and all
sales must be within
customer’s credit limit
& on pre-approved cr
Greenwich
terms.
(RefUniversity
checked)
TEST OF CONTROLS
ASSERTION
CONTROL
OBJECTIVE
CONTROLS TEST OF CONTROLS
Select a number of sales orders
and follow through to customer
credit approval document by
appropriate management and
inspect order form for evidence
of checking credit approval/credit
approval by snr staff.
Review all new customer files and
ensure satisfactory references
were obtained and are kept on
file.
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ASSERTIO
N
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CONTROL
OBJECTIVE
CONTROLS
TEST OF CONTROLS
Goods and
services are
provided at
authorised prices
on authorised
terms. Customers
are encouraged
to pay on time.
Authorised
price lists and
trade terms are
in place.
Select a number of sales invoices.
Trace the prices on the invoice
through to the authorised price list.
Inspect the invoice for the terms of
trade and follow this through to the
authorised terms of trade. Examine
application controls for authorised
prices/terms.
Sales are made to
a valid customer
with good credit
rating.
Management
needs to
approve
changes to
existing
customer
details, such as
address or
bank account
details.
Review changes during the year
(could compare beginning of yr and
end of yr customer standing data)
and inspect management
authorisation (signed
document/authorisation code) for
changes to existing customer .
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ASSERTION
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CONTROL
OBJECTIVE
CONTROLS
When a sale is
recorded, this
actually
represents
goods that are
shipped.
Sales are only recorded into the
Select a number of
system if there is an approved
sales invoices and
order form and shipping document. trace it through to
authorised order
forms and shipping
documents. Examine
the application
controls for
authorisation.
Account for numerical sequences
of invoices-for instance if it is a
hardcopy invoice book an
appropriately authorised employee
needs to sign for taking invoice
book x with invoices number y-z.
The unused invoice books need to
be locked away. Issue invoices in
triplicate or have a computer code
that automatically generates
invoices
numerically.
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TEST OF CONTROLS
Review and test the
entity’s procedure
for accounting for
numerical sequence
of invoices.
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ASSERTIO
N
CONTROL CONTROL
OBJECTIVE
CONTROL TEST
Customer statements are sent out on
a monthly basis. The total of the
customer statements at month end
agree to the debtors ledger and the
GL debtors balance at month end and
any differences are properly
reconciled and the reconciliation
reviewed. Customer
queries/complaints are handled
independently. (This can be classified
as rights/obligations as well=recorded
sales result in customers regarding
whom the company has a legal right
to collect money from.)
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Review the entity’s
procedures for
sending out
monthly statements
and dealing with
customer
complaints. Inspect
a number of month
end reconciliations
for accuracy. Trace
balances of debtors
ledger and GL to
debtors ledger and
GL for particular
months. Investigate
validity of
reconciling items.
Cast rec. for
accuracy & inspect
for management
authorisation
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ASSERTION
CONTROL OBJECTIVE
CONTROL
CONTROL TEST
Completeness
All the sales are
recorded.
Have sequential
numbering for
order forms and
sales invoices.
Review entity’s
procedures for
accounting for
numerical sequence of
invoices and test this eg:
Through inspection of
the invoice sign out
book & discussion with
personnel/ audit
software obtain the
sequential parameters
of invoices used within
the period. Select a
number of invoice
numbers and follow this
through to the ledger.
Select a number of
invoices in the ledger
and ensure it falls within
the established
parameters.
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ASSERTION
CONTROL
OBJECTIVE
CONTROL
CONTROL TEST
All goods and
services sold are
correctly invoiced.
Match shipping
docs to sales
invoices.
Select a number of
shipping docs and
trace this through
to the invoice and
the ledger entry.
Sales invoices are
Review a sample of
reconciled to a daily reconciliations.
sales report.
Trace daily sales
report figure
through to actual
daily sales report
and total sales
invoices figure to
actual sales invoice
for particular day.
Review recs for
accuracy and
authorisation.
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ASSER CONTROL OBJECTIVE
TION
Accur
acy
All sales and adjustments are correctly
journalised, summarised and posted
to the correct accounts. Invoice details
are accurate.
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CONTROL
CONTROL TEST
An open order file is
kept and reviewed
regularly.
Inspect the open
order form for regular
reviews and obtain
explanations and
evidence for
unfulfilled, long
outstanding orders.
Sales invoices and
matching
documentation are
needed for all entries.
The input of data to
generate the sales
invoice must be
checked for accuracy,
the input of data
originating from the
sales invoice must be
reconciled with the
total of the sales
invoices.(control
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totals)
Select a number of
sales entries in the
ledger and trace this
through to the
supporting
documentation (sales
invoice, order form,
shipping document.)
