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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. Objectives.

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Internal controls and control testing: Part 3

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  1. Internal controls and control testing: Part 3 Chapter 10 – BPP SET TEXT

  2. 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

  3. 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

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

  5. 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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  16. Did you notice? IK Greenwich University

  17. 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

  18. 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

  19. Assertions, objectives, controls and tests IK Greenwich University

  20. Assertions, objectives, controls and tests IK Greenwich University

  21. Assertions, objectives, controls and tests IK Greenwich University

  22. Assertions, objectives, controls and tests IK Greenwich University

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  29. 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

  30. 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

  31. 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

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

  33. assertions, ob, and tests. IK Greenwich University

  34. assertions, ob, and tests. IK Greenwich University

  35. assertions, ob, and tests. IK Greenwich University

  36. assertions, ob, and tests. IK Greenwich University

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  38. Cash- Payments IK Greenwich University

  39. Cash- Payments IK Greenwich University

  40. Cash- Payments IK Greenwich University

  41. Cash- Payments IK Greenwich University

  42. Cash- Payments IK Greenwich University

  43. Cash- Payments IK Greenwich University

  44. Cash- Receipts IK Greenwich University

  45. Cash- Receipts IK Greenwich University

  46. 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

  47. 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

  48. Cash- Receipts continued… IK Greenwich University

  49. Cash- Receipts continued… IK Greenwich University

  50. Cash- Receipts continued… IK Greenwich University

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