Transcript
Solutions Manual to accompany
Auditing: a practical nd approach 2 edition by Jane Hamilton CHAPTER !aining an understanding o" the client#s system o" internal controls
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Solutions manual to accompany Auditing: a practical approach 2e
Solutions manual to accompany Auditing: a practical approach 2e
Chapter $ !aining an understanding o" the client#s system o" internal controls RE%&E' ()EST&*+S ,-,--
&" an auditor auditor does does not not intend intend to to rely rely on internal internal contr controls ols in in the audit. audit. does does the auditor need to obtain an understanding o" internal control/ E0plain,
ASA 315 requires the auditor to otain an understandin! o" internal control on all audit audit en!a! en!a!em ement ents# s# $h $here ere"or "ore, e, e%en e%en i" the audit auditor or inten intends ds to tae tae an entir entirely ely sustanti%e approach to the audit and not rely on internal controls, the auditor must otain an understandin! o" internal control# $his is ecause 'ithout !ainin! this understandin!, the auditor 'ill not "ully understand the riss o" material misstatement o" the "inancial report# ASA 315 states that !ainin! an understandin! o" the entity and its en%ironment, en%ironment, includin! its internal internal control, estalishes estalishes a "rame o" re"erence 'ithin 'hich the auditor plans the audit and e(ercises pro"essional )ud!ement throu!hout the audit# $he standard allo's the auditor to use pro"essional pro"essional )ud!ement to determine the e(tent o" the understandin! o" internal controls required in each case#
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E0plain the di""erence bet1een entity$leel controls and transaction$leel controls, &s an auditor interested in both/
*ntity+le%el controls are 1# the the contr control ol en%iro en%ironm nment ent 2# the entityentity-ss ris ris asses assessme sment nt proces processs 3# the in"orma in"ormation tion system system,, includin! includin! the related related usiness usiness processes, processes, rele%an rele%antt to "inancial reportin!, and communication .# cont contro roll act acti% i%it itie iess 5# monit onitor orin in! ! o" cont contro rols ls *ach o" these controls relates to the 'hole or!anisation# $ransaction+le%el controls are controls that impact a particular transaction or !roup o" transactions# $here"ore, the di""erence is that entity+le%el controls ha%e the potential to impact all o" the processes in the or!anisation, includin! those that ha%e a direct impact on the "inancial report and others, 'hile transaction+le%el controls impact only a speci"ic !roup o" transactions# $ransactions mae up the "inancial report that the auditor is auditin!, and can e impacted y oth entity+le%el and transaction+le%el controls# $his is 'hy an auditor 'ould e interested in oth types o" controls#
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Chapter 7: Gaining an understanding of the client’s system of internal controls
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4iscuss the contention that the control enironment is the most important part o" a system o" internal controls because it proides the "oundation,
$he control en%ironment sets the tone o" the entity and in"luences the control consciousness o" its people# eople, throu!h their actions, determine the e""ecti%eness o" internal controls# " the control en%ironment does not encoura!e ethical eha%iour and hi!h quality 'or, the people 'ithin an or!anisation could "ail to implement controls or o%erride them 'hen per"ormin! their duties# *%en the est control system is not 100 e""ecti%e, and all systems are less e""ecti%e i" the people 'orin! 'ith them do not support the systems# o'e%er, all components o" an internal control system are important# a%in! a stron! control en%ironment 'ill not e su""icient y itsel" to ensure that an or!anisation is ale to achie%e its o)ecti%es#
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E0plain 1hy an auditor 1ould be interested in the "unctioning o" the human resources department 1ithin an organisation,