Cast invoice for
accuracy. Cross check
details between
documents and ledger
entry.
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ASSERTION
CONTROL OBJECTIVE
CONTROL
Cut-off
The sales are recorded in the
right period.
Shipping docs are sent Compare date on
to invoicing on a daily sales invoice with date
basis.
on corresponding
shipping doc.
Sales are recorded on
the day it occurs.
CONTROL TEST
Select a number of
sales invoicescompare date on sales
invoice with date in
sales ledger.
Select the last few
shipping docs before
an the first few after
year end. Follow this
through to the ledger.
Inspect that last few
before y/e are
captured in this fin
year and first few for
next year are not.
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ASSERTION
CONTROL OBJECTIVE
Classification All transactions are properly
classified in the accounts.
CONTROL
CONTROL TEST
There is an authorised Review the treatment
chart of accounts in
of the sales ledger
place.
within the accounts
hierarchy for proper
classification as
revenue in the
statement of
comprehensive
income.
There are authorised
codes in place for
different types of
products or services.
Examine a number of
sales invoices for
proper classification.
Test application
controls for codes.
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Did you notice?
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Directional testing
• Direction matters!!!
When we tested for completeness we started
at the shipping docs and followed this through
to the sales ledger.
• When we tested for existence/occurrence we
selected sales invoices in the ledger and
followed this through to the shipping docs and
authorised order forms.
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Purchases system
• 3 main things happening:
1. Order goods (authorisation)
2. Receive goods (custody)
3. Account for goods (recording)
Same 5 assertions as for sales:
Existence/occurrence, cut-off, completeness,
classification, accuracy + rights and obligations
(which we said could be added to sales when we
made the link to debtors).
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Assertions, objectives, controls and
tests
Assertion
Objective
Control
Test
Existence/occurren
ce
Ordering of goods,
receipt of goods
and accounting are
all performed by
different people.
Segregation of
duties.
Observe the
segregation of
duties & evaluate
whether this is
sufficient.
Purchases relate to
goods/services
ACTUALLY received.
Have a policy in
place for approving
an order of
goods/services.
Inspect the
policy/procedures
and inquire
regarding these.
For every intended
purchase there
must be a
purchase-order that
is approved by
management.
Select a number of
purchase entries in
the GL and follow
this through to an
approved purchase
order.
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Assertion
Objective
Control
Test
Assertions, objectives, controls
Review and
the list of
people that are
tests
allowed to approve
orders for
reasonableness and
appropriate level of
seniority.
Every receipt of
goods must be
matched to an
approved purchase
order.
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Select a number of
receipts from the
goods received
register in the store
room, if there is no
such register in
place select a
sample of orders.
Match the details of
the GRN with a preapproved order.
Inspect date of
order approval and
compare this to the
date on the GRN. 20
Assertion
Objective
Control
Test
approved purchase
order.
number of orders
and follow this
through to signed
Goods Received
Note (GRN) or
other evidence of
receipt and checks.
The stores clerks
receiving the goods
sign as evidence of
responsibility.
Select a number of
orders and follow
this through to
signed
documentation of
acceptance of
goods (GRN?).
Assertions, objectives,
controls
Upon receipt
of
Observeand
staff
goods, check
receiving goods for
quantity and type
proof of performing
tests
of product to
this check. Select a
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Assertions, objectives,
controls
and
Purchase
Select a number of
orders and
invoices in the
tests
GRNs are
purchases ledger and
Assertion
Rights /
obligations
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Objective
Recorded purchases on
credit represent the
liabilities of the entity.
IK
Control
Test
matched with
the supplier’s
invoices.
follow this through to
the physical invoice
matched with the GRN
and purchase order.
Inspect the 3
documents for
agreement in
description, quantity
and price.
Purchase
orders and
GRNs are
matched with
the supplier’s
invoices.
Select a number of
invoices in the
purchases ledger and
follow this through to
the physical invoice
matched with the GRN
and purchase order.
Compare.
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ASSERTIO
N
OBJECTIVE
CONTROL
TEST
Accuracy,
valuation
All purchases are
recorded correctly
and at the right
value.
Match invoices with GRNs and
purchase orders to confirm price
and quantity.
Select a number of
invoices in the
purchases ledger and
follow through to the
supporting docs.
Compare details.
Calculations on invoices are
Select a number of
checked, things like quantity x
entries in purchases
price, applied trade discounts, VAT. ledger and follow
through to invoice.
