AUI 3702 EXAM PACK.

AUI 3702 EXAM PACK. The Internal Audit Process: Test Of Controls. Combined assurance is a manner in which the company sets itself up to adequately addresses the significant risk which the company faces. It can be provided by  Internal assurance providers‟ e.g. internal audit, finance function. The focus will be on enabling an effective internal control environment and supporting the integrity of information used for internal decision making by management, the board and its committees.  External assurance provider‟s e.g. external audit, industrial regulators. The focus will be on supporting the integrity of external reports, the internal audit and the finance function. 2.2) a) Try to enter an employee in the master file with a valid income tax number and without identity number and confirm if the entry is not going to be successful. In the master file using chats do a walk through the whole population to indentify if they is no entry with an empty income tax number and identify number held, if so follow up with management. b) Select a sample of program change form and inspect the signature of CAE for evidence of approval c) Select a sample of employees and ask them to gain access to the company local area network using correct user ID and wrong password and confirm if they are restricted access. Try to gain access to the company LAN using fictions user ID and password and confirm if access is denied. d) On a surprise bases, visit the company to observe if the factory manager is doing on screen report and files it is evidence of review Select a sample of employees from the company and some should be late and some should be absent. MR. BLESSING K 523 282 Follow through to the on screen print out and confirm if all the employees in your sample who were absent and late from work were included in the report with their names and sections which they are designated. On month end select a sample of employees, - Try to load their wages and salaries on a different terminal and approved by two authorized personnel and confirm if it is unsuccessful. - Try to load their wages and salaries on correct one terminal and approved by one authorized personnel and confirm if it unsuccessful. - Try to load their wages and salaries on a correct terminal and approved by two authorized personnel and confirm if it is successful. Test the computer literacy and computer skills of existing employees on the payroll section by giving them a short exam. Check if supporting evidence (copy of certificates) is available for current employees if they fail the exam set by the auditor. g) Inspect if :  Changes to pay rates, promotions to higher employment grades and any other changes in service conditions were decided upon by the personnel department/wage committee and were made after due consultation with interested parties, for example the union representatives and consideration of relevant laws and regulations, e.g. overtime, pay rates, minimum wage regulations.  All changes are documented and authorized by the authorizing body such as wage committee.  All amendments to employees details are sequenced in the payroll amendment forms which should be cross-referenced to the supporting documentation and authorized by a the personnel manager. h) Obtain a sample of monthly director‟s minutes and inspect the details discussed to confirm details. MR. BLESSING K 523 282 QUESTION 3 3.1) Five components of internal control as per the COSO framework are - Control environment - Control activities - Risk assessment - Information and communication - Monitoring 3.2) Weakness in the above acquisitions and payments cycle includes the following; Ordering of goods  Orders written on a piece of paper made by the order clerk to the buyer may be lost since information on a hard copy may be lost easily.  Footwear Limited may lose sales due to insufficient stock if there are immediate variations in demand since orders are made on how the customers buy their current stock.  Expensive and poor quality stock items may be bought since the buyer only consider availability of stock items on suppliers when placing orders. Receiving of goods  There is risk of theft upon the receipt of goods since there is no security controls such as security person on the receiving section.  Poor segregation of duties in the acquisition and payment cycle. The delivered stock items are received by the order clerks or buyers who initiated purchase orders.  There may be discrepancies between physical goods transferred by warehouse clerk and items listed on the goods received note since the warehouse clerk is not comparing the two before making a transfer. MR. BLESSING K 523 282 Recording of purchases There are no controls over recording of purchases and for this reason; incorrect amounts may be recorded arising from  Quality and type not as ordered or received  Prices of goods not as quoted  The raising of fictitious purchases/creditors by the introduction of invoices which are for goods never ordered or received by the company. (Results in invalid flows of cash leaving the company). Payment preparation There are no controls over the payroll preparation. For this reason, the following risks may arise ,  payment to fictitious creditors  