$he human resources department 'ithin an or!anisation is responsile "or hirin!, inductin!, trainin!, e%aluatin!, counsellin!, promotin! and compensatin! employees# $his means that the 4 department is responsile "or ensurin! that the or!anisation-s employees are competent and honest# As such, the 4 department sets policies and procedures 'hich ha%e a direct e""ect on the or!anisation-s control en%ironment# or e(ample, the 4 department ensures that employees ha%e the required sills and quali"ications "or the position they are appointed to# $he 4 department in"luences the aility o" the or!anisation to retain trained, competent, and e(perienced employees to dischar!e the duties required "or the e""ecti%e operation o" the internal control systems# An auditor can !ain an understandin! o" the or!anisation-s standards, commitment to quality, and the lielihood o" e""ecti%e control y studyin! the operation o" the 4 department#
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'hat sort o" ris7s 1ould an entity8s ris7 assessment process consider/ !ie some e0amples "or a retailer, 'hich o" these ris7s 1ould be releant to "inancial reporting/ E0plain,
An entity-s ris assessment process 'ould consider riss to its achie%ement o" its o)ecti%es at all le%els# $hese 'ould include riss to re%enue throu!h product competition, to attractin! and retainin! sta"", e(chan!e rate riss, transport interruption riss 6oth "rei!ht and passen!er transport delays a""ectin! sta"" and customers7, climate chan!e ris, "inancin! ris 6otainin! and ser%icin! loans7, supply riss, and riss relatin! to protection o" assets "rom the"t and "raud etc# A retailer 'ould ha%e a particular "ocus on the ris o" not ein! ale to uy the appropriate products "rom reputale suppliers, product quality riss 'hich 'ould lead to sales returns and8or 'arranty claims, e(posure to e(chan!e rate riss i" suppliers are located in other countries, transport ris a""ectin! imports, competiti%e riss "rom other retailers in the same location or ser%icin! the same type o" customer, sta"" riss relatin! to attractin! and retainin! the ri!ht type o" sta"" "or all shi"ts, physical riss includin! po'er interruption, shoppin! centre uildin! issues, "inancin! riss relatin!
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Solutions manual to accompany Auditing: a practical approach 2e
to "undin! product purchases and payin! e(penses prior to receipt o" cash "rom customers, and protection o" assets and the inte!rity o" sales and other transactions in the accounts# $he retailer 'ould e interested in identi"yin! and controllin! riss to its aility to operate and achie%e its o)ecti%es# All uncontrolled riss "or the entity could a""ect the aility o" the entity to sur%i%e 6i#e# e a !oin! concern7# $here"ore, all riss are o" interest to the auditor# o'e%er, the auditor is most directly concerned 'ith riss relatin! to protection o" assets and the inte!rity o" transactions in the accounts# $he auditor must consider the ris to the accounts so that the audit can e planned 'ith appropriate consideration o" the ris o" material misstatement
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E0plain the importance o" segregation o" incompatible duties, 'hat sort o" duties 1ould be segregated 1ithin the sales process/ 'hy/
Se!re!ation o" incompatile duties is a part o" the control acti%ities o" an or!anisation# 9ontrol acti%ities are policies and procedures that help mae sure mana!ement-s directi%es are carried out# $he concept o" se!re!ation o" incompatile duties is that no one employee or !roup o" employees should e in a position oth to perpetrate and hide errors or "raud in the normal course o" their duties# " these duties are not se!re!ated, an employee could steal assets 6such as cash or stoc7 and ad)ust the records to conceal the the"t# " the duties are se!re!ated, the employee stealin! the assets 'ould ha%e to !et the cooperation o" another employee to ad)ust the records to hide the the"t# $here"ore, it is %ery important "or the e""ecti%e operation o" a control system that incompatile duties are split et'een di""erent employees# Within the sales process, the person main! the sale is not responsile "or recordin! the sale, and should not e ale to process a sales return or other ad)ustment to a detors account alance# " these duties 'ere not se!re!ated, the sales employee could record a sale to a "ictitious customer and tae the !oods "or themsel%es# $o conceal the the"t, the employee 'ould later process a sales return or ad)ustment to eliminate the alance in the "ictitious detor-s account#
