You are the audit manager on the audit of Bridge Limited, the company which produces and sells fine art materials. Bridge Limited has a large production facility which is located in the countryside and it operates a number of shops throughout the country. You have started the planning of the upcoming audit and you are assessing the control environment within Bridge Limited. From the initial assessment, you identified that Bridge Limited has strong control environment and therefore in order to reduce the extent of the substantive procedures you are planning to test controls that will address relevant assertions of the accounts that you are going to audit. Bridge Limited has a large finance team which includes of accountants, senior accountants, financial controller and financial director. During the planning you identified that the significant accounts will include revenue, inventory, fixed assets, cash, accounts receivable and accounts payable. You noted during initial inquiry that controls exist for each of the selected significant accounts relevant to the audit. Based on the understanding of the entity, you noted that the accountants responsible for particular area are preparing the journals and are sending them for review to senior accountants. Once senior accountants review the journals, they are sent for final approval to financial controller. All the journals to be posted and which are above 10,000 has to be reviewed and authorised by the financial directors. Also, the financial director has authorise all the outcoming payments as she is the only person within Bridge Limited who has a mandate to the bank account. The trial of the reviews and authorisation is stored electronically in the accounting system on the server, and the paper file for all the transactions is stored in the safe. The accountant and senior accountant who are responsible for inventory attend the annual stock count and they compare the quantities of the goods held in the warehouse to the quantities recorded in system. The finance director is responsible for maintaining the system of internal controls within the organisation.

(a) Outline FIVE components of internal control system. (10 marks)

(b) Describe FOUR control activities outlined in the scenario and briefly explain further THREE control activities which were not mentioned in scenario but applicable to the control system. (14 marks)

(c) List and briefly explain THREE limitations of internal controls. (6 marks)