Question Tag: Internal Control

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  • 14 Marks

AAA – May 2021 – L3 – Q1a – Ethical Issues in Auditing

Discussion of ethical issues and professional challenges in the audit of Blackmart Plc, and recommendations for addressing them.

Blackmart Plc is one of your listed audit clients which offers property management, property financing, and mortgage services to its clients. During the audit of the company, the following matters came to your attention:

(i) Grace Sadiku, one of the audit team members, has provisionally agreed to take out a mortgage facility with a duration of 10 years using the facility of Blackmart Plc to finance her first residential property. In the area where the property is located, the first residential property gets a full tax waiver on the entire installments paid within the first 5 years, which is usually a significant tax incentive. The mortgage facility would be secured by the property and it has been defined as the best offer available in the market.

(ii) Also, during the period, the Human Resources (HR) Manager of Blackmart Plc resigned, and the company had reached out to your firm to provide a staff on secondment till a substantive HR Manager is appointed.

(iii) The management of Blackmart has also informed your audit team that the company maintains only two bank accounts and there will be no need to circularise the banks as the auditors can rely on the balances as generated from the bank’s portal as at the end of the year.

(iv) The audit committee has asked your firm to work with the internal audit team to design internal controls over the part of the accounting system which deals with revenue, and also evaluate the operating effectiveness of the internal controls.

Required:
Prepare a memo to your Manager, commenting on the professional and ethical issues arising from the audit of Blackmart Plc and also suggest to him/her on how to manage the identified issues. (15 Marks)

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  • 1 Marks

AAA – Nov 2013 – L3 – AII – Q11 – Internal Audit and Corporate Governance

Identify four key factors for internal control evaluation in universities.

In the evaluation of the system of internal control as applicable to a university, there are four factors to be considered by the auditors as follows: Methods of keeping records, ………………. and ………………….., segregation of duties, and custodial controls.

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q19 – Internal Audit and Corporate Governance

This question identifies assignments that qualify as continuous audit functions.

Which of the following assignments can be regarded as a continuous audit function?
A. Examining the effectiveness, efficiency, and economy of a cement project
B. Evaluating the adequacy of the security and control measures of the information technology
C. Ascertaining the fairness of the annual financial statements and notes to the accounts
D. Reviewing the internal control procedures before commencing the audit
E. Reviewing the company’s compliance with relevant guidance and release of financial information periodically

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q12 – Advanced Audit Planning and Strategy

This question assesses the primary purpose of understanding a client’s internal control system.

Which of the following is the primary purpose for obtaining an understanding of client’s internal control?
A. Provide a basis for making constructive suggestions in a management letter
B. Determine the nature, timing and extent of tests to be performed in the audit
C. Obtain sufficient and competent evidential matter to afford a reasonable basis for an opinion on the financial statements under examination
D. Provide information for communication of internal control related matters to management
E. Obtain sufficient evidence to afford a basis for an opinion on the financial statements

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  • 1 Marks

AAA – Nov 2013 – L3 – A – Q2 – Audit of IT Systems and Data Analytics

This question assesses the knowledge of internal controls in a computerized accounting system.

In order to understand the internal control system of a computerized accounting system of a client, which of the following computer documentation will assist the auditor the most?
A. System narrative
B. Record layout
C. Programme listing
D. Record counts
E. System flow charts

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  • 1 Marks

AAA – Nov 2012 – L3 – SA – Q3 – Regulatory Framework and Professional Standards

Identifying non-responsibilities of directors related to accounting functions in a company.

The responsibilities of the directors in relation to the accounting functions of the company fall under the following EXCEPT:
A. Safeguarding the company’s assets and preventing errors and fraud in the company
B. Defining the concept of materiality and tolerable error as a guide to the auditor
C. Ensuring that the company keeps proper accounting records as defined in the legislations
D. Setting up internal control system in the company as a standard practice
E. Preparing the financial statements to show the results of the company for the year and financial position as at year-end

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  • 30 Marks

AAA – Nov 2021 – L3 – Q1 – Overview of Advanced Audit and Assurance

Evaluate auditor's objectives under ISA 250, internal control deficiencies, and communication requirements for audit strategy.

Eat Well Bakeries is a private limited liability company. It bakes bread and other confectioneries, produced from the main bakery and a smaller bakery in another part of town. Products are sold from these two bakeries and five additional outlets in the same town. Distributors purchase products outright and bear the risk of sale.