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'hy 1ould an auditor be interested in a client8s control monitoring processes/
A client should ha%e processes "or monitorin! the e""ecti%eness o" its internal controls ecause circumstances and conditions chan!e o%er time and controls need to ad)ust accordin!ly# An out+o"+date control system may not e ale to alert mana!ement to ne' riss, or control ne' types o" transactions# $he monitorin! process allo's the client to assess the need "or chan!es to internal controls# As such, the auditor 'ill e interested in the e""ecti%eness o" the monitorin! system and 'hether the client-s mana!ement are ale to e sure that internal controls remain current and %alid# $he auditor 'ill also e ale to assess the client-s mana!ement attitude to internal control systems throu!h e%aluation o" the monitorin! processes 'ithin the client#
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Chapter 7: Gaining an understanding of the client’s system of internal controls
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4iscuss the role o" internal audit in an entity8s system o" internal controls, &s internal audit an essential element o" a control system/ E0plain,
nternal audit is a part o" an entity 'ith responsiility "or assessin! the per"ormance o" the entity-s control systems and main! e%aluations o" client-s acti%ities# nternal auditors pro%ide in"ormation aout the "unctionin! o" the entity-s internal control system, its stren!ths and 'eaness, and mae recommendations- "or impro%ements, to the entity-s mana!ement# Althou!h internal audit departments are usually separate to other "unctions 'ithin the client, they are not independent o" the client# :ot all or!anisations ha%e an internal audit department# Smaller or!anisations usually do not ha%e an internal audit "unction and many lar!er or!anisations outsource the internal audit "unction to a third party# o'e%er, as or!anisations ecome lar!er, the le%el o" importance placed y an entity on its internal audit "unction can e a !uide to its o%erall commitment to internal control#
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Credit committee reie1 and approe all applications "or credit oer ?-===8, E0plain the impact o" this control on the aluation assertion "or sales receiable @debtors,
A control such as <9redit committee re%ie' and appro%e all applications "or credit o%er =1000- 'ill require applications "or credit o%er the speci"ied amount ein! separately authorised# $his control is related to the accuracy assertion "or sales ecause it pre%ents sales transactions ein! recorded that are incorrectly processed# or e(ample, i" a data entry error is made so that a sale "or =500 is incorrectly entered as =5,000, the transaction 'ould not e accepted until it had een authorised# >ecause there is a data entry error, the person responsile "or authorisin! the transaction should notice that it is not "or =5,000, ut should e entered as =500# $he control also impacts
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Chapter 7: Gaining an understanding of the client’s system of internal controls
on the %aluation assertion "or sales recei%ale ecause it 'ould pre%ent the incorrect sale ein! entered to the detors account, and thus pre%ent it "rom ein! o%erstated# n addition, i" sales are !enuinely ein! made "or amounts o%er =1,000, the authorisin! person has a chance to consider i" the detor has capacity to pay lar!e amounts# rocedures to chec the credit+'orthiness o" detors is liely to impro%e the chances o" the amounts ein! paid y the detors 6ecause only detors that can and 'ill pay their dets are allo'ed to uy on credit7, increasin! the lielihood that detors are %alued correctly#
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Solutions manual to accompany Auditing: a practical approach 2e
PR*etty is responsile "or technical issues, such as repairin! computers, rather than the administration side o" the usiness, she is also an o'ner o" the usiness and as such should e in%ol%ed in settin! the tone o" the or!anisation# a( and >etty appear to ha%e "ailed to estalish !ood internal controls and to communicate and en"orce the importance o" the systems to their sta""# $here is no e%idence o" any unethical eha%iour y the sta"", ut they do not appear to ha%e een adequately trained and8or appropriately selected "or the positions they hold# n a small usiness, such as this, mana!ement in%ol%ement is a sustitute "or a lar!e system o" "ormal controls# $his means that a( and >etty must e personally