Cast and recalc to
ensure accuracy on
invoice.
Amount posted to GL is reconciled
to the purchases ledger.
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Review recon (check
balances to…,consider
reconciling items,
authorised?)
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ASSERTION
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OBJECTIVE
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CONTROL
TEST
A monthly reconciliation is
performed between the purchases
ledger and the customer
statement.
Review recon(check
balances to…,consider
reconciling items,
authorised?)
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ASSERTION
OBJECTIVE
CONTROL
TEST
Classification
Purchases are
correctly classified
as such and treated
correctly in the
financial
statements.
Purchases orders
and GRNs are
matched to the
supplier’s invoice
to ensure valid
purchases are
recorded as such.
Reconciliations
between
purchases ledger,
GL, Supplier
statement. There is
a chart of accounts
in place for correct
treatment of
ledger accounts.
RED ON THIS
SLIDE=RIGHTS/OBL
IGATIONS;VALUATI
ON/ACCURACY
Select a number of
invoices from the
purchases ledger
and match with
supporting docs.
Inspect the
authorised chart of
accounts for
approval from the
right level of
management.
Test application
controls. Review
purchases journal
and GL for
reasonableness,
any unexpected
items such as a
purchase of fixed
assets?
Normal checks on
reconciliations… 25
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ASSERTION
OBJECTIVE
CONTROL
TEST
Completeness
All purchases are
recorded
Purchase orders
and GRNs are
matched with the
supplier invoice.
Select a number of
purchase orders
and follow through
to GRNs and
invoices and ledger.
Ensure details
agree.
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ASSERTION
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OBJECTIVE
IK
CONTROL
TEST
Periodic accounting for
prenumbered GRNs and purchase
orders.
Review entity’s
procedure for
accounting for
prenumbered docs.
Inspect & observe to
verify explanations
given by
personnel.(See
example of controls
over sequential
numbering under
sales.) Examine
application control.
Have senior personnel review the
purchases journal every
day/month.
Inspect evidence of
independent check .
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ASSERTION
OBJECTIVE CONTROL
TEST
Cut-off
Purchases GRNs /goods received
are
reports are sent to the
recorded
accounts dept. daily.
in the right
period.
Inspect a number of GRN’s / goods
received reports for evidence of
when this was received by the
accounts dept.
/Compare dates on reports to dates
on relevant vouchers.
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Procedures to ensure
recording of goods/
services asap after
receipt.
Select a number of GRN’s and follow
through to purchases
ledger/purchases journal . Compare
dates on GRN with dates of entry by
accounts dept. /Compare dates on
vouchers to dates in purchase
journal
GRNs sent to accounts
dept daily and
procedures in place to
ensure transactions
are captured asap
after transaction.
Select the last couple of GRNs shortly
before and the first couple shortly
after year end and follow through to
ledger to ensure last few are included
in this audited financial year and first
few of next year are not included.
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Remember
*SPELL IT OUT: invoice, shipping docs, authorised
sales order form or supplier invoice, authorised
purchases order form, GRN. Don’t be general and
say things like supporting documents – WHICH
SUPPORTING DOCS?
*USE VERBS – inspect, recalculate, inquire,
observe, read , match NOT make sure, establish
whether …
*When you review a reconciliation you have to
follow balances being reconciled through to
originating records/docs, re-calc recon for
accuracy, investigate/inquire around reconciling
items. Inspect for independent, snr authorisation
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Auditing inventory
3 Scenario’s:
1.Entity has a perpetual system, ie inventory is
counted continuously. No year end count is
Performed. If controls risk is LOW follow a
controls based approach.
2. If the year end count is performed PRIOR to y/e
and adjusted by perpetual inventory records for
y/e value, control risk must be assessed as LOW.
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Auditing inventory
• If inventory quantities are determined via y/e
date count, a PURELY SUBSTANTIVE approach is
taken. (Covered in chapter 13)
• Note that most controls on inventory were
covered under PURCHASES and SALES cycles.
• Auditor now concerned with how business
safeguards inventory & how movements are
recorded.
• Detailed tests on valuation are carried out @
substantive stage.
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Inventory assertions, objectives,
Occurrence/
All inventory
Prenumbered
Inspect
Existence
movements
are
documentations
such documentation in
controls,
and
tests.
authorised and
as GDNs (Goods
use.
ASSERTIONS
OBJECTIVES
CONTROLS
recorded.
Delivered Notes) and
GRNs (Goods
Received Notes) in
place.
Reconcile inventory
detailed records with
ledger (GL).
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TESTS
Review a sample of
reconciliations.
