Tutorial 4 Flashcards
What is a key control in the credit approval process?
- new customers undergo credit checks
- limits are approved by the credit controller
- Audit test: inspect customer files for evidence of credit checks and system-applied limits
What control ensures goods are correctly packed and verified?
- goods are double-checked against the dispatch note by a second staff member
- audit test: examine signed dispatch notes confirming this second check occurred
What control confirms delivery to the customer?
- customers sign and return a copy of the dispatch note as proof of delivery
- audit test: inspect retained signed copies of dispatch notes for confirmation
How can companies ensure only dispatched goods are invoiced?
- invoices are generated directly from dispatch notes
- audit test: match invoices to dispatch notes and verify pricing accuracy
What control prevents unauthorised pricing or discount changes?
- system access is restricted
- discounts must be formally approved
- audit test: attempt to process unauthorised changes (with permission) and review access controls
How can receivables be monitored effectively?
- regular reviews of the ledger, credit balances and issuing customer statements
- audit test: look for manager sign-offs and evidence of monthly statements
How should segregation of duties be applied in cash receipts?
- counting, recording and reconciling should be performed by different individuals
- Audit test: observe the cash handling process and verify role separation
What is a control deficiency in customer credit management?
- credit checks are not regularly updated for existing customers
- FIX: Implement periodic re-assessments for all active credit accounts
What is a weakness related to inventory and sales orders?
- goods availability is not confirmed before order acceptance
- FIX: require real-time inventory checks before processing sales
What’s the issue with timing of credit checks?
- credit limits are verified only after orders are entered
- FIX: ensure system block orders exceeding credit limits until checked
Why is non-sequential invoice numbering a problem?
- it increases the risk of missing or unrecorded invoices
- FIX: Introduce sequential invoice numbering and regular reviews
What’s the issue with inconsistent reconciliations?
- reconciliations are only done when staff have time, risking delayed error detection
- FIX: assign responsibility and set fixed reconciliation timelines
What are common ways that companies manipulate depreciation to inflate profits?
- extending asset useful lives
- increasing residual values
- avoiding write-downs on impaired assets
What are examples of aggressive accounting techniques to inflate income?
- deferring expenses
- recognising revenue early
- misclassifying reserves as income
How might auditors become complicit in fraud?
- ignoring errors
- accepting bribes or extra fees
- issuing clean opinions despite known issues
What threats to auditor independence can arise in audit-client relationships?
- familiarity with client executives
- self-interest due to fees or job offers
- intimidation or pressure from management
- conflict of interest
What can happen when auditors fail to maintain independence and integrity?
- shareholder losses
- regulatory fines
- collapse of the audit firm
- long-term reputational damage
- increased regulation (e.g. Sarbanes-Oxley in the US)
