Now you have been asked to obtain and evaluate evidence on financial systems and controls of Red Earth Pty Ltd using established testing procedures and with criteria identified in audit methodology. So, identify and document financial operational functions, services, and systems in accordance with standard formats in the following scenarios related to Red Earth Pty Ltd:

After a discussion with various managers and other employees of Red Earth Pty Ltd, you have identified internal control procedures for most financial transactions and compiled your notes in the document 'Internal Control Review'. 

We have Reviewed these notes and identified in the table given : a) One significant strength in internal controls of each subsystem. b) One significant weakness in controls of each subsystem. Question :Fill the last two coloumn of the table by

1. Rank these weaknesses (of each subsystem) in accordance with "audit objectives "(specify which audit objective/s will be affected by each of the weaknesses).
2. Identify and explain which internal control principle/feature will be affected by the weaknesses identified above.

 

o features of internal controls » v v v w w v Segregation of duties: adequate segregation requires separate individualsperforming each of the following: » Authorisation » Recordkeeping > Custodianship. For example, when a cashier (custodian) authorises the write off of bad debts(authorisation) a weakness exists. Additionally, in a good internal control systemreconciliation of an account with some other information should be performed byan individual otherwise independent of the function. For example, the individualpreparing payments should not perform the bank reconciliation. Authorisation Custody Documentation: organisation charts and system flow charts are essential Comparison: records can be reconciled with external documents Internal audits: these can provide a review of an organisation's internal control system. Management review of reports: management should compare budget and actualperformance in budget reports and investigate differences. Security of assets and records: access to an organisation's computer system shouldbe restricted. Physical assets should be protected by alarm systems and security fences. ICS Objectives An internal control system has several objectives. They are: »»» Completeness. All transactions should be recorded completelyValidity. Recorded transactions should be authorised Accuracy. Transactions should be properly wvalued, errors in calculation andrecording should be avoided & transactions should be properly classified andrecorded in a timely way Operational environment. Operations should be conducted in an orderly andefficient way, all controls should be maintained continuously, and irregularitiesshould be prevented and detected. Safeguards. All assets should be safeguarded. Accountability. Staff should be assigned responsibility, with their positions andduties clearly defined. To be thorough, we can also add a few secondary objectives: » Existence and occurrence. The 1CS should record transactions only if they haveoccurred, and record assets and liabilities only if they actually exist. Presentation, disclosure, valuation and measurement. These are generallyassociated with substantive objectives and assertions. The ICS should provideprocedures and processes to ensure that financial items are presented appropriately,that transactions are measured appropriately, and that assets and liabilities are valuedaccording to accounting standards. Question 1 Part CInternal ControlSubsystemsstrengthsweaknessesAudit objectivesPrinciple/Feature AffectedNot all sales retums are notAccount receivableCustomer orders are reviewed forprices and quantitiesapproved.The mail is opened by a personDiscounts are not reviewed by ancashseparate from the cash clerk.authorised person.Perpetual records of inventoriesAll stock are not insured and thereInventoryare reconciled periodically tois no security system in placephysical counts.Review and approval of timesheetsThere is no payroll liability systemPayrollin place to facilitate annual/ longand overtime hours byservice leave & superannuateonmanagement.provisions/payments.There are no procedures forAsset disposals, acquisitions, andadjusting depreciation records forNon-current Assetsdepreciation require authorization.additions, disposals, andretirementsThe director is responsible for allThe control risk score of 0.5functions related to investments,suggests a moderate level ofInvestmentsand there is periodic reconciliationcontrol risk, but specificby the accounts manager.weaknesses were not identified.Shareholder's FundsAll share issues and dividends areNo weakness found.authorised.