(Confirm GL bal acc to
rec to GL bal, confirm
detailed records bal.
acc to rec to detailed
records bal. Inspect
/query reconciling
items. Recalc
accuracy of rec.
Inspect for review of
snr independent
personnel.)
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ASSERTIONS
assertions, ob,
and
tests.
Segregation of duties Observe/evaluate
OBJECTIVES
CONTROLS
TESTS
proper segregation of
duties.
Inventory included in
the statement of
financial position
physically exists.
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Physical safeguards
are in place to ensure
inventory is not
stolen
Review security
systems in place,
CCTV, Locks, access.
Separate
responsibilities for
recording and
custodianship
Review policies and
procedures in place
and discuss with
relevant staff.
Inventory is counted
regularly.
Review count
procedures and
attend physical
inventory count and
observe
adherence/nonadherence to count
procedures.
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ASSERTIONS
Completeness
assertions,
ob,
and
tests.
All purchases and
Have controls to
Review the entity’s
OBJECTIVES
CONTROLS
sales of inventory
have been included in
the accounting
system.
ensure inventory held procedures for
at third parties are
consignment
included and
inventory.
inventory held on
consignment is
excluded.
Rights and obligations Only items that
belong to the entity
are included in the
inventory
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TESTS
Reconcile accounting
inventory with
physical inventory.
Review rec.
performed and
inspect for review by
independent snr
person.
Have controls to
ensure inventory held
at third parties are
included and
inventory held on
consignment is
excluded.
Review the entity’s
procedures for
consignment
inventory.
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ASSERTIONS
Accuracy,
classification,
valuation.
assertions,
ob,
and
tests.
Inventory
Comparison of physical Review and test physical stock
OBJECTIVES
CONTROLS
TESTS
quantities have
been accurately
determined.
inventory counts with
amounts in perpetual
inventory records.
(periodic/annual)
take procedures. Review
reconciliation and inspect for
sign off by snr personnel.
Standard cost reviewed
by mgt.
Review and test the entity’s
procedure of developing
standard cost.
Review accumulated
cost and variance
reports.
Inspect produced variance
reports and consider
reasonableness of std cost
levels.
Inventory managers
review stock regularly
to identify slowmoving, obsolete or
excess stock.
Enquire from management
how this is controlled and
physically observe the
performed procedure.
Inventory is
properly stated at
the lower of cost
or NRV.
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ASSERTIONS
Cut-off
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OBJECTIVES
CONTROLS
TESTS
sales are recorded in
the correct
accounting period.
processed daily to
record the dispatch
of finished goods.
documentation and
follow through to the
detailed inventory
subledger to ensure
daily processing.
All goods inwards
reports (GRNs)
processed daily to
record the receipt of
inventory.
Inspect
documentation and
follow through to the
detailed inventory
subledger to ensure
daily processing.
Reconcile inventory
records/detailed
inventory list
(including count
details) with GL.
Review/inspect/recalc
and verify aspects of
the reconciliation.
assertions,
ob,
and tests.
All purchases and
All dispatch docs are
Inspect
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ASSERTIONS
OBJECTIVES
CONTROLS
TESTS
Presentation and
disclosure
Inventory
transactions and
balances are
identified and
classified in f/s.
Have a proper
system of orders for
materials, and
production data
forms in order to
capture goods
through
production.
Review the entity’s
procedures and
docs to classify
inventory through
the different stages
of production.(RM,
WIP, FG)
Disclosures for
classification and
valuation are
efficient.
Approval by FD.
Inspect the entity’s
working papers for
evidence of FD
approval/review.
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Cash- Payments
ASSERTION
OBJECTIVES
CONTROL
TEST
Occurrence
Only valid cash
payments are
made.
Segregate duties.
Observe and
evaluate proper
segregation of
duties.
Supplier statements
independently
reviewed and
reconciled to trade
payables ledger.
Review procedures
for reconciling
supplier
statements.
Monthly bank
recons. Prepared
and reviewed.
Review sample of
bank
reconciliations-are
they performed
properly and
reviewed?
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ASSERTION
OBJECTIVES
CONTROL
TEST
Only authorised
personnel can make
EFTs (Electronic
Fund Transfers) and
issue cheques.
Physical control
over cheque booklocked away. Only
limited terminals
have EFT software.
Review delegated
list of authority for
cash payments for
reasonableness.
Select a number of
cheques and EFTs
and inspect for
authorisation as per
list of authority.
Cash transfers or
cheque payment
only occur after all
source documents
were independently
approved.
Inspect
documentation for
evidence of
approval by snr
personnel.
