Systems and controls Flashcards

Question

What are the purchase cycle stages?

Answer 1

Requisition raised Order placed Goods received Invoice received Purchase recorded Cash paid

Answer 2

Obtain the ledger recording purchase orders: ensure each page has been signed by a responsible official to confirm all orders have been recorded and there are no gaps in the sequence of orders Obtain a sample of purchase invoices; ensure each invoice has been signed by a responsible official to confirm checks on the invoice have been completed and the invoice is passed for payment Obtain a sample of credit notes; ensure each credit note is signed by a responsible official to confirm credit note details (goods description and quantity) have been agreed to the relevant goods returned note Review the purchase order for the relevant signature for approval Review purchase invoice for evidence that the invoice has been reviewed and checked Review purchase invoice for initialling of grid stamp Review supplier reconciliation note to ensure the control has been complied with

Answer 3

Pays the right people Pays the right rate Pays for valid work done Deals correctly with taxes and other deductions

Answer 4

Timesheets submitted Standing data input Processing of data Recording of payroll Staff paid

Answer 5

Test a sample of timesheets, clock cards or other records, for approval by a responsible official. Pay particular attention to the approval of overtime Observe wages distribution for adherence to procedures ensuring employees sign for wages, that unclaimed wages are rebanked, etc Test Obtain the payment sheet for casual labour payments and ensure this has been signed by the chief accountant to authorise the payments made Obtain the weekly payroll and ensure this has been signed by a responsible official to approve the payments Examine evidence of independent checks of payrolls Inspect payroll reconciliations to confirm they are done regularly, agreeing PAYE liability to Inland Revenue records Examine explanations for payroll expense variations Test authorisation for payroll deductions by reviewing employees records, looking at who is authorised to make amendments, and observe process authorisation for payroll amendments by reference to personnel records Test controls over payroll amendments by reviewing changes and seeing whether they have been authorised. You could print off an exception report highlighting changes and follow those through. You could also do a dummy transaction to see how the system handles change

Answer 6

Inventory levels are in keeping with the needs of - Production (raw materials and bought in components) - Customer demand (finished goods) Inventory levels are not: - Excessive - Too low (stockouts) Value for money is achieved Goods/services delivered are what was ordered Quality of goods/services delivered is satisfactory

Answer 7

Inventory received Inventory stored Raw materials used in production Inventory despatched Inventory count

Answer 8

Observe physical security of inventories and environment Obtain inventory records. Where quantity has been changed without reference to GDN and GRN, ensure that amendment is signed by a responsible official to authorise that change In client’s warehouse, observe client staff ensuring that where a movement in inventory occurs, that movement is recorded on the appropriate GDN or GRN Test for evidence of authorisation to write off or scrapping of inventories (existence of signature) Observe controls over recording of movements of inventory belonging to third partiesObserve the procedures for authorisation for inventory movements ie the use made of authorised goods received and despatched notes Inspect reconciliations of inventory counts to inventory records (this gives overall comfort on the adequacy of controls over the recording of inventory) Test for evidence of sequences checks of despatch and goods received notes for completeness Assess adequacy of inventory counting procedures and attend the count to ensure that procedures are complied with

Answer 9

Controls virtually identical to controls over purchases. Some controls may vary, such as: Capex often substantial amounts, so most companies require items in annual budget authorised by senior management Regular revenue expense items may be monitored by simple variance analysis monthly Capital items likely to be stored on an asset register, which records details of supplier, price, insurance details, current location, responsible employee, etc As for inventories, assets likely to be checked against the register on a regular basis Assets sold second-hand to be checked against similar items or price guides to ensure the company receives fair value Ownership documents (title deeds, vehicle registration documents) will be safely stored

Answer 10

Cash balances are safeguarded Cash balances kept to a minimum Money can only be extracted from bank accounts for authorised purposes

Answer 11

- Observe that mail opened by 2 staff to minimise the possibility of fraud - Reperform reconciliation of cash receipts to bank lodgements - Test for evidence of a sequence check on any pre-numbered receipts for cash - Test for evidence of arithmetical check on cash received records - Inspect current cheque books for Sequential use of cheques Controlled custody of unused cheques Any signatures on blank cheques - Test for evidence of arithmetical checks on cash payments records, including cashbook - Obtain file of direct debit payments – ensure each payment is authorised Bank reconciliations: Examine evidence of regular bank reconciliations, at least once per month, but in larger organisations this should be done daily or weekly Examine evidence of independent checks of bank reconciliations (eg a signature) Examine evidence of follow up of outstanding items on the bank reconciliation. Pay particular attention to old outstanding reconciling items that should be written back such as old, unpresented cheques Petty cash: Test petty cash vouchers for appropriate authorisation Test cancellation of paid petty cash vouchers Test for evidence of arithmetical checks on petty cash records Test for evidence of independent checks on the petty cash balance Perform a surprise petty cash count and reconcile to petty cash records

Answer 12

Auditors should communicate deficiencies in internal control to those charged with governance and management ISA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management Agreed in engagement letter Report to management at end of audit process, making clear that: - The report is not a comprehensive list of deficiencies, but only those that have come to light during normal audit procedures - Report is for sole use of company - No disclosure should be made to a third party without written agreement of the auditor - No responsibility is assumed to any other parties Structure – deficiency, consequence, recommendation