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Solutions manual to accompany Auditing: a practical approach 2e
in%ol%ed in authorisin! and super%isin! transactions to a !reater e(tent than i" there 'ere more sta""# 67 Se!re!ation o" duties should "ollo' the road principle that the "ollo'in! duties are se!re!ated Authorisation or appro%al o" transactions a""ectin! assets 9ustody o" assets 4ecordin! or reportin! o" transactions 9ontrol o%er processin! o" a transaction should e separated "rom recordin! or reportin! a transaction • • • •
Sally is employed to help 'ith administration# $he other sta"" is a computer technician and a sales part+timer# $his means that Sally and a( are the only t'o sta"" currently 'ith administrati%e responsiilities# t 'ill e di""icult to adequately se!re!ate duties 'ith only t'o sta"" in the area# $here"ore, a( and >etty must per"orm additional re%ie' tass, such as separately re%ie'in! all transactions o%er a certain limit, monthly reports o" detor-s alances and transactions, an reconciliations etc# n addition, i" Sally retains the tas o" anin!, she should not e in%ol%ed in recordin! transactions, particularly cash receipts# An alternati%e 'ould e "or a( to do the anin! and lea%e Sally responsile "or transaction processin!# >etty could tae responsiility "or stoc control, so that the sales sta"" are not in%ol%ed in maintainin! stoc records as 'ell as ha%in! access to the stoc "or main! sales#
,2 Control enironment Reuired Ho1 does the aboe in"ormation a""ect your understanding o" the control system at Cheetah Air1ays/
$he in"ormation a%ailale to the auditor raises questions o%er the tone at the top o" 9heetah Air'ays ecause it is alle!ed to ha%e en!a!ed in cartel acti%ities 6acti%ities relatin! to distortin! the maret "or "rei!ht or passen!ers7# Speci"ically, is there a commitment to inte!rity and ethical %alues in the or!anisationD What is mana!ement-s philosophy and operatin! styleD s there a 'in at all costs attitude and lac o" respect "or la's that a""ect the usinessD At the time o" the audit there is an in%esti!ation y the A999, ut no prosecution a!ainst the client# o'e%er, se%eral customers o" the audit client ha%e taen their usiness else'here# $his "act also raises questions "or the auditor ecause it su!!ests that the client-s re%enue has een ad%ersely a""ected, and could e more ad%ersely a""ected i" other customers also tae this action# n the e(treme case, there could e questions aout the audit client-s aility to continue as a !oin! concern 6althou!h this 'ould require many more customers to also lea%e7, and could impact on the auditor-s opinion# " there is a poor ethics8tone at the top, or e%idence o" "raudulent or ille!al acti%ities, the auditor should consider 'hether the client is one that they 'ish to continue to audit# $he auditor should reconsider the in"ormation it !athered at the time o" tain! o%er the client E 'hat did the prior auditor disclose, 'hat did the auditor-s in%esti!ations disclose etc# Fltimately, the auditor 'ill ha%e to document the action taen to in%esti!ate the matter and consider the inte!rity o" the client, and any impact on the auditor-s aility to per"orm the audit# or e(ample, has the auditor had any
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Chapter 7: Gaining an understanding of the client’s system of internal controls
di""iculties in !ettin! access to records and personnel it requires in order to do the auditD as the client een ale to o""er the auditor any assurances aout their inte!rityD $he auditor may conclude that the ad pulicity is un'arranted and the departure o" se%eral customers is more related to acti%ities y the client-s competitors# Alternati%ely, the auditor may decide to resi!n "rom the audit en!a!ement i" the client is unale to pro%ide the assurances required#
,29 E0pense transaction ris7 Reuired 4iscuss the ris7 o" misstatement "or depreciation costs, 'hat could go 1rong/