Segregation of
duties
Observe and
evaluate proper
segregation of
duties.
Cash- Payments
Completeness
01/04/10
All cash payments
that occurred are
recorded
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ASSERTION
OBJECTIVES
CONTROL
TEST
Supplier statements
independently
reviewed and
reconciled to trade
payables ledger.
Review selected
reconciliations. &
review procedures
for reconciling
supplier statements
Monthly bank
recons. Prepared
and reviewed.
Review sample of
bank
reconciliations-are
they performed
properly and
reviewed?
Review of
electronic cash
payment by
manager before EFT
release.
Inspect a sample of
payments /listings
for evidence of snr
review.
Daily reconciliation
of cash payments to
posting to payable
accounts
Review a sample of
reconciliationsproperly
performed,
authorised?
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Cash- Payments
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ASSERTION
OBJECTIVES
CONTROL
TEST
Use of
prenumbered
cheques
Inspect cheque book.
Obtain range of cheques
issued during the year
and randomly select a
number of cheques and
follow through to ledger.
If manual, select a
number of cheques in the
ledger and ensure it falls
within the known range.
If CAATs are used can scan
cheque numbers for
outliers.
Reconcile a daily
payments report to
electronic cash
payment transfers
and cheques issued.
Audit sample of
reconciliationsperformed; Accurate;
Reconciling items;
Authorised?Discrepencies
followed up timely?
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Cash- Payments
Accuracy,
classification
and valuation
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Cash payments
must be
recorded
correctly in the
ledger.
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ASSERTION
OBJECTIVES
CONTROL
TEST
Supplier statements
reconciled to
payable accounts
regularly.
Review selected
reconciliations for a
sample of accounts.
Cash- Payments
Monthly bank recon Review bank recon…
of bank statement
to ledger.
Cash payments
are posted to
correct payable
accounts and to
the GL.
Supplier statements
reconciled to
payable accounts
regularly.
Review selected
reconciliations for a
sample of accounts.
Agree monthly cash Review postings from the
payments journal to journal to the GL-amount,
GL ledger posting.
cr to bank, drs?
Individual payable
Review recon…
accounts need to be
reconciled to the GL
control account.
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ASSERTION
OBJECTIVES
CONTROL
TEST
Cut-off
Cash payments
are recorded in
the correct
accounting
period.
Reconcile EFT and
Review recon and check
cheques issued with for regular completion &
postings to cash
review.
payment journal
and payables
account. (control
totals)
Presentation
and disclosure
Cash payments
are charged to
the correct
accounts
Have an approved
chart of accounts
Cash- Payments
Review cash payments
journal to assess the
reasonableness of
charging certain accounts.
Independent
Review assignment of GL
approval and review account.
of general ledger
account assignment
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Cash- Receipts
ASSERTION
OBJECTIVES
CONTROL
TEST
Occurrence
All valid cash
receipts are
received and
deposited.
Segregate duties
Observe and evaluate
proper segregation of
duties.
Use of electronic
cash receipts
transfer , not
physically received
and deposited.
Examine application
controls for electronic
cash receipts transfer.
Monthly bank
reconciliations
performed and
independently
reviewed.
Review bank recon…
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IK
Greenwich University
44
Cash- Receipts
ASSERTION
01/04/10
OBJECTIVES
IK
CONTROL
TEST
Use cash registers
or point-of-sale
devices
Observe cash sales
procedures.
Periodic inspection
of cash sales
procedure
Enquire of managers
about results of
inspections.
Restrictive
endorsement of
cheques on receipt.
Observe mail opening
procedures, including
endorsement of cheques.
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What does endorsing mean
Endorse the check on the reverse :
Business Name, Your Name, and
position in the company.
Example: Jim's Hardware Store
James Smith Owner1
Write "For Deposit Only" below the
endorsement.
Write your account number below that.
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Greenwich University
46
Does it help if the cheque is crossed
• No, you cannot subsequently endorse a
crossed cheque.
• A crossed cheque can only be paid into the
account of the payee and is non-transferrable.
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Greenwich University
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Assertions
Objectives
Controls
Tests
Occurrence
All valid cash
receipts are
received and
deposited.
Mail must be
opened by 2 staff
members.
Observe the mail
opening
procedures.
Immediately
prepare a cash
book or a list of
mail cash receipts.
Observe how the
cash receipts
records are
prepared at the
point where the
mail is opened.
Someone who was
not involved in cash
collection from
customers needs to
independently
check the
cash/cheques to be
deposited at the
bank with the cash
register totals and
receipts listing.
