Internal Control Systems and Tests of Controls - 20 Marks

a) Give three reasons as to why the predominantly substantive approach can be more suitable for smaller entities.(4 marks)

b) Your audit client is concerned with the overpayment of overtime in the payroll system on some of its construction projects. You have recommended that the client implement the following internal control procedures:

i) Authorisation by the shift supervisor of all overtime hours worked.

ii) Review of overtime payment records by the project manager.

Briefly explain the purpose of each of the above control procedures, and identify whether the procedure recommended is a 'prevent' or 'detect' control.(4 marks)

c) You are reviewing the test result in relation to accounts receivable at Ryan's Tools as below:

Test descriptionConclusionA number of customers' credit memos were selected and checked to ensure pricing and discounts have been reviewed and authorised by the sale manager. Four out of 20 memos tested had not been authorised and incorrect discounts were applied in these memos. A follow-up of the four memos with deviations did not highlight a pattern or specific reason for the errors.Accepted as the errors in discount amounts recorded were immaterial.

i) Is the above test a test of controls or a substantive test of details? Explain your answer. What type of procedure did the auditor use?(4 marks)

ii) Determine the key assertion addressed by the test procedure. Suggest ONE alternative testing procedure that can be used to test the assertion identified.(4 marks)

iii) Explain why the conclusion reached is appropriate or inappropriate, and outline the key additional audit procedure that you believe needs to be performed.(4 marks)