$he main ris "or depreciation costs is that they are understated# an!aloo7D Was there e%idence o" appropriate consideration o" the riss o" a chemical spill and the impact o" the cost o" clean+up on the companyD What action has mana!ement taen to repair the dama!eD s the company-s "ailure to repair the dama!e e%idence o" "inancial prolems at the clientD $he petty the"t could e simply a prolem isolated to se%eral dishonest employees, or could e "urther e%idence o" poor control procedures at the client# s the resi!nation o" the 9BB related to either the chemical spill or the the"tD Goes it si!ni"y that there are "urther prolems at the client 'hich the client has not pro%ided in"ormation aout to the auditorD What procedures ha%e een adopted to "ind a replacementD
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Solutions manual to accompany Auditing: a practical approach 2e
$he auditor should consider 'hether those char!ed 'ith !o%ernance 6oard o" directors7 are a'are o" the prolems and tain! action# as the oard estalished suitale policies "or dealin! 'ith the ris o" operatin! in >an!alooD What e%idence can the auditor !ather aout 4ed inerals- mana!ement- philosophy and operatin! styleD What approach has mana!ement taen to estalishin! procedures to implement policies around the ris o" chemical spills and control o%er company assetsD o' ha%e the policies and procedures, as 'ell as the ethical %alues o" the or!aniIation, een communicated "rom the oard to mana!ement and more 'idely in the or!aniIationD ,2; Reenue "raud ris7 Reuired E0plain 1hy the reenue in income statements is at signi"icant ris7 o" "raudulent "inancial reporting by management,
$he H9 creates additional pressures on mana!ement to achie%e per"ormance tar!ets, includin! re%enue !ro'th and pro"it# n the case o" Leopard Air'ays, there is a ris that the amount o" re%enue recei%ed in ad%ance is trans"erred to re%enue too early ecause it 'ould help mana!ement achie%e their re%enue and pro"it tar!ets# $he e%idence "rom the "inancial statements su!!ests that there is a !reater "all in re%enue recei%ed in ad%ance than in re%enue# $his could occur i" re%enue recei%ed in ad%ance is incorrectly treated as re%enue o" the period 6re%enue in ad%ance 'ould e decreased and re%enue "or the period 'ould e increased7# Althou!h oth type o" account are lo'er than pre%ious years, the decrease is not e%enly distriuted across the t'o types o" account, as 'ould e e(pected# o'e%er, an alternati%e e(planation is that the re%enue in ad%ance is lo'er ecause ooin!s "or the ne(t period ha%e "allen e%en "urther than ooin!s "or the current period#
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*bDecties o" internal control Reuired @a !ie e0amples o" transactions that 1ould occur at Emerald Spa, @b E0plain 1hat could go 1rong 1ith these transactions i" the system o" internal controls could not meet any o" the seen generally accepted obDecties o" internal controls,
6a7 $ransactions 'ould include 9ash receipts "rom customers "or ser%ices 4eimursement "rom health insurance companies "or counsellin! and massa!e ser%ices 9redit purchases o" supplies, such as oils, hair products *lectronic "unds trans"ers to pay 'a!es 9heque payments "or rent, electricity, "urniture purchases, insurances, ta( remittances, ad%ertisin! Gepreciation "or "urniture and equipment • •
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67 otential prolems in transactions i" control system does not meet o)ecti%es include ncorrect pricin! used "or customer ser%ices; ser%ices pro%ided ut not char!ed to customers or recorded in the accounts; duplicate receipts recorded :ot all cash receipts are aned intact in a timely manner ailure to claim reimursements "rom health insurance companies on ehal" o" clients, or claims "or the 'ron! ser%ices Brderin! 'ron! supplies or su""icient supplies to meet demand ailure to eep supplies sa"ely loced a'ay, as required ailure to record purchase o" supplies; payment "or supplies not recei%ed; incorrect cost o" supplies recorded >ranch mana!er appro%es salary payments "or hours not 'ored y sta"", at 'ron! rates, or "or sta"" that do not 'or "or the usiness ailure to control costs such as electricity, throu!h ine""icient use o" equipment *quipment and "urniture not accounted "or, not ept secure at the premises, char!in! depreciation on "urniture and equipment no lon!er used y the usiness; "ailure to record depreciation ecause equipment not recorded as asset 4epairs to "urniture and equipment recorded as ne' purchases o" assets; ne' purchases recorded as repairs •
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Control enironment at a large company Reuired 4iscuss the control enironment at &nternational an7 assuming the press reports are correct, 'hich parts appear to be most de"icient/