Review
documentation for
evidence of
independent check
(such as date and
signature of person
checking, consider
seniority of
independent
checker )
Cash- Receipts continued…
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Greenwich University
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Assertions
Objectives
Controls
Tests
rec
Review doc for
Cash- ReceiptsIndependently
continued…
the bank deposit
independent check
slip with the daily
cash summary.
Completeness
01/04/10
All cash receipts are Segregation of
recorded.
duties
IK
of rec.
Observe and
evaluate proper
segregation of
duties.
Use of electronic
cash receipts
transfer.
Examine application
controls for
electronic cash
receipts transfer.
Perform and
independently
review monthly
cash rec.
Review monthly
cash rec, performed
& reviewed &
normal checks re
recs?
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Assertions
Objectives
Controls
Tests
the daily Review the
Cash- ReceiptsReconcile
continued…
cash receipts listing reconciliation.
with the posting to
customer accounts.
Customer
statements need to
be prepared and
sent out on a
regular basis.
Accuracy,
classification and
valuation
01/04/10
Cash receipts are
recorded at the
right amounts.
IK
Inquire fro
management how
customer
statements are
handled. Examine a
sample of customer
statements and
note the frequency
of statements.
Have a daily
Review the
remittance report
reconciliations.
that is reconciled to
the control listing of
remittance
advices.**
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**What on
earth**
remittance advice? When a client
sends money through the mail this
should be accompanied by a
remittance advice that gives details
about the client account number, the
amount paid, the invoice that this
payment relates to.
A good control is the banking of the
cash recorded by the mail openers by
an independent person and the
recording of the remittance advices
by the accounts department.
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Greenwich University
51
Cash receipts
Assertions
Objectives
Cash receipts are
posted to the
correct receivables
accounts and to the
GL.
01/04/10
IK
Controls
Test of controls
Monthly bank
reconciliation
performed and
reviewed
independently.
Review rec for
proof of
performance and
review.
Daily remittance
report is reconciled
daily with postings
to cash receipt
journal and
customer accounts.
Review rec.
Monthly customer
statements sent
out.
Review the client’s
procedures for
sending out
customer
statements.
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Assertions
Objectives
Controls
the cash
Cash Agree
receipts
receipts journal to
Test of controls
Review the journal and
the posting to the GL.
the GL posting on a
monthly basis.
Reconcile the
receivables ledger
to the control
account (debtors
control)
Review the rec
Cut off
Cash receipts are
recorded in the
correct accounting
period.
Bank recon at
period-end.
Review and test the
reconciliation.
Presentation &
Disclosure
Cash receipts are
charged to the
correct accounts.
Have a chart of
accounts.
Review the cash
receipts journal for
unusual items. Trace
cash receipts from cash
receipts listing to cash
receipts journal for
proper classification.
01/04/10
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Greenwich University
53
The payroll system
Key controls over payroll include:
1. Document and authorise changes
in staff
2. Calculate the wages and salaries
(gross, deductions, net)
3. Pay wages
4. Authorise deductions
Assertions
Control objectives
Controls
Tests
Occurrence and
existence
Payment is made
only to actual
employees
Segregate duties
between HR and
payroll
Observe and
evaluate whether
functions are
54
properly segregated
01/04/10
IK
Greenwich University
The payroll system
Assertions
Control objectives
Controls
Tests
There is a personnel Review a number of
file for every
starters and leavers
employee.
during the year and
ensure the right
documentation is in
place.
Have procedures
for authorising:
new joiners,
terminations, time
clocked, wage rates,
overtime, benefits
etc.
01/04/10
IK
Greenwich University
Review and test if
authorisation
procedures are in
place. Review
policies and
procedures in place
for changing status
and consider
whether this is
adequate.
55
Assertions Control
objectives
01/04/10
IK
Controls
Tests
Any changes in the
status of employees
must be
communicated to HR.
Select a number of
employees whose status
changed during the year,
inspect their personnel files
to ensure HR has updated
the files with the current
details.
Use time clocks for
time worked
Observe employees using
time clocks- for instance
clocking in and out,
touching in and out, signing
in and out…
Clock cards must be
approved by the
supervisor
Select a number of
employees from the wages
register and follow them
through to auth. Clock
cards.
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Assertions
Completenes
s
01/04/10
Control objectives
All payroll costs
are recorded for
work performed
by employees
IK
Controls
Tests
Only employees with
valid employee
numbers are paid.
Review and test the
procedures for
entering and removing
employee numbers
from the payroll
master file.
Have payroll budgets in
place and mgt needs to
review.
Review the budgeting
procedures.
