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(a) Briefly explain the meaning of the term "control procedures". (b) What is the importance of...

      

(a) Briefly explain the meaning of the term "control procedures".
(b) What is the importance of segregation of duties as a control procedure'? (c) In carrying out an audit, the auditor appraises and tests the system of internal control in order to ascertain that it is capable of processing transactions or determining quantities and values completely and accurately. The auditor further carries out substantive tests in an attempt to ensure that the transactions, assets and liabilities recorded in the accounting records upon which the figures in the financial statements are based, are completely and accurately recorded. Required: List and briefly explain the substantive tests the auditor would carry out to verify the values attributed to: (i) Trade debtors in a company's financial statements.
(ii) Trade creditors in a company's financial statements.

  

Answers


johnson
a) You are required to briefly explain the meaning of the term "control
procedures".
Control procedures are the detailed policies and procedures established by
management within the control environment. Control procedures put together
constitute an internal control system. For example the requirement that all
purchase orders must be authorised by a senior responsible company official is an
example of a control procedure. Control procedures are aimed at achieving a
desired control objective. For example the above requirement that purchase orders
should be authorised is an example of a preventive control aimed at ensuring that
all purchase transactions have received the necessary approval which will assist in
the prevention of errors and frauds.

b) You are required to discuss the importance of segregation of duties as a
control
procedure.
Segregation of duties refers to the separation of the various duties and
responsibilities such that one person cannot process and record complete
transactions from beginning to the end without being checked by another person.
E.g. in the purchase of a company’s fixed assets a single individual should not
authorise the purchase, place the order, receive the asset and record the transaction
in the accounting records, to minimise the risk of error and/or intentional
manipulation of information.
Segregation of duties is important because:
? It helps detect errors in processing transactions. This is because the work of
one individual will be checked by another. Errors made will be detected;
? Helps in deterring fraud. Segregation of duties would help in deterring people
from perpetrating frauds. This is because the work of every individual is
counter checked by another person.

c) You are required to List and briefly explain the substantive tests the auditor
would carry out to verify the values attributed to:
i) Trade debtors in a company's financial statements.
Substantive tests are the tests that the auditor carries out to obtain evidence as
to the completeness and validity of the balances reported in the financial
statements i.e. procedures carried out to test the management assertions.
In regard to debtors the following substantive procedures will be necessary:
? To carry out a trend analysis on the level of debtors by comparing the current
year debtors with the previous two years and obtaining explanations for the
reported trend. The evidence obtained from this analysis will assist the
auditor in identifying circumstances that could lead to the misstatement of
debtors balances;
? Compute the debtors’ days, debtors’ turnover and the ratio of provisions for
doubtful debts to trade debtors’ balances. Compare the ratios with the
previous year and obtain explanations for any significant variations. Such an
analysis will assist the auditor in evaluating the recoverability of the debtors’
balances and whether an adequate provision has been made;
? Obtain a listing of balances as at the year end and agree the total to ledger
balance;
? Select a sample of debtors’ balances and perform circularization. This will
assist in confirming existence of the balances;
? Obtain a sample of significant balances and verify if any payments have been
received after the year-end. This will provide good evidence as to the
recoverability of debtors balances;
? Discuss with management accounts that appear doubtful. This will include
accounts above the authorised credit limits, accounts with disputed balances
and balances that have been outstanding for a long period of time. Ensure
that an adequate provision has been made for these balances;
? Test the operation of the cut-off procedures by obtaining details of the last
dispatch note processed during the year and ensure that all transactions that
relate to the current financial period have been recorded.
(ii) Trade creditors in a company's financial statements.

a) Compare the current years creditors balance with the previous year and
obtain explanations for any significant movements. Such an analysis will
give indications for example on the completeness on creditors.

b) Compute the creditors days and compare with the previous years and
obtain explanations for any significant movements. Creditors days give an
indication of the number of days it takes on average to pay creditors.

c) Obtain a creditors listing and verify that the total per the listing agrees with
the total per the ledger.

d) From the listing select a sample of creditors and carry out the following
procedures:
? Obtain or prepare a reconciliation of the creditors balance per the ledger
to the suppliers’ statements;
? Obtain explanations for all the reconciling items and where appropriate
ensure that the reconciling items have been adjusted in the books of
account. The reconciling items will mainly include suppliers invoices not posted in the clients ledger or payments not reflected in the suppliers
statements.
e) Obtain a sample of payments made to suppliers after year- end and verify
that all the invoices that related to the period under review had been accrued
for.
f) Obtain all the pending invoices that relate to the fi
johnson mwenjera answered the question on August 4, 2018 at 12:16


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