$he prolems at nternational >an 6>7 appear to e!in at the most senior le%els o" the "orei!n currency department, rather than 'ith an indi%idual trader# $he attitude at senior le%els 'as that i" the trader 'as ale to mae a pro"it, the o""icial policies and procedures could e i!nored, or o%erridden# $his su!!ests that the control en%ironment in the department did not rein"orce inte!rity and ethical %alues, and encoura!ed ris tain! in pursuit o" pro"it# uestions must e ased aout more senior le%els in > i" senior mana!ement o" one department has a poor ethical attitude, ho' 'as this %ie'ed y hi!her le%els o" mana!ement and those char!ed 'ith !o%ernanceD Gid senior le%els in the "orei!n currency department hide their attitudes "rom their super%isors, or did those super%isors could e de"icient i" there 'as not e""ecti%e super%ision o" the "orei!n currency department# n addition, 4 policies and practices 'ere either i!nored or 'ere none(istent 'ith respect to inculcatin! ethical attitudes and eha%iour# B%erall the most si!ni"icant prolem 'as 'ith communication and en"orcement o" inte!rity and ethical %alues# Bther considerations $he ris assessment processes at > appear to not ha%e considered the potential prolems in the "orei!n currency department, or at least ha%e addressed them in "ull# $he in"ormation system should ha%e produced reports to more senior le%els o" these irre!ularities# 9ontrol acti%ities, such as per"ormance re%ie's, should ha%e detected the common occurrence o" the risy tradin! eha%iour, or alerted senior mana!ement to e(cessi%e pro"itaility ased on risy acti%ity# nternal audit department o" > should ha%e pro%ided in"ormation on the risy trades to those char!ed 'ith !o%ernance# inally, transaction le%el controls should ha%e pre%ented or detected the lar!e trades and unalanced positions#
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Segregation o" duties and documentation Reuired @a Create a "lo1chart to represent the "lo1 o" transactions "rom the raising o" a purchase order to cash payment, @b 'hich duties in the aboe process should be segregated/
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4equisition "or stoc prepared y stores sent to purchases department Appro%ed %endor a%ailaleD
4e"er to purchases mana!er to source appro%ed supplier
:o
Kes unds a%ailaleD
:o
4equest appro%al to e(ceed purchases limit
4equest appro%edD
:o
4e)ect purchase requisition
Kes
Kes 9reate purchase order and send to %endor
Stoc recei%al process
4ecei%in! report, pacin! list and supplier in%oice recei%ed
Go quantities, unit price and shippin! a!ree to purchase orderD Kes
:o
9ontact supplier to resol%e discrepancy
Supplier payment process
rocess purchase in purchase led!er
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Solutions manual to accompany Auditing: a practical approach 2e
67 As indicated on the "lo'chart, the stores 'hich create the requisition and recei%e the !oods are separate "rom the purchasin! process# $he store-s mana!er is not permitted to mae purchases directly 'ith suppliers ecause there needs to e a se!re!ation o" the authority to commit the entity to purchasin! !oods and the custody o" the !oods# $he recordin! o" purchases into the stoc account is separated "rom the record eepin! at the stores# Also, the payment process is separate "rom the purchases process# At %arious points in the process, permission is sou!ht "rom purchases mana!er and the accountant "or action# $he purchases mana!er arran!es "or suppliers to e selected and appro%ed# Bnly appro%ed suppliers are used to ensure that they are reliale and the items meet the entity-s speci"ications# $he accountant !i%es permission to create purchase orders i" the purchases department does not ha%e appro%ed "unds a%ailale# ayment is not appro%ed "or processin! until the purchase order, recei%in! report and pacin! list, and supplier in%oice are matched and reconciled# :ot sho'n on this "lo'chart, appro%al "or processin! the payment 'ould e required e"ore the supplier is paid#