Use prenumbered clock Review numerical
cards.
sequence of clock
cards.
Segregation of duties
Observe and assess
the proper segregation
of duties.
The cashing of wage
cheques must be
properly authorised.
Enquire from
management what the
procedures around
authorisations of cash
57
cheques are.
Greenwich University
Assertions
Control
Controls
objectives
Tests
Consider
appropriateness of
designated signatories
and number of
signatories per cash
cheque. Select a
number of cash
cheques and verify
that only approved
personnel signed and
compare to payment
requisition and
substantive
documentation
accompanying cheque
request.
01/04/10
Custody of cash: Things like who
cashes cheque, security of pay
packets, banking unpaid wages
,bank
transfer Greenwich
lists etc…(p177)
IK
University
Several steps re wages
paid in cash…(p177)
58
Assertions
Control
objectives
Controls
Tests
Verify identity when
physical wage
packets are
distributed,
recipient signs as
proof of
receipt/recording of
distributions
01/04/10
IK
Physically observe a wage payout
to ensure official procedures are
adhered to.
Before wages are paid compare
payroll total with total of wages
packets to ensure ALL employees
have a wages pack.
Observe/examine whether
unclaimed wages are updated in
unclaimed wages book/inspect
entry into unpaid wages book.
Observe if any employee receives
more than one packet.
Match the unclaimed wages
entries with entries in payroll to
ensure agreement.
Is there a pattern of unclaimed
wages., any indication of failure
to record? Procedures around
holiday pay – for instance check
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calculation…(p178)
Ass
erti
ons
01/04/10
Contro Controls
l
objecti
ves
Tests
Have procedures to
authorise cheques
and bank transfer lists.
(eg bank transfer
terminals limited to
senior approved
personnel). 2 people
authorise cheques, 2
people
release/approve EFT’s.
Observe and inspect procedures, such as
approved list of cheque signatories. Follow a
number of wages/salary cheques through to
signed cheque and ensure this was signed by
authorised personnel. Test general and
application controls around EFT’s. Controls
can be on input and output, for instance a
printout of the loaded EFT with a signature
from authoriser. Bank can provide list of auth.
personnel.
Compare bank
transfer list and
cheques to payroll.
Inspect the evidence of the comparison –
signed printouts.
Maintain and
reconcile the wages
and salaries bank
accounts.
Inspect evidence of the maintenance of the
wages/salaries bank accounts on the bank
statements – for instance a transfer of the
gross salary amount prior to the salary run.
Compare the transferred amount to the gross
Greenwich
University
60
salary
amount.
IK
Assertions
Accuracy,
classification
and valuation
Control objectives Controls
All benefits and
deductions are
computed
correctly.
Tests
Prepare and
authorise cheques
and bank transfer
lists.
Observe that the person
who prepares the
cheque/EFT and the
person who authorises it
are not the same. See
discussion around tests of
authorisation above.
Verify payroll
amounts and benefit
calcs.
Recalc benefits and
deductions for a sample
of employees.
Payroll budgets in
Review budgeting
place, review by mgt. procedures.
Agree gross earnings
and total tax
deducted with tax
returns.
01/04/10
IK
Greenwich University
Inspect docs for evidence
of mgt review and
agreement of supposedly
matching docs.
61
Assertions Control
objectives
Payroll
transactions
are correctly
recorded in the
payroll system.
Controls
Tests
Changes to master
payroll file must be
confirmed by a before
and after report and
authorised by
management.
Review reconciliation.
Payroll master file
reconciled to GL
Review rec.
Any changes to payees
and payroll details are
updated promptly by
the payroll dept. and
the master file is
updated promptly.
Review the entity’s procedures
for reporting changes to the
payroll dept.
Check a sample of starters and
leavers to confirm discussed
policy.
Cut-off
Payroll
transactions
are recorded in
the right
accounting
period.
Presentati
on and
disclosure
assertions
Payroll
Have an approved
Review approved chart of
transactions
chart of accounts.
accounts.
are properly
classified in the
fin. statements. IK
Greenwich University
01/04/10
62
Assertions
Control objectives Controls
Independently
approve and review
the accounts that
form part of payroll.
Tests
Review the procedures for
classifying payroll costs.
Have payroll budgets Review budgeting
in place and mgt
procedures. Does the
needs to review this. disclosed payroll amount
bear resemblance to the
budget?
01/04/10
IK
Greenwich University
63
Revenue and capital expenditure
What is the difference?
• Revenue expenditure is expensed to the
statement of comprehensive income.
• Capital expenditure is capitalised to the
statement of financial position (ie an asset.)