payment of incorrect amounts  unauthorized payments 3.2 Weakness 3.3 Controls Orders written on a piece of paper made by the order clerk to the buyer may be lost since documentary information is less secured Order clerk should sent orders through emails to the buyer to ensure delivery. There is no safety stock kept to cater for an unexpected rise in demand or delays in deliveries by suppliers Footwear Limited should use economic order quantity for ordering or keep a buffer level to avoid disruptions of operations Expensive and poor quality stock items may be bought since the buyer only consider availability of stock items on suppliers when placing orders and no quality matters are considered Suppliers must be compared in terms of price, quality before considered. There is risk of theft upon the receipt of goods since there is no security controls such as There must be security controls such as security persons and cameras on the receiving MR. BLESSING K 523 282 security person on the receiving section. section to avoid the risk of theft upon the receipt of goods. Poor segregation of duties in the acquisition and payment cycle. The delivered stock items are received by the order clerks or buyers who initiated purchase orders. There must be proper segregation of duties in the acquisition and payment cycle. The person responsible for placing orders must not be responsible for receiving delivered items delivered in order to avoid the risk of fraud. Shortages or damaged goods may be received and accepted The warehouse clerk should count the goods and inspect them for quality. Damaged items must be returned. Goods may be stolen be they are moved to the warehouse There must be proper security controls such as circuit cameras from the receiving section upto the warehouse. Movement of goods to the warehouse is not recorded Every movement of items must be recorded to help in audit trial. Incorrect amounts may be recorded arising from quality and type not as ordered or received The delivery notes must specify the quality of items either by codes or grades to avoid receiving poor quality stock items. Incorrect amounts may be recorded arising from prices of goods not as quoted Both purchase order forms and purchase invoices must have prices so that comparisons can be made before purchases are recorded in the system. The raising of fictitious purchases/creditors by the introduction of invoices which are for goods never ordered or received by the company. (Results in invalid flows of cash leaving the company). For each purchase invoice received, purchase requisition and orders must be confirmed first before recording the purchases. If there is no purchase requisition and order, it means the invoice is for a fictitious purchases or creditors. Payment to fictitious creditors A creditor‟s clerk should identify in the ledger MR. BLESSING K 523 282 those creditors who must be paid at month end and confirm from ordering and receiving demand if there were orders made from these creditors. Payment of incorrect amounts The monthly creditors statement sent by the supplier should be reconciled to the supporting documentation. Unauthorized payments Cheque requisitions should include details of the cheque being requested and should not be authorized by the preparer of the requisition. There must also be a review or second authorization procedure by another employee. QUESTION 4 4.1) 4.4) Four factors that must be taken into account when determining the acceptable error rate are  materiality  the risk that the non-discovery of an error will have a material influence on the findings of the auditor  the purpose of the test  the effectiveness of the system of internal control 4.5) Inventory turnover rate = Cost of Sales / Average Inventory = R40 500/R22 600 = 1.796 = 1,796 times MR. BLESSING K 523 282 This means that, on average the entity is holding inventory which it can turn into sales 1.796 times per year. The entity kept lower level of inventory in 2016 as compared to 2015. 4.6) Average collection period = Credit sales/Average accounts receivable = R35 650/ R62 500 x 365 days = 208,196 days This means that, on average, debtors are taking 208, 196 days to pay their credits. In 2016, debtors took more days than in 2015 to pay their credits. This may be due to changes in credit terms offered by the entity to its customers. 4.6) Gross Profit ratio = (Total Sales – Cost of Sales)/Total Sales x 100% = (R70 500- R40 600)/R70500 X 100 % = 42, 41% This means that gross profit was 42, 41% of total sales during the year 2016. Gross profit ratio decreased by 7, 27% (49,68% - 42,41%) from year 2015 to year 2016. This may be due to increase in cost of sales components such as purchases. QUESTION 5 5.1) According to the Enterprise Risk Management (ERM) model, four ways to respond to risk include the following:  Risk limitation or reduce it - A reduce or share response is used to bring residual risk into an acceptable risk tolerance range. Reduce risk by implementing set of controls to guard against threat  Risk acceptance or accept it- If the risk is within the company‟s risk tolerance, they will typically accept the risk  Risk spread or share it- Risk is shared on different operations through diversification. MR. BLESSING K 523 282  Risk avoidance or avoid it- An avoid response is typically only used when there is no way to cost-effectively bring risk into an acceptable risk tolerance range. 