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&nternal control components @a E0plain ho1 the internal control components are usually adDusted to meet the needs o" small entities, 'hat adantages and disadantages does this bring/ @b Assess the internal controls at an reconciliations and re%ie's o" )ournal postin!s should e done y Sarah or eter, and they should also e authorisin! transactions# $here appears to e no separate 4 "unction and there is a dan!er that payroll is not %alid# B%erall, the internal controls appear to ha%e de"iciencies# $he documentation should e completed y Sarah and she should tae more responsiility "or o%erseein! the operations o" the accounts department# eter does not appear to e per"ormin! the necessary authorisation and super%ision roles#
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Communication 1ith management 'rite a management letter to Justin and Sarah Morris,
$he mana!ement letter 'ould con"orm to the e(ample in the te(t# t 'ould e addressed to the chair o" the oard o" eathered 6Justin orris7# t 'ould e(plain the de"iciencies in internal control, as outlined in ro"essional Application uestion /#33, 'ith the appropriate recommendations 'ith respect to se!re!atin! duties and completion o" documentation o" policies and procedures#
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Components o" internal control Reuired Select t1o @2 components o" internal control, E0plain ho1 the role o" internal and e0ternal audit 1ould di""er in assessing these components in relation to the ne1 manu"acturing costing system,
617 9ontrol *n%ironment# $he hi!h le%el o" security around in"ormation relatin! to product desi!n, manu"acturin! and costin!, and the client identity and transactions is a ey part o" the internal control system at Securima(# $he secure en%ironment pro%ides the "oundation "or the success"ul implementation o" the ne' manu"acturin! costin! system ecause data are secure and only certain personnel 'ill ha%e access to it# $he hi!hly secure en%ironment indicates that the control en%ironment at Securima( has a "ocus on clear assi!nment o" authority and responsiility and a "ormalised or!anisational structure# t also re"lects mana!ement-s philosophy and operatin! style 'hich rates security hi!hly# 9onsistent 'ith this approach it 'ould e e(pected that internal audit ha%e a "ormal and important role in the or!anisation# nternal audit 'ere in%ol%ed in all sta!es o" the installation o" the ne' manu"acturin! costin! system# $heir role 'ould ha%e een to ensure that the inte!ration 'ith other systems 6e#!# sales7 is correct# nternal audit 'ill also e interested in maintainin! the secure en%ironment and assessin! the per"ormance 6i#e# e""iciency and e""ecti%eness7 o" the ne' system# *(ternal audit 'ould "ocus on understandin! the control en%ironment and assessin! 'hether the control en%ironment means that mana!ement has positi%e attitudes
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Solutions manual to accompany Auditing: a practical approach 2e
to'ards internal control systems# $he auditors 'ould e interested in assessin! ho' 'ell the implementation o" the ne' costin! system 'as e(ecuted, and 'hether the secure en%ironment 'as maintained# 627 4is assessment process# $he ris assessment process re"ers to mana!ement-s processes to identi"yin! and respondin! to usiness riss# Securima( has responded to the ris o" usin! inaccurate costin! data y installin! the ne' manu"acturin! costin! system# o'e%er, there are riss in%ol%ed 'ith the installation and these 'ould need to e mana!ed# $he internal audit department 'ould e in%ol%ed in assessin! ho' mana!ement handle the implementation and other riss# $he e(ternal audit department 'ould use the in"ormation "rom the internal audit department-s assessment to e%aluate the le%el o" ris to the "inancial accounts "rom any prolems 'ith the manu"acturin! costin! system# 637 9ontrol acti%ities $he in"ormation pro%ided does not e(plain the se!re!ation o" duties and physical controls relatin! to the ne' manu"acturin! costin! system# o'e%er, internal audit 'ould assess the le%el o" se!re!ation and physical controls 'hen determinin! the success o" the implementation process# *(ternal audit 'ould require an understandin! o" these matters in order to assess control ris "or transactions relatin! to the costin! system#
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Control enironment 4iscuss the implications o" the sales bonus system "or the control enironment 1ithin HCH!, 'hat special "actors 1ould management hae to hae to consider/
