Question 1 For each internal control procedure provided, identify the risk that the procedure is designed to minimize. Risk Internal Control Procedure a. The cores of internal control procedure are checking and balance. And the purchase task needs to follow the procedures because it is related to the subjects internal or external. So, these tasks (purchase order, receiving goods, invoice checking inspection) and treating invoice should be done independently and sequential. a. It is very difficult to find errors because the total amount is correct but the sub-account that is designated by purchase is incorrect. b. It is best way for solution the problem the correct to match the account according to purchaser. c. And, we operate the checking system between the account and the vendor. a. There are three factors for inventories management: ordering cost, carrying cost and shortage cost. b. The person who is responsible of the inventory management tries to do his best to minimize the total costs incurring through as mentioned above cost. C. The manager set up the management schedule through a predetermined amount and a appropriate time. d. Also, the purchase department always must be interested in the situation of the counterpart for perfect purchase. a. After a receiving department have finished to receive the ordered goods, the department must transfer the invoice to funding department. One copy is needed to keep for the receiving department. b. f the company has another department for inspection on purchased goods, a inspection department is responsible of the department is responsible of the Open with Google Docs inspection instead of the receiving department. c. If the receiving department has to do the inspection, it is more effective to separate the person between a receiving task and a inspection task. a. On purchasing product, there are to need at least two steps. First, a product manager signs to demand a purchase order. Second, a general manager confirms to need the purchase. Once, it is determined, it is very difficult to turn back the offer So, the company needs at least two times steps. a. Product is money. And there can be a lot of frauds in inventory management, especially purchase. Stealing, manipulation of product's amount and kinds, forge receiving and so on. So, it is necessary to use and install the electronic facility such as CCTV for managing products. Any cure is not better than prevention. a. All sales and purchase always have the possibility to occur a return sale and a return purchase. So, whenever it occurs to the transaction like return purchase, the concerned department keeps it recording and transfer the data to the funding department for accurate payment and liquidation. Shipment have been connected with at least two business partners: buyers and sellers (or adding carrier). And some departments, not one department, on each company are concerned with shipinent. So, the shipment is not always correct. So, there is necessary to make a policy about shipment. There are two representative policies: allowed %, and blind PO. The criteria of policy setting up are based on company's internal objective and the relationship with supplier. On adopting allowed 5% policy, the policy gives some room for receiving and inspection for purchase. However, it is not possible inspection for purchase. However, it is not possible these items - fresh goods, danger ones, goods Die 2.0 PM needed large space, and goods difficult to keep. And, sometimes, it is necessary for both parties are to recognize or to be recognized the inspection errors found after shipment under partnership regardless of who's benefit. On adopting blind PO, there is no room for receiving and inspection. The amount shipped must always meet with the amount purchased. The policy is determined by the company's size, the number and kinds of items treated, objectives and partner's capabilities and numbers. When the person does not recognize the payment about a certain invoice, he/she can pay one more time. It produces non necessary - additional - task. So, the company prevent the person from paying one more time through the stigma that is recorded payment. more time through the stigma that is recorded payment Also, unexpected payment can be incurring the problem of cashflow. Once, payment is wrong, it is difficult to meet the balance in actual money. However, it is more difficult to adjust the balance in the accounting system than real system. 10 Marks Question 2 1. Describe and explain the key components of an internal control system. 2. Identify and describe the important elements of internal controls, including the control environment and management control activities. 3. Explain the importance of internal control to auditors 3 Marks Question 3 Open with Google Docs Your Obtaining knowledge of the client's business is an important part of planning the audit work. The auditors' knowledge of the business assists in the identification of events, transactions and practices having a material effect on the financial statements. Moreover, the auditors should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. The internal control system is not limited to matters directly relating to the functions of the accounting systems, but also includes the control environment and control procedures. As a result of the complexities of modern business, an increasing number of audit firms are adopting a business-like approach to audit planning. An audit strategy is formulated for each audit client on the basis of both external and internal factors. Auditors formulate the general audit strategy in an overall audit plan, which sets the direction for the audit and provides guidance for the development of the audit programmes. Required: (a) List FIVE sources from which an auditor can obtain knowledge of a client and its industry. (b) Define control environment and control procedures. Explain the importance of a strong control environment and the factors reflected in the control environment. 