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The matter listed below are always included in the internal control of a firm. You are required to explain the purpose of each of the...

      

The matter listed below are always included in the internal control of a firm. You are required to explain the purpose of each of the items listed as (a), (b) and (c) below. Indicate the compliance tests you would carry out in order to ensure that the
intended controls were operating properly.
a) A requirement that mail is opened by two responsible employees who must promptly make listings of all receipts.
b) A rule that a fixed asset register must be maintained and updated promptly.
c) A requirement that a bank reconciliation statement is prepared on monthly basis.

  

Answers


Wilfred
a) The purpose of requiring that mail is opened by two persons ? To ensure that all receipts by mail are accounted for. The two persons will over look the activities of each other to ensure that all collections are recorded;
- To reduce the risk that one individual could be tempted to conceal some of the receipts and latter misappropriate the collections;
- To ensure that the receipts are accurately recorded. One person will counter check to ensure that the receipts are correctly recorded.

The tests of controls that I would carry out in order to ensure that the control was operating properly will include:
- Attending one of the sessions when mail is being opened to observe that the exercise is conducted by two persons;
- Inspecting the listing of the receipts to confirm that it is accurately prepared and all the receipts for the day are recorded;
- Inquiring from officials of the client that the opening of the mail is always conducted by two persons and inspecting a sample of the listings prepared during the year to confirm that there is evidence that the mail opening was indeed conducted by two persons.

b) The purpose of requiring that a fixed assets register must be maintained and promptly updated:
A fixed assets register provides details of all the assets of the company, the location, serial identification number, person who has custody, cost, depreciation policy and the net book value among other details. This register serves the following purposes:
- Ensures that there proper records showing all the purchases and disposals of fixed assets i.e. all the movements in the fixed assets are accounted for;
- Makes it easy to physically verify the existence of the assets. By using the register one can be able to trace the location of the assets;
- Increases accountability over the usage of the assets because all the assets are under assigned specific persons who control their usage;
- Reconciling the fixed assets register to the ledger ensures completeness and accuracy of the fixed assets balances in the ledger.

Tests over the operation of this control
- Inspecting the register to confirm that it is updated with all the assets movements and reconciles to the general ledger;
- Inspecting the register to verify that a senior responsible person reviews the register on a regular basis to ensure completeness and accuracy.

c) The purpose of preparing a bank reconciliation statement on a monthly basis:
- Such a reconciliation is useful in ensuring the completeness and accuracy of the bank balance as appearing in the ledger. By reconciling the cash book balance to the bank statement transactions that have not been captured in the cash book such
as interest charged/earned will be highlighted and subsequently recorded. In addition any errors made in recording transactions in the ledger will also be identified and corrected.
- Such a reconciliation will highlight any fictitious transactions that have gone through the bank for example fraudulent payments which have not been captured in the cash book will be identified;
- The reconciliation will also highlight any errors that might have been made by the bank such as debiting the accounting with a larger amount than was paid out. Such errors can then be followed up with the bank.

Testing the operation of this control
- I will inquire whether the reconciliation‘s are indeed prepared on a monthly basis;
- Inspect a sample of the reconciliation‘s and confirm that they are indeed prepared on a monthly basis and that there if evidence of review by a senior responsible person;
- Inspect a sample of the reconciliation‘s to confirm that they are accurately prepared, the reconciling items are promptly cleared and that there are no unexplained variances.
Wilfykil answered the question on February 21, 2019 at 07:01


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