The main administrative and management functions of the bakeries are conducted from the main bakery, while basic records are kept at the small bakery and sales outlets. These records are transmitted to the main office every morning. Detailed accounting records and performance analysis are handled in the main administrative office.

Despite being a private business, the chairman insists on maintaining proper standards to stay competitive. The chairman transferred the company’s audit to your firm after a discussion with your partner, and professional clearance was obtained. However, limited documentation from the predecessor auditor was available, and no extensive documentation was done at the beginning of the audit.

You have been assigned to continue the audit from where it was left off, ensuring the chairman’s expectations are met.

Required:

a. Evaluate the Auditor’s objective concerning ISA 250 that would be discussed with the chairman. (5 Marks)

b. Prepare an outline of matters that should be communicated. (5 Marks)

c. Your review shows internal control challenges. Based on this, prepare a brief on:

  • i. The meaning of deficiency as per ISA 265 (3 Marks)
  • ii. The components to be included in communication to the chairman regarding deficiencies (5 Marks)

d. Evaluate potential audit strategies, and recommend an appropriate model for application to Eat Well Bakeries. (12 Marks)

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  • 1 Marks

AAA – Nov 2011 – L3 – SA – Q20 – Audit of IT Systems and Data Analytics.

Identifies the documentation that aids in understanding the internal control system.

To obtain an understanding of the internal control system, which ONE of the following computer documentations can assist the auditor?

  • A. System narrative
  • B. System flowchart
  • C. System counts
  • D. Record layout
  • E. Programme listing

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  • 15 Marks

AAA – Nov 2023 – L3 – SC – Q7 – Audit Planning and Strategy

Outlines audit strategies, factors for strategy selection, and distinction between audit strategy and audit plan for Orlando Professional Services.

The overseas technical partners of Orlando Professional Services came for a review of operations and system of internal control of the firm. A number of audit engagement files regarding financial statements on which the firm had expressed audit opinion were selected for review. It was believed that the strategic review would be necessary to determine the appropriate audit approach for a detailed audit plan in the firm to bring efficiency and enhance good client service delivery. The review exercise also covered:

i. The firm’s basis of risk assessment on audit and assurance engagements;
ii. Determination of staff recruitment, training, reward, and evaluation;
iii. Previous audit opinions on financial statements and progress on ongoing jobs;
iv. System of archival and retrieval of documents;
v. Major risks and other factors such as industry issues;
vi. Procedures for engaging and monitoring experts both internal and external; and
vii. Reports from regulators.

The team interviewed partners, staff, and directors of major clients of the firm. It was believed that the outcome of the review exercise would help to reposition the firm and upscale strategies to get a fair share of the market in the upcoming mandatory rotation of auditors.

At the end of the exercise, it was reported that the audit strategy of the firm was not robust enough, too generic, and lacked focus to meet the firm’s need in the next decade. The team recommended that proactive steps should be taken to evolve a good strategy that would stand the test of time in the light of the increasing competition in the audit and assurance marketplace.

As a staff of the firm, you have been selected as a member of the committee to develop the new audit strategies for submission in the next two weeks for the consideration and approval of the executive council of Orlando Professional Services.

Required:

a. Outline the approaches to the main audit strategies your firm is expected to adopt.
(9 Marks)

b. Explain the factors that will be considered in the selection of audit strategies.
(4 Marks)

c. Explain the difference between Audit Strategy and Audit Plan.
(2 Marks)

Total: 15 Marks

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  • 15 Marks

AAA – Nov 2022 – L3 – SC – Q6 – Internal Audit and Corporate Governance

Discuss reasons for outsourcing internal audit, advantages/disadvantages, and functions that cannot be outsourced.

The Internal Audit Unit of Oluvia Bank Limited has been accused of collusion with staff in committing monumental fraud. The following types of fraud were found to be common:

  • Cheque suppression
  • Fraudulent bookkeeping to overstate income
  • Inflation of the worth of the company’s assets
  • Intercepting replaced customers’ cards
  • Fraudsters impersonating Senior Managers or Chief Executive Officer
  • Online banking fraud, such as phishing, malware attacks, and clone websites
  • Impersonating the owner of an account or using fake documents to open an account under someone else’s name (no proper Know Your Customer conducted)

The bank examiners came and were surprised at the level of fraud in the bank and requested management to address it urgently.

After the supervisory visit, the board of directors discussed the issue with the bank’s external auditors, who suggested that the bank could outsource the internal audit functions. The Board of Directors found this suggestion favorable and mandated the Managing Director to act swiftly and report back with details at the next board meeting.