$he sales onus system 'ould impact on the control en%ironment at 9H ecause it increases the "ocus on recorded sales and pro%ides incenti%es "or personnel to tae actions to increase their onus throu!h increasin! sales# A onus structure can 'or a!ainst mana!ement attempts to communicate and en"orce inte!rity and ethical %alues ecause it implies a re'ard "or control actiities8 component o" internal control. "ormulate one uestion that each o" internal audit and e0ternal audit 1ill as7 regarding the s1itch$oer o" the patient reenue systems by !ardens +ursing Home,
$he internal audit department 'as required to an reconciliations are prepared on a monthly asis y 9arla and re%ie'ed y Ga%id# 2# Additional questions rom the inter%ie' transcript, students should as the "ollo'in! questions "or "urther in"ormation or clari"ication or the sales mana!er o' o"ten are prices chan!edD What is the process "or main! a chan!e to the master price listD Who has access to the master price listsD What are the mechanics o" the credit chec the system per"ormsD Who set the limitsD What happens i" they are o%er their limitsD o' are the limits chan!edD •
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or the shippin! super%isor o' are the !oods prepared "or deli%ery E i#e# ho' are they paca!edD Go the dri%ers chec their loads a!ainst the dispatch notes prior to departin! the 'arehouse or durin! their deli%eriesD o' is this e%idencedD • •
or the 'arehouse mana!er o' do you ensure all sales orders are "illedD What happens i" a product is returnedD • •
or 9arla Johnson 6to represent "inance7 What happens i" the atch postin! report doesn-t reconcile to the an reportD o' do you no' to 'hat in%oice the payment relatesD Go you e%er ha%e cash that you can-t determine 'hat customer or in%oice a!ainst 'hich it should e appliedD • • •
or an $ ana!er B%erall, there is such a reliance on the $ systems that the audit team 'ould 'ant to !et an $ specialist in%ol%ed to help re%ie' the !eneral controls 6access, chan!e mana!ement, acups7 as 'ell as help understand e(actly 'hat happens to the data that !ets entered#
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Chapter 7: Gaining an understanding of the client’s system of internal controls
3 & . otential misstatements and assertions $he Wholesale Sales to 9ash 4eceipts process includes transactions recorded in Sales, Accounts 4ecei%ale and 9ash# Students should ha%e identi"ied the "ollo'in! potential errors Si!ni"icant otential isstatements rocess Sales8Accounts 9redit memos are not issued or 4ecei%ale recorded "or returns on a timely asis or at all# Guplicate8"alse sales transactions are recorded#
n%oice misstates the quantity o" !oods shipped or incorrect pricin!# roper credit authorisation is not otained "or 'holesaler transactions# Sales )ournal8su+led!er is incorrectly posted to H8L or does not reconcile# Sales transaction is not recorded upon shipment o" !oods#
Sales transaction is recorded 'hen !oods not shipped#
9ash 4eceipts
9ash receipts are not recorded 'hen recei%ed#
Assertions Sales + Bccurrence; Accounts 4ecei%ale + *(istence Sales + Bccurrence; Accounts 4ecei%ale + *(istence; Allo'ance "or >ad Get + 9ompleteness Sales + Accuracy; Accounts 4ecei%ale + Maluation; n%entory + Maluation; 9BHS + Accuracy Allo'ance "or >ad Get + 9ompleteness Sales + 9ompleteness
Sales + 9ompleteness; Accounts 4ecei%ale + 9ompleteness; n%entory + *(istence; 9BHS E Bccurrence Sales + Bccurrence, Accounts 4ecei%ale + *(istence; n%entory + 9ompleteness; 9BHS + 9ompleteness Accounts 4ecei%ale + 9ompleteness; 9ash + 9ompleteness Accounts 4ecei%ale + Maluation; 9ash + Maluation
9ash receipts in "orei!n currencies are incorrectly %alued 6e#!# y usin! the incorrect e(chan!e rate7# 9ash receipts recorded di""er "rom Accounts 4ecei%ale + amounts deposited# 9ompleteness and *(istence; 9ash + 9ompleteness and *(istence
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Solutions manual to accompany Auditing: a practical approach 2e
9ash receipts and trans"ers are recorded in the 'ron! period# Guplicate postin!s o" cash receipts are made to the !eneral led!er# $his 'ould lead to a discrepancy et'een the !eneral led!er and the underlyin! A4 suled!er# $otals in cash receipts )ournal are incorrectly posted#
Accounts 4ecei%ale + 9ompleteness; 9ash + 9ompleteness 9ash + *(istence
9ash + 9ompleteness
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