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. IK Greenwich University

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. IK Greenwich University

We’ve got the auditor examining the business IK Greenwich University

Sales system • 3 main areas in a sales system: • Sell (authorisation) • Send goods outwards (custody) • Account for the transaction (recording) • 4 things to consider: audit assertion (auditor), control objectives (business), controls (business), test of controls (auditor). IK Greenwich University

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Did you notice? IK Greenwich University

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. IK Greenwich University

Purchases system • 3 main things happening: • Order goods (authorisation) • Receive goods (custody) • 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). IK Greenwich University

Assertions, objectives, controls and tests IK Greenwich University

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 IK Greenwich University

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. IK Greenwich University

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. IK Greenwich University

Inventory assertions, objectives, controls, and tests. IK Greenwich University

assertions, ob, and tests. IK Greenwich University

Cash- Payments IK Greenwich University

Cash- Receipts IK Greenwich University

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. IK Greenwich University

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. IK Greenwich University

Cash- Receipts continued… IK Greenwich University

Internal controls and control testing: Part 3

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