Internal controls and control testing: Part 3 Chapter 10 – BPP SET TEXT.

Internal controls and control testing: Part 3

Chapter 10 – BPP SET TEXT

IK Greenwich University 2

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.01/04/10


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).01/04/10

IK Greenwich University 601/04/10

ASSERTION CONTROL OBJECTIVE

CONTROLS TEST OF CONTROLS

Occurrence & existence (sales actually took place & the sales amount in the statement of comprehensive income is a true reflection of sales income)

Taking orders, recording sales and sending out the goods to the customer are separate functions performed by different individuals.

Segregation of duties. 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)

Customers who buy on credit must be pre-approved (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 terms. (Ref checked)

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).




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.


ASSERTION

CONTROL OBJECTIVE


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 .




When a sale is recorded, this actually represents goods that are shipped.

Sales are only recorded into the system if there is an approved order form and shipping document.

Select a number of sales invoices and 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.

Review and test the entity’s procedure for accounting for numerical sequence of invoices.

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ASSERTION

CONTROL OBJECTIVE

CONTROL 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.)

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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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 reconciled to a daily sales report.

Review a sample of reconciliations. 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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ASSERTION

CONTROL OBJECTIVE 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.

Accuracy

All sales and adjustments are correctly journalised, summarised and posted to the correct accounts. Invoice details are accurate.

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 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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Cut-off The sales are recorded in the right period.

Shipping docs are sent to invoicing on a daily basis.

Compare date on sales invoice with date on corresponding shipping doc.

Sales are recorded on the day it occurs.

Select a number of sales invoices-compare 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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Classification All transactions are properly classified in the accounts.

There is an authorised chart of accounts in place.

Review the treatment of the sales ledger 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).01/04/10


Assertions, objectives, controls and tests

Assertion Objective Control Test

Existence/occurrence

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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Review the list of people that are allowed to approve orders for reasonableness and appropriate level of seniority.

Every receipt of goods must be matched to an approved purchase order.

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 pre-approved order. Inspect date of order approval and compare this to the date on the GRN.

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Upon receipt of goods, check quantity and type of product to approved purchase order.

Observe staff receiving goods for proof of performing this check. Select a 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?).

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Assertions, objectives, controls and testsAssertion Objective Control Test

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. Inspect the 3 documents for agreement in description, quantity and price.

Rights / obligations

Recorded purchases on credit represent the liabilities of the entity.

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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ASSERTION

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 checked, things like quantity x price, applied trade discounts, VAT.

Select a number of entries in purchases ledger and follow through to invoice. Cast and recalc to ensure accuracy on invoice.

Amount posted to GL is reconciled to the purchases ledger.

Review recon (check balances to…,consider reconciling items, authorised?)

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ASSERTION OBJECTIVE 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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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/OBLIGATIONS;VALUATION/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…

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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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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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Cut-off Purchases are recorded in the right period.

GRNs /goods received reports are sent to the accounts dept. daily.

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.

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, controls, and tests.

ASSERTIONS OBJECTIVES CONTROLS TESTS

Occurrence/ Existence

All inventory movements are authorised and recorded.

Prenumbered documentations such as GDNs (Goods Delivered Notes) and GRNs (Goods Received Notes) in place.

Inspect documentation in use.

Reconcile inventory detailed records with ledger (GL).

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, ob, and tests.ASSERTIONS OBJECTIVES CONTROLS TESTS

Segregation of duties Observe/evaluate proper segregation of duties.

Inventory included in the statement of financial position physically exists.

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/non-adherence to count procedures.

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Completeness All purchases and sales of inventory have been included in the accounting system.

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.

Reconcile accounting inventory with physical inventory.

Review rec. performed and inspect for review by independent snr person.

Rights and obligations Only items that belong to the entity are included in the inventory

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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Accuracy, classification, valuation.

Inventory quantities have been accurately determined.

Comparison of physical inventory counts with amounts in perpetual inventory records. (periodic/annual)

Review and test physical stock 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 is properly stated at the lower of cost or NRV.

Inventory managers review stock regularly to identify slow-moving, obsolete or excess stock.

Enquire from management how this is controlled and physically observe the performed procedure.

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Cut-off All purchases and sales are recorded in the correct accounting period.

All dispatch docs are processed daily to record the dispatch of finished goods.

Inspect 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.

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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- PaymentsASSERTION 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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Only authorised personnel can make EFTs (Electronic Fund Transfers) and issue cheques. Physical control over cheque book-locked 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.

Completeness All cash payments that occurred are recorded

Segregation of duties

Observe and evaluate proper segregation of duties.

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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 reconciliations-properly performed, authorised?

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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.

Accuracy, classification and valuation

Cash payments must be recorded correctly in the ledger.

Reconcile a daily payments report to electronic cash payment transfers and cheques issued.

Audit sample of reconciliations-performed; Accurate; Reconciling items; Authorised?Discrepencies followed up timely?