Required:

a. Discuss the main reasons for outsourcing internal audit functions. (3 Marks)

b. Outline the advantages and disadvantages of outsourcing. (10 Marks)

c. Discuss which part of the internal audit function cannot be outsourced. (2 Marks)

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  • 5 Marks

AA – Mar 2023 – L2 – Q5a – Audit and Assurance Risk Environment

Identify and explain the components of an entity’s internal control system.

ISA 315 (Revised): Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment requires auditors to understand the entity’s internal control. An entity’s internal control is made up of several components.

Required:
In reference to the statement above, state the FIVE (5) components of an entity’s internal control and give a brief explanation of each component.

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  • 4 Marks

AA – Dec 2022 – L2 – Q5e – Audit and Assurance Risk Environment

Lists four factors an auditor may consider when determining whether deficiencies in internal control are significant.

The significance of a deficiency or a combination of deficiencies in internal control depends not only on whether a misstatement has actually occurred, but also on the likelihood that a misstatement could occur and the potential magnitude of the misstatement. Significant deficiencies may therefore exist even though the auditor has not identified misstatements during the audit.

Required:
State FOUR (4) matters that an Auditor may consider in determining whether a deficiency or combination of deficiencies in internal control constitutes a significant deficiency.

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  • 6 Marks

AA – Dec 2022 – L2 – Q5d – Audit and Assurance Risk Environment

States the auditor's responsibilities when significant deficiencies in internal control are identified during an audit.

A significant deficiency in internal control is one which merits the attention of those charged with governance.

Required:
State THREE (3) requirements of an Auditor when there are deficiencies in internal control of a client.

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  • 10 Marks

AA – May 2016 – L2 – Q4c – Planning and Approach for Audit and Assurance Engagements

This question discusses the points to consider when advising on a system of control for cash sales.

(c) You have been asked by your client, a garage proprietor, to advise on a system of control for cash sales. Set out the points you would take into consideration before giving your recommendations. (10 marks)

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  • 20 Marks

AA – Nov 2015 – L2 – Q3 – Audit and Assurance Risk Environment

Identifying audit risks and auditors' responses, performing proof in total calculations for revenues and expenses, and proposing internal controls for club operations.

You are the senior responsible for planning the audit of Hometown Football Club Limited (HFC) for the year ended May 31, 2008.

HFC runs a football club which was promoted to the top division in the league this season. The football season starts on September 1 and ends on May 31 so that the players get a break over the summer months.

HFC owns their football stadium, which now has the capacity to seat 25,000 people. Of the 25,000 seats, 19,000 are allocated to HFC supporters (home supporters) and are sold to season ticket holders only. The remaining 6,000 tickets are for away supporters and cannot be sold to HFC supporters.

Season tickets cost GHS175 for children. Following their recent promotion, all the season tickets have been sold this year with 70% of season tickets sold to adults and the remaining 30% to children. Tickets for away supporters are always sold at GHS20 per ticket, regardless of whether the ticket is sold to an adult or a child. On average, 50% of away supporter tickets have been sold for each of the 14 home games played at HFC’s stadium during the football season.

HFC’s other revenue streams include the sale of football kits and other memorabilia from the club shop, and food and drink sales from the club snack bars.

Following promotion to the top division, the club added an extra stand to the stadium to increase the seating capacity to the current level of 25,000. Other existing areas of the stadium also underwent maintenance in order to restore them to their original condition. The work was carried out during June and July 2007 and cost a total of GHS3,360,000. To finance this, HFC took out a GHS2,900,000 loan on June 1, 2007. The loan carries an interest rate of 7% and is repayable over the next five years. The loan is secured on the stadium.

The directors feel that the club’s greatest assets (other than the stadium) are the football players themselves. The players have performed so well this year that some of the other football clubs in the same division have made preliminary offers to buy three of HFC’s players. HFC is particularly pleased about this as these players joined the club through their youth academy programme. Consequently, the directors would like to value these three players as intangible non-current assets in HFC’s financial statements. The players will be valued at the offer price received from the other clubs. The directors feel this is a prudent valuation because they are confident that the eventual selling price would be much higher than the preliminary offer.

One of the major drawbacks of the club’s promotion has been that the club has had to increase the level of players’ salaries. The total salary expense for the year is estimated to be in the region of GHS2,800,000. This is a particularly surprising figure as it is higher than the other operating costs for the year, which are estimated at GHS2,400,000.

HFC has just appointed a team of internal auditors. They have not been in position long enough to help you with your audit work, but the directors are keen for the internal auditors to improve the company’s internal controls in relation to the club shop and snack bars.