2 marks Question 1 For each internal control procedure provided, identify the risk that the procedure is designed to minimize. Risk Internal Control Procedure a. The cores of internal control procedure are checking and balance. And the purchase task needs to follow the procedures because it is related to the subjects internal or external. So, these tasks (purchase order, receiving goods, invoice checking inspection) and treating invoice should be done independently and sequential. a. It is very difficult to find errors because the total amount is correct but the sub-account that is designated by purchase is incorrect. b. It is best way for solution the problem the correct to match the account according to purchaser. c. And, we operate the checking system between the account and the vendor. a. There are three factors for inventories management: ordering cost, carrying cost and shortage cost. b. The person who is responsible of the inventory management tries to do his best to minimize the total costs incurring through as mentioned above cost. C. The manager set up the management schedule through a predetermined amount and a appropriate time. d. Also, the purchase department always must be interested in the situation of the counterpart for perfect purchase. a. After a receiving department have finished to receive the ordered goods, the department must transfer the invoice to funding department. One copy is needed to keep for the receiving department. b. f the company has another department for inspection on purchased goods, a inspection department is responsible of the department is responsible of the Open with Google Docs inspection instead of the receiving department. c. If the receiving department has to do the inspection, it is more effective to separate the person between a receiving task and a inspection task. a. On purchasing product, there are to need at least two steps. First, a product manager signs to demand a purchase order. Second, a general manager confirms to need the purchase. Once, it is determined, it is very difficult to turn back the offer So, the company needs at least two times steps. a. Product is money. And there can be a lot of frauds in inventory management, especially purchase. Stealing, manipulation of product's amount and kinds, forge receiving and so on. So, it is necessary to use and install the electronic facility such as CCTV for managing products. Any cure is not better than prevention. a. All sales and purchase always have the possibility to occur a return sale and a return purchase. So, whenever it occurs to the transaction like return purchase, the concerned department keeps it recording and transfer the data to the funding department for accurate payment and liquidation. Shipment have been connected with at least two business partners: buyers and sellers (or adding carrier). And some departments, not one department, on each company are concerned with shipinent. So, the shipment is not always correct. So, there is necessary to make a policy about shipment. There are two representative policies: allowed %, and blind PO. The criteria of policy setting up are based on company's internal objective and the relationship with supplier. On adopting allowed 5% policy, the policy gives some room for receiving and inspection for purchase. However, it is not possible inspection for purchase. However, it is not possible these items - fresh goods, danger ones, goods Die 2.0 PM needed large space, and goods difficult to keep. And, sometimes, it is necessary for both parties are to recognize or to be recognized the inspection errors found after shipment under partnership regardless of who's benefit. On adopting blind PO, there is no room for receiving and inspection. The amount shipped must always meet with the amount purchased. The policy is determined by the company's size, the number and kinds of items treated, objectives and partner's capabilities and numbers. When the person does not recognize the payment about a certain invoice, he/she can pay one more time. It produces non necessary - additional - task. So, the company prevent the person from paying one more time through the stigma that is recorded payment. more time through the stigma that is recorded payment Also, unexpected payment can be incurring the problem of cashflow. Once, payment is wrong, it is difficult to meet the balance in actual money. However, it is more difficult to adjust the balance in the accounting system than real system. 10 Marks Question 2 1. Describe and explain the key components of an internal control system. 2. Identify and describe the important elements of internal controls, including the control environment and management control activities. 3. Explain the importance of internal control to auditors 3 Marks Question 3 Open with Google Docs Your Obtaining knowledge of the client's business is an important part of planning the audit work. The auditors' knowledge of the business assists in the identification of events, transactions and practices having a material effect on the financial statements. Moreover, the auditors should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. The internal control system is not limited to matters directly relating to the functions of the accounting systems, but also includes the control environment and control procedures. As a result of the complexities of modern business, an increasing number of audit firms are adopting a business-like approach to audit planning. An audit strategy is formulated for each audit client on the basis of both external and internal factors. Auditors formulate the general audit strategy in an overall audit plan, which sets the direction for the audit and provides guidance for the development of the audit programmes. Required: (a) List FIVE sources from which an auditor can obtain knowledge of a client and its industry. (b) Define control environment and control procedures. Explain the importance of a strong control environment and the factors reflected in the control environment. 2 marks