AA – May 2017 – L2 – SC – Q5 – Internal Control Systems

Examination of internal control meaning, examples, and sources of audit evidence for completeness, ownership, and valuation.

Question

You are the Auditor of Bistro Bottling Limited (BBL), a major manufacturer and distributor of fruit juice drinks based in Lagos. A review of the previous year’s audit working papers revealed some weaknesses in internal controls with regard to safeguarding the company’s non-current assets.

The company uses a combination of both owned and leased motor vehicles for operational activities, including deliveries to customers. It has recently sold some old vehicles and bought new ones in a bid to lower motor vehicle running expenses.

During the planning of the audit, you have decided that motor vehicles will be a key area because of the likelihood of weaknesses in the company’s system of internal control over non-current assets.

You are required to:

(a) Explain with suitable illustration the meaning of Internal Control. (4 Marks)
(b) List FIVE examples of internal controls. (5 Marks)
(c) Identify TWO sources of audit evidence you will obtain for each of the following: completeness, ownership, and valuation, to provide reasonable assurance with regard to the company’s assets and liabilities. (6 Marks)

Answer

(a) Meaning of Internal Control

Internal control refers to processes and procedures designed and implemented by management or those charged with governance to provide reasonable assurance regarding the achievement of objectives related to:

Effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with applicable laws and regulations

For example, an internal control system may include regular reconciliation of cash balances to prevent fraud and ensure accurate financial reporting.

(b) Examples of Internal Controls

Segregation of duties to prevent and detect errors and fraud.
Organisational controls, including clear lines of responsibility.
Physical controls to secure assets, like locks on equipment rooms.
Personnel controls, such as background checks during hiring.
Performance reviews to monitor and evaluate processes.

(c) Sources of Audit Evidence

Completeness
- Test of controls over asset recording
- Substantive procedures like circularisation of receivables and payables
Ownership
- Inspection of non-current assets register
- Review of title documents, such as property deeds or vehicle registrations
Valuation
- Verification through supplier invoices to confirm costs
- Review of bank statements and interview with management on asset valuation methods

Tags: Audit evidence, Completeness, Dividend valuation, Internal Control, Non-current Assets, Ownership, Valuation
Level: Level 2

Topic: Internal Control Systems
Series: MAY 2017

Uploader: Theophilus