01/04/10
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Greenwich University
64
Revenue and capital expenditure
Assertions
Control objectives
Controls
Tests
Authorisation
Proper
authorisation at
correct mgt level
for expenditure.
All expenditure
authorised.
Review the policy
and procedure in
place.
Example a sample
of orders for
appropriate au
thorisation.
**Refer to p 179 of
BPP SET TEXT for
lay out**
Orders for capital
expenditure
authorised by
appropriate mgt
levels.
01/04/10
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Greenwich University
65
Revenue and capital expenditure
Assertions
Control objectives
Controls
Tests
The same person
authorising the
order must
authorise the
invoice.
Mark the invoice
with the correct GL
code.
Orders for capital
expenditure must
be made out on a
different requisition
form than one for
revenue
expenditure.
01/04/10
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Greenwich University
66
Revenue and capital expenditure
Assertions
Control objectives
Controls
Tests
Classification
All expenses are
correctly classified in
the fin/ statements as
revenue or capital in
nature.
Std controls over
purchases relevant
here.
See tests covering
purchases.
Completeness
All non-current assets
are correctly
recorded, all expenses
are correctly
recorded.
Capital assets must
be written up in
the non-current
asset register.
Review n-c asset rec for
regularity of
performance & reviews
by snr personnel and
that all discrepancies
are followed up and
resolved timely.
01/04/10
IK
Reconcile n-c asset
register to GL and
investigate and
Greenwich
University
resolve
differences.
67
What if order docs for capital and
revenue expenditure is the same?
• Ask company what system is for recording and
filing capital invoices?
• If capital purchases are low, might be better to
opt for substantive tests over non-current
assets.
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Greenwich University
68
Homework
•
•
•
•
Read chapter 10 – p 159
Do question : Sales system p 163
Do question : Purchases controls p 167
Do question: System control weaknesses
page 180
• Do the quick quiz page 184
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Greenwich University
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Homework continued
• Construct grids/tables of common controls within a cycle
and across cycles that address numerous control
objectives and assertions.
1. For instance sequential numbering – always a control to
achieve completeness.
2. How many assertions are covered by the bank recon?
3. Etc…
You will NOT get an answer sheet for this, this is really a
summary exercise to help you narrow down the work and
make it more digestible.
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Greenwich University
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Tutorial questions
Q1
Your are the auditor of PAKO, a private
company that runs 7 local stores that sell fruit
and vegetables. The subsidiary companies enjoy
autonomy when it comes to maintaining the
inventory levels and selecting suppliers. Pricing
is established on a cost-plus basis.
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Greenwich University
71
Each store maintains their accounts separately.
Head office sends a representative to collect
local accounts once every 2 months. This
representative does a small “audit” on 1 of the
stores on a rotation basis. Management
accounts are prepared on a quarterly basis.
a) Describe the internal controls issues you’ve
identified and the risks associated with each.
b) Make four recommendations to management
to enhance internal controls and explain the
advantages and disadvantages of each.
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Greenwich University
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• Q2
• You’ve recently qualified as Chartered
Accountant and joined the accounts
department of Hit and Miss plc. – they sell
tennis equipment to clubs around London. All
sales occur on credit. Your direct manager
asked you to read through their procedure
documents for cash and bank in order to:
a) Identify internal control risk
b) Describe improvements to the current
procedures in order to mitigate the risks.
01/04/10
IK
Greenwich University
73
Cash and bank procedures
• One person opens the mail.
• Any cash / cheque receipts and the
accompanying remittance advices are taken to
the accounts manager to be locked in the safe.
Any remittance advices pertaining to direct
deposits are stacked in the cash book clerk’s
in-tray.
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Greenwich University
74
• Around 2pm each day the cash book clerk picks
up the cash/cheques from the accounts manager,
enters the details into the cash book and the
individual debtors account, prepares the cash
deposit book and banks the cash in the
company’s bank account. The integrated
accounting system automatically updates the
cash ledger and debtors ledger.
• The cash book clerk prints off a bank statement
once a week. This is used to identify payments
and direct deposit. Any payments are credited to
the cash book and debited to a suspense account.
01/04/10
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Greenwich University
75
• Direct deposits from clients are matched to the
remittance advices in the in-tray and debited to
cash and credited to the individual debtors
account. Any direct deposits for which there
aren’t remittance advices are circled on the bank
statement and filed in the outstanding deposits
file – these are not entered into the cash book.
• The outstanding deposits file is reviewed by
management once a month. Bank reconciliations
are prepared once a month by the cash book
clerk and reviewed by the accounts manager.
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Greenwich University
76