Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

a) Explain the purpose of an internal control questionnaire to an auditor. (4 marks)

b) Explain the factors an auditor should consider when determining the adequacy of a
client‘s internal control system. (6 marks)

c) Kenya Cans Ltd. Manufactures cans which are stamped from sheets of metal moulded and supplied to Selmont Ltd for packing fruits. After stamping the sheets of metal, scrap metal is produced as residue. During the year 2004, revenue from scrap metal amounted to Sh.500,000.

The company has established the following system to monitor the sale of scrap metal;

i) Scrap metal is placed employees in a large bin outside the workshop
ii) At the of the week a local scrap dealer collects the scrap metal leaving the bin empty
iii) The scrap dealer takes the scrap metal to the gatekeeper who measures and records the weight in a register before it exits the factory.
iv) The scrap dealer sends a cheques the following week with a statement showing the weight collected, price and cheques amount. The company‘s cashier on receiving the cheques, compares it with the statement to ensure that they both agree with the gatekeeper‘s registers.

Required;
i) Explain the weaknesses of the above system. (4 marks)
ii) Suggest recommendations to improve on the above system. (6 marks)
(Total: 20 marks)

ANSWER
a) Purpose of internal control questionnaire to an auditor
It is a form of recording internal control system. It is regarded as document for evaluating rather than recording the system. It consists of objective questions which focus on some specific controls and information obtained in completing the Internal Control Questionnaire used to answer relevant internal control evaluation questions.

Objectives/uses of internal control questionnaires
– Ascertain a client‘s system of accounting and internal control
– To record client‘s system
– Identify controls or absence of controls

– Assist the evaluation of the system
– Enable the auditor to review and assess adequacy of system
– Enable auditor to design a series of tests hence draw up the audit programmer
– Enable audit staff to familiarize themselves with the system quickly and comprehensively

b) Factors to consider when determining adequacy of the internal control system

i) Segregation of duties
– No one person should be responsible for recording and processing of a complete transaction. There should be different staff for recording, processing, authorization and approval of the transactions.
– Involvement of several people reduces risk of intentional manipulation of accidental error and increases the element of checking of work

ii) Physical control
Concerns physical custody of assets and involves procedures designed to limit access to authorized personnel only

iii) Authorization and approval
All transactions should require authorization or approval an appropriate person. Limits to authorization should be specified.

iv) Organization controls An enterprise should have
– Plan of organization that defines and allocates responsibly.
– Every function should be in charge of a specified person – the responsible official

v) Delegation of authority and responsibility clearly defined. An employee should always know the precise powers delegated to him, the extent of his authority and to whom he should report to.

vi) Supervision.
All actions all levels of staff should be supervised. The responsibility for supervision should be clearly laid down and communicated to person being supervised.

vii) Management
These are controls exercised management which are outside and over and above the day to day routine of the system. They include overall supervisory controls, review of management accounts, internal audit and budgeting.

viii) Control of Documents
Sensitive documents i.e. receipts, local purchase orders etc should be handled reliable person. They should be pre-numbered to ensure control.

ix) Personnel
Company should employ qualified and experienced people

x) Arithmetic and accounting accuracy
This ensures that accuracy of transactions through paper recording use of calculators and computers. These are controls in recording function which check that the transactions have been authorized, that they are all included and that they are correctly recorded and accurately processed.

c) Kenya Cans Ltd.

i) Weaknesses in the system
– Lack of supervision.
There is no authorized employee to monitor and supervise the employees as they place scrap metal in large bins outside the workshop. The scrap metal is therefore prone to theft staff

– Lack of authorization controls
There is no staff to authorize the local scrap dealer when collecting the scrap metal from the bin.

– Incomplete recording system
There is no staff recording the scrap metal on being collected local scrap dealer. Company is prone to losing income from scrap metal

– Collusion between gate keeper and scrap metal dealer
There is not staff to monitor the gatekeeper while weighing the scrap before it leaves the factory. The dealer is likely to collude with the dealer to conceal some income and defraud the company.

– Lack of accounting documentation
There is no recording system over scrap metals collected dealer. The dealer is likely to deflate the cheques sent theredefrauding the company of the income from sales.

– Collusion between scrap metal dealer and company cashier
There is no approval, authorization and monitoring controls over the amounts received from dealer. Cashier is likely to collude with dealer to defraud company income.

ii) Recommendations
– An efficient recording system to ensure proper documentation and scrap metal sales
– An upto date report on scrap metals sales on a monthly or weekly basis
– A specific qualified competent accountant positioned at the gate to monitor processing of the weighing and recording of scrap metal safes
– An upto date technology to be implemented for recording and weighing scrap metal
– A proper supervisory control system to ensure that gatekeeper, scrap metal dealer and cashier are supervised.
– Segregation of duties. There should be different staff for weighing scrap metal, recording and receiving cheques
– Confirming amount and recording in cheques



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