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Supplier statements reconciled to payable accounts regularly.

Review selected reconciliations for a sample of accounts.

Monthly bank recon of bank statement to ledger.

Review bank recon…

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 payments journal to GL ledger posting.

Review postings from the journal to the GL-amount, cr to bank, drs?

Individual payable accounts need to be reconciled to the GL control account.

Review recon…

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Cash- PaymentsASSERTION OBJECTIVES CONTROL TESTCut-off Cash payments

are recorded in the correct accounting period.

Reconcile EFT and cheques issued with postings to cash payment journal and payables account. (control totals)

Review recon and check for regular completion & review.

Presentation and disclosure

Cash payments are charged to the correct accounts

Have an approved chart of accounts

Review cash payments journal to assess the reasonableness of charging certain accounts.

Independent approval and review of general ledger account assignment

Review assignment of GL account.

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Cash- ReceiptsASSERTION OBJECTIVES CONTROL TESTOccurrence 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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Cash- ReceiptsASSERTION OBJECTIVES 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 Owner1Write "For Deposit Only" below the endorsement.Write your account number below that.01/04/10


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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Cash- Receipts continued…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 )

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Independently rec the bank deposit slip with the daily cash summary.

Review doc for independent check of rec.

Completeness All cash receipts are recorded.

Segregation of duties

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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Reconcile the daily cash receipts listing with the posting to customer accounts.

Review the reconciliation.

Customer statements need to be prepared and sent out on a regular basis.

Inquire fro management how customer statements are handled. Examine a sample of customer statements and note the frequency of statements.


Cash receipts are recorded at the right amounts.

Have a daily remittance report that is reconciled to the control listing of remittance advices.**

Review the reconciliations.

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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.01/04/10


Cash receipts Assertions Objectives Controls Test of controls

Monthly bank reconciliation performed and reviewed independently.

Review rec for proof of performance and review.

Cash receipts are posted to the correct receivables accounts and to the GL.

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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Cash receipts Assertions Objectives Controls Test of controls

Agree the cash receipts journal to the GL posting on a monthly basis.

Review the journal and the posting to the GL.

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.

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The payroll system

Assertions Control objectives Controls TestsOccurrence and existence

Payment is made only to actual employees

Segregate duties between HR and payroll

Observe and evaluate whether functions are properly segregated

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Key controls over payroll include:1. Document and authorise changes

in staff2. Calculate the wages and salaries

(gross, deductions, net)3. Pay wages4. Authorise deductions


The payroll systemAssertions Control objectives Controls Tests

There is a personnel file for every employee.

Review a number of starters and leavers 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.

Review and test if authorisation procedures are in place. Review policies and procedures in place for changing status and consider whether this is adequate.

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Assertions Control objectives

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 Control objectives 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.

Completeness

All payroll costs are recorded for work performed by employees

Use prenumbered clock cards.

Review numerical 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 cheques are.

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Controls 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.

Custody of cash: Things like who cashes cheque, security of pay packets, banking unpaid wages ,bank transfer lists etc…(p177)

Several steps re wages paid in cash…(p177)

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Controls Tests

Verify identity when physical wage packets are distributed, recipient signs as proof of receipt/recording of distributions

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 calculation…(p178)

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Assertions

Control objectives

Controls 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 salary amount.

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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.


All benefits and deductions are computed correctly.

Verify payroll amounts and benefit calcs.

Recalc benefits and deductions for a sample of employees.

Payroll budgets in place, review by mgt.

Review budgeting procedures.

Agree gross earnings and total tax deducted with tax returns.

Inspect docs for evidence of mgt review and agreement of supposedly matching docs.

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Controls Tests

Payroll transactions are correctly recorded in the payroll system.

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.

Cut-off Payroll transactions are recorded in the right accounting period.

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.

Presentation and disclosure assertions

Payroll transactions are properly classified in the fin. statements.

Have an approved chart of accounts.

Review approved chart of accounts.

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Independently approve and review the accounts that form part of payroll.

Review the procedures for classifying payroll costs.

Have payroll budgets in place and mgt needs to review this.

Review budgeting procedures. Does the disclosed payroll amount bear resemblance to the budget?

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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.)

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Revenue and capital expenditureAssertions 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 authorisation.

**Refer to p 179 of BPP SET TEXT for lay out**

Orders for capital expenditure authorised by appropriate mgt levels.

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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.

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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.

Reconcile n-c asset register to GL and investigate and resolve differences.

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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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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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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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Tutorial questions

Q 1Your 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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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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• Q 2• 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 riskb) Describe improvements to the current

procedures in order to mitigate the risks.

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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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• 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.

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• 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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Internal controls and control testing: Part 3 Chapter 10 – BPP SET TEXT.

Documents

Transcript of Internal controls and control testing: Part 3 Chapter 10 – BPP SET TEXT.