5.2) Three audit objectives for the audit of guests‟ accounts include the following,  To check if all expenses incurred during a guests stay is being paid upon checking out (completeness).  To tests the effectiveness of controls over accounting information related to guests stay (accuracy).  To determine the risks of Stay With Us Hotel related to guest stay. 5.3) Six risks in the process used by the personnel at the Stay with Us Hotel, which could lead to expenses not being paid by guests include the following,  Failure to bill the guest‟s room all expenses incurred by the guest when the following happens, - A guest does not check out by 11:00 on the day of departure - All used items are not identified and recorded by housekeeping resulting in the reception adding an incorrect amount to the guests‟ account.  Failure of the guest when drunk to sign the bill at the bar in the entertainment area resulting in improper cash up.  There is risk that guest might leave the hotel without paying the full bill as transaction entered after 22:00hrs are added in the next might shift and guest leave/check out at 11:00am.  The guest can enjoy hotel services without enough money to pay the expenses.  The guest intentionally providing wrong room number so that wrong account number is billed.  The guest may not be in his or her room when food is delivered to his or her room resulting in a bill not signed as a proof of acceptance of the expense. MR. BLESSING K 523 282  Some pieces that need to be laundered may not be identified resulting in the slip understating the cost associated with the service.  Some bills that are received towards shift changes may not be received by the reception resulting in them failure to be recorded in guest account. 5.4) 5.3 Risks 5.4 Controls The guest can enjoy hotel services without enough money to pay the expenses The hotel should take, a deposit when the guest arrive which is refundable if the guest does not exceed the deposit amount. Failure to bill the guest‟s room all entertainment expenses when he or she is drunk and fails to sign the bill at the bar in the entertainment area Control measures such as biometric scanner linked to the billing modules of the hotel must be put at the exit point for every guest to scan when departing. There must be a person or cameras at the exit point to ensure that all guests are accounted before their departure Billing bar fridge costs after check-out The bar fridge must be inspected few minutes before 11:00 on the day of departure. Wrong account number may be billed when the guest provides wrong room number intentionally or by error. Proper controls such as the guest‟s name, national identity number must be included in room‟s file for further checks. Before the expense is signed by the guest to a specific room, the guest should provide the waiter with a room card to avoid wrong allocation of cost. The guest may not be in his or her room when food is delivered to his or her room resulting in a bill not signed as a proof of acceptance of the expense. The guest must be called first on his or her mobile phone to confirm his or her presence before food is delivered. If he/she is not present, there must be an alternative approach to acceptance such as sending an emails and the guest must also response through email. MR. BLESSING K 523 282 Some pieces that need to be laundered may not be identified resulting in the slip understating the cost associated with the service. Pieces that need to be laundered must be counted twice be different people to avoid understating the number. Some bills that are received towards shift changes may not be received by the reception resulting in them failure to be recorded in guest account. Reception workers must add all bills which come during their shift to avoid confusion which happens during handover time MR. BLESSING K 523 282 October/November 2016 AUI 3702 QUESTION 1 1, 1. D – Assurance that there is reasonable control over day-to-day operations.(CIAP.1 qstn 244) 2. A- The system is functioning as intended 3. C- To determine whether the internal control system provides reasonable assurance that the organization‟s objectives and goals are met efficiently and effectively (CIAP.1 qstn 149) 4. D – I and III. (I)Recommending standards of control for a new information system application. (III) Performing reviews of procedures for a new computer application before it is installed. 5. A- Participation would affect audit independence, and the auditor would not be able to perform an objective review after the system is implemented. 6. C- to obtain audit evidence 7. B- A former purchasing assistant performs a review of internal controls over purchasing, four (4) months after being transferred to the internal audit activity .(CIAP.1 qstn 119) 8. B- detective controls 9. C- Risk acceptance 10. C-significant impairment to the ability to provide a service 11. D- intentional abuse of policies, code of conduct and erosion of honesty 12. A- I and II only 13. B – removal of the employees names to protect confidentiality.