Required:

a) Using the information provided, describe FIVE (5) audit risks and explain the auditor’s response to each risk.
(10 marks)

b) Describe how the auditor could perform a proof in total calculation to confirm each of HFC’s revenue from ticket sales, loan interest, and payroll expense for players’ salaries.
(4 marks)

c) Explain THREE (3) internal controls the internal auditors of HFC should implement relating to the club shop or snack bars, and state the objective of each of the three controls.
(6 marks)

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  • 15 Marks

AA – May 2017 – L2 – Q2c – Audit and Assurance Risk Environment

Design of internal control systems for cheque payments and bank reconciliation.

As the Chief Finance Manager of a company, design an internal control for the company with respect to:
i) Cheque payments (10 marks)
ii) Bank reconciliation (5 marks)

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  • 5 Marks

AA – Nov 2016 – L2 – Q5a – Completion Procedures and Reporting

Explain what a management letter is and describe its contents.

ISA 265 “Communicating Deficiencies in Internal Control to Those Charged with Governance and Management” requires auditors to communicate deficiencies in internal control with management.

Required:
Explain clearly what a management letter is, indicating the contents of such a letter. (5 marks)

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  • 15 Marks

AA – May 2018 – L2 – Q2b – Audit and Assurance Risk Environment

Identifies deficiencies in a company's wages system and provides recommendations to prevent misstatements in financial statements.

Third Floor Ltd is a construction company with many contracts being executed concurrently. A large number of workers are on various construction sites. Third Floor Ltd has an internal audit department, and the team is currently reviewing cash wages systems within the company.

The following information is available concerning the wages systems:

  • Workers on each site are controlled by a foreman. The foreman has a record of all employee numbers and can issue temporary numbers for new employees.
  • Any overtime is calculated by the computerised wages system and added to the standard pay.
  • The two staff in the wages department make amendments to the computerised wages system in respect of employee leave, illness, as well as setting up and maintaining all employee records.
  • The computerised wages system calculates deductions from gross pay, such as employee taxes (PAYE), and other statutory deductions.
  • Finally, a list of net cash payments for each employee is produced. Cash is delivered to the wages office by secure courier. The two staff place cash into wages envelopes for each employee along with a handwritten note of gross pay, deductions, and net pay. The envelopes are given to the foreman for distribution to the individual employees.

Required:
Identify and explain FIVE deficiencies in Third Floor Ltd’s system of internal control over the wages system that could lead to misstatements in the financial statements, and, for each deficiency, suggest an internal control to overcome that deficiency. (15 marks)

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  • 10 Marks

AA – May 2019 – L2 – Q1a – Responsibilities for the prevention and detection of fraud

Explains auditor’s responsibility regarding fraud detection and outlines audit procedures to detect fraud anomalies.

a) J.K. Asenso is a member of a team auditing the financial statement of Sascraku Co. Ltd for the year ended 31 December 2017. Shortly after the end of the audit, the media made an allegation of fraudulent activities with the aim of reducing tax liability against the company. A committee was appointed by Ghana Revenue Authority (GRA) to examine the books of the company to substantiate the allegations.

The committee discovered the following anomalies:

  • Diverting receipts to private bank accounts;
  • Stealing physical assets or intellectual property;
  • The entity paid for goods that had not been received;
  • Assets had been used for personal purposes.

The directors were not happy with the work of the auditors due to their inability to discover the above anomalies.

Required:
i) Explain the responsibility of the Auditor with respect to detection and prevention of fraud.
(5 marks)
ii) Outline the audit procedures that the auditors should have adopted to detect the above anomalies.
(5 marks)

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  • 10 Marks

AA – Nov 2018 – L2 – Q2a – Internal Audit and Its Relationship with External Audit

Discusses the advantages and disadvantages of outsourcing the internal audit function compared to maintaining an in-house team.

a) Proper Banking Limited (PBL) has been trading for 20 years selling banking products and has recently become a listed company. In accordance with corporate governance principles of Bank of Ghana, PBL maintains a small internal audit department. The board of directors feels that the authorized business of the Company is banking which is core to the success of PBL. On 20 November 2017, the Operational and Governance Committee of the Board met to discuss whether to maintain the internal audit department and increase its size and build its expertise or to outsource the whole function to their external auditors, International & Co with headquarters in Accra, Ghana, with a global presence in over ninety-nine (99) countries.

Required:
Advise the Board of PBL on the advantages and disadvantages of whether to outsource or maintain their internal audit function. (10 marks)

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