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a) You are required to explain management objectives that an internal control system (ICS) can help management achieve.
- An ICS enables management to carry out the business in an orderly and efficient manner. Internal controls lay out the various procedures to be followed in conducting the affairs of the organisation. E.g. there will be procedures laying out the procedures to be followed in procuring raw materials to ensure that only necessary materials are procured which meet the quality standards of the company;
- An ICS ensures that the various policies that have been put in place are adhered to by employees in running the operations of the company;
- An ICS helps in safeguard the company‘s assets. Some controls are designed specifically to ensure the assets of the company are protected from theft, destruction and that they are used in the best interest of the company. This can either be directly through physical locking up or indirectly through recording. It includes assessing assets and ensuring that any access is authorised.
- ICS help in ensuring completeness and accuracy of the records maintained. The company‘s Act requires that the management of a company keep proper books of accounts. These records are the basis for the preparation of the financial statements.
- Strong internal controls help in preventing and detecting errors and frauds. The responsibility for the prevention and detection of fraud and error rests with management. This is achieved through the implementation and continuous operation of an adequate system of internal controls. Such a system reduces but does not eliminate the possibility of fraud and error.
b) You are required to discuss five control objectives that an internal control system over sales aims to achieve.
- To ensure that the company only sells to credit worthy customers. This is aimed at reducing the risk of selling to un credit worthy customers resulting in bad debt losses;
- To ensure that all sales made to customers are subsequently billed and recorded in the ledger;
- To ensure that all sales made are recorded in the correct financial period;
- To ensure that sales are billed at the approved selling prices;
- To follow up on payments from customers and ensure that customers are adhering to the approved terms of credit;
- To ensure that there is proper control and authorisation of bad debts write offs
c) Inherent limitations of an internal control system
- Management has to ensure that the benefits expected from an internal control system outweigh the costs. As a result certain important controls might not be put in place due to the costs involved. E.g. a small entity might not have the resources to employ sufficient staff to ensure proper segregation of duties.
- Most internal controls tend to be directed towards routine transactions rather than non-routine transactions. This leaves gaps that can be exploited because the non-routine transactions will not be subjected to appropriate controls.
- Human error due to carelessness, distraction, mistakes of judgment and misunderstanding instructions could undermine the effectiveness of the internal control system.
- A member of management or an employee could circumvent controls through collusion with persons outside or inside the entity. E.g. where duties are segregated the employees could collude to perpetrate and conceal a fraud. Such collusion will render the segregation of duties ineffective.
- Abuse of responsibility e.g. a member of management overriding an internal control
- The possibility that procedures maybe inadequate due to changes in conditions
Wilfykil answered the question on February 22, 2019 at 06:17
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State the evidence, which you, as the auditor, would like to find in place and pay attention to when vouching the following payments made by RR Paper Mills Ltd., during the financial year ended 31 October 2002.
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c) Fire insurance premiums amounting to Sh. 10, 000 paid for the office block.
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Required:
a) Describe the steps you would take before advising the partners of your firm whether to accept the appointment as auditors or not.
b) State with reason whether professional auditors should accept the method of remuneration as proposed by the directors of the client company.
c) Explain the implications of fixing the audit fee by negotiation between the directors and the external auditors on the independence of the auditor.
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Required:
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Control procedures consist of practices and procedures in addition to the control environment, established to achieve certain specific objectives. For each of the procedures listed below, explain the purpose of the control procedures and state the tests of control you would perform to confirm that the control objective was being achieved
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Many auditors now use laptops computers to perform various audit tasks. However, if audit firms use laptop computers they risk data being corrupted and appropriate controls must therefore be put in place to prevent the corruption of data.
a) Explain six ways which auditors can use laptop computers in their audit work (other than computer-assisted audit techniques).
b) Explain the computer assisted audit techniques listed below:
i. Embedded audit facilities.
ii. Integrated test facilities.
c) Briefly describe two types of software that might be used by auditors in their work other than Computer Assisted Audit techniques.
d) Describe the controls that auditors should implement when using laptop computers on audits.
Date posted: February 21, 2019. Answers (1)
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One of the responsibilities of the directors of a company is to establish strong internal controls to safeguard the assets of the firm.
Required:
a) State the audit objectives of internal controls on fixed assets.
b) Set out the audit procedures you would follow to verify directors‘ fees.
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Date posted: February 21, 2019. Answers (1)
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An auditor is required to state whether, in his opinion proper books of account have been kept and whether the financial statements give a true and fair view of the state of the financial affairs of the company being audited.
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Your client, ABC Ltd. has a system for inputting purchase and expense invoice where the operator inputs the following from each item.
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-Supplier code number
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-Nominal account code (entered by purchase department manager) Date
-Goods inward note
-number Net amount
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-Gross amount
Required:
a) Suggest manual operation and controls which might previously have applied to these invoices.
b) Suggest input controls that might be applied by the program to these items.
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Date posted: February 21, 2019. Answers (1)
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You have been the auditor of Crossborder Trading Company Ltd. for a number of years. The company‘s head office is in Nairobi, Kenya and if has considerable overseas operations. At each accounting year end, there are large debts due from overseas agents of the company (Sh. 270 million out of total debts of Sh. 680 million as at 31 December 2000). In the past, these debts have always been settled after year end but you have insisted that the debts be the subject of a specific representation made by the company‘s director.
Required:
a) Outline the purpose of a letter of representation from management to the auditor.
b) Draft a paragraph for a letter of representation appropriate to the circumstances described above.
c) Outline the audit work which should be performed when seeking evidence to substantiate the management‘s representations as drafted and indicated the value of the directors‘ representations in these circumstances. You should present your answer
under the following headings:
- Existence and title.
- Valuation.
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Date posted: February 21, 2019. Answers (1)
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List three disadvantages of using standardized audit programmes and how these disadvantages can be avoided.
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In the course of the audit of ABC Stationers Ltd. for the year ended 30 June 2001, you have noted and recorded in the audit working papers, the following evidential matters:
1. Flowcharts of the company‘s payroll prepared by your audit assistant backed up by tests of controls.
2. An oral statement by the production director that the expected working life of plant acquired during the year is ten years.
3. A letter to the managing director from the company‘s bank manager indicating that the bank intends to extend overdraft facilities for a period of one year.
4. A list of items of inventory counted by a member of your audit team during observation of the company‘s annual stock count.
5. A letter from a customer to your firm in reply to a confirmation request indicating agreement with the balance recorded in the books of ABC Stationers Ltd.
Required:
a) With respect to each matter listed above, explain its relevance to the overall audit objective of forming an opinion and reporting on the financial statements.
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Date posted: February 21, 2019. Answers (1)
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Required:
a) Explain the preliminary procedures you would carry out upon your appointment.
b) What is the importance of a preliminary review?
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d) State why it is important for an incoming auditor to hold consultations with the outgoing auditor.
Date posted: February 21, 2019. Answers (1)
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You have been appointed the auditor of United Millers Company Limited, a medium manufacturing company which is quoted on the stock exchange.
Required:
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Date posted: February 21, 2019. Answers (1)