Internal auditor control risk control weaknesses audit tests
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Question 1:
The external auditor can rely on the work of the internal auditor subject to certain conditions being met. One of this relates to the internal auditor reporting to the audit committee rather than to management.
Required:
(i) Please explain as to why this is an important condition to be met
(ii) Provide three benefitsof the audit committee in enhancing governance
Question 2:
In your preliminary assessment of control risk, you have assessed it as low. In undertaking your tests of control you note that the results fail to confirm your preliminary assessed level of control risk.
Required:
Explain the impact this would have on your audit plan.
Question 3:
The sales system of John limited is as follows. John Ltd is a wholesaler of office supplies and sells them to a number of retail outlets (customers) in the Perth region on credit. Its prices are competitive and it offers a same day delivery service for orders telephoned before noon. The sales cycle relative to the phone ordering, despatch of goods and update of ledger are as follows:
i. The customer phones through an order to the sales department which raises a sales order and two invoice copies which are priced and totalled. This is forwarded to the despatch department.
ii.The despatch department makes up the orders and gives the goods to the driver with thetwo invoice copies of the order.
iii. The driver delivers the goods, provides the customer with one copy of the invoice and returns with the other copy of the invoice.
iv. The driver returns and hands the second copy of the invoice to the sales clerk who uses it to update the ledger.
Required:
(i) State five major control weaknesses in the sales system of John Ltd and provide your reasons for each of them.
Question 4:
In carrying out the audit of audit of Tom Ltd, you have evaluated the controls risks as high and that the existence of both inventory and accounts receivable is at risk.
Required;
Identify two audit procedures you could use to test:
(a) the existence assertion for inventory
(b) the existence assertion for accounts receivable.
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Solution Summary
Your tutorial is 845 words plus a reference on audit committees. The discussion gives you five internal control issues, discusses the impact of audit committees, gives you two audit procedures to test for existence of AR and inventory and guides you through audit risk, inherent risk, control risk and how changes to inherent or control risk changes detection risk. A sample computation is given to show you.
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1. The external auditor can rely on the work of the internal auditor subject to certain conditions being met. One of this relates to the internal auditor reporting to the audit committee rather than to management.
Explain as to why this is an important condition to be met
Internal auditors are employees of the client and therefore have loyalties to the business. Their boss is also the person that may be perpetrating fraud or less than competent to make GAAP decisions and they may be reluctant to report on this or to report on it fully. They may downplay or "white wash" it to look less serious than it is in order to not anger the boss. If they report to the audit committee, the boss can't fire them if they don't like the report.
Provide three benefits of the audit committee in enhancing governance
1. The audit committee contains members who are all independent of management and so provides a more objective view of the firm's condition.
2. The audit committee has special financial expertise because of their specific role in hiring, overseeing and compensating the external auditors. At least one member must have financial expertise.
3. The audit committee often takes on the role of enterprise risk monitoring, continually gathering information about financial and non-financial risk factors, providing an entity-wide view of major threats. Their "big picture" view is often not available to other players in the firm's governance because of their more narrow duties.
2. In your preliminary assessment of control risk, you have assessed it as low. In undertaking your tests of control you note that the results fail to confirm your preliminary assessed level of control risk.
Explain the impact this would have on your audit plan.
If I assessed the controls as "low" I believe the controls (1) have an exceptionally strong design and (2) ...
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