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(a) Internal controls over non-current assets are designed to ensure the orderly and efficient running of the business, adherence to management policies, safeguarding of assets,...

      

(a) Internal controls over non-current assets are designed to ensure the
orderly and efficient running of the business, adherence to management
policies, safeguarding of assets, the prevention of fraud and error and
the completeness and accuracy of the accounting records.
Required:
List the internal controls that a small printing company with office
equipment, motor vehicles and plant and machinery should have in place
to achieve the objectives described above.

(b) Audit sampling is a technique for drawing conclusions about the
characteristics of a population by testing a sample drawn there from.
Internal and external auditors use it for both tests of controls, and
substantive testing.
Required:
Describe the following:
(i) Judgement sampling and statistical sampling;
(ii) A representative sample;
(iii) Tolerable error;
(iv) Two different methods of selecting a representative sample;
(v)The extrapolation of errors.

  

Answers

johnson
(a) Internal controls
(i) Controls contributing to the orderly and efficient running of the
business, safeguarding the assets and adherence to management policies
would include the following:
? Physical controls over access to the assets such as the locking of
doors and the maintenance of an appropriate fire and flood resistant
environment;
? Insurance against disaster and contingency plans;
? The use of passwords for access to computers and plant and
equipment;
? The numerical or other tagging of all equipment, referenced to an
asset register;
? Performing periodic asset audits;
? Internal regulations requiring staff who take equipment such as
laptops and motor vehicles home to ensure that they are secure, and
prohibiting staff from using their own software on company
equipment;
? The maintenance of firewalls and virus checking software.
(ii) Controls contributing to the prevention of fraud and error, and the
completeness and accuracy of the accounting records would include the
following;
? The preparation and monitoring of capital expenditure budgets
together with authorisation of capital expenditure,
? Disposals and depreciation rates by independent persons at an
appropriate level within the organisation who do not have day-to-day
responsibility for the related records or assets;
? The maintenance of an asset register that is reconciled to the general
ledger and the assets themselves;
? The periodic checking and review of asset lives, and fully depreciated
assets, to ensure that assets are being depreciated correctly, over an
appropriate period of time.

(b) Description
(i) Judgement and statistical sampling
Judgement sampling uses the auditor’s judgement to select the number of
items to be tested, which items to be tested, and to interpret the results.
Statistical sampling uses probability theory to do the same. Some
judgement is always used in statistical sampling in the assessment of
materiality and in the determination of what constitutes tolerable error, for
example.
(ii) Representative sample
A representative sample is one whose characteristics are the same as, or
similar to, the characteristics of the population as a whole. All sample
selection methods attempt to select samples that are representative.
For example, a sample of invoices that have not been properly authorised
in 5% of cases will be representative of all invoices if the population as a
whole also has around 5% of invoices not authorised.
(iii) Tolerable error
Tolerable error is the maximum error that the auditor is prepared to accept
and still conclude that the audit objective has been achieved.
For example, in relation to receivables, the auditor may be prepared to
form the conclusion that receivables are not materially misstated if
sampling shows that the receivables population has a value that is within
plus or minus, say, 5% of the figure in the financial statements.
(iv) Different methods of sample selection
Random selection requires the use of random number tables in order to
select a representative sample.
Haphazard selection may be deemed to approximate to random selection
provided that no bias is displayed.
Interval (or systematic) selection involves taking every nth item, starting at
random. Monetary unit sampling is also a form of systematic selection.
Block selection methods (taking one full part of the population) will
probably not result in a representative selection.
Block selection might involve obtaining confirmation of receivables from
one region of the country only, for example.

(v) Extrapolation of errors
Errors found in a sample are extrapolated across the population as a whole,
in order to enable the auditor to form a conclusion on whether the
population is materially misstated. It is important to remember that there is
not necessarily a direct, linear relationship between errors in samples and
errors in the populations from which they are drawn.
johnson mwenjera answered the question on April 3, 2018 at 14:30

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