- 4 Marks
Question
Oboshie Audit Firm has been engaged to audit the financial statements of Abakah Manufacturing LTD for the year ended December 31, 2023. During the planning phase of the audit, the audit team identified that Abakah Manufacturing LTD relies heavily on its internal control system to ensure the accuracy and completeness of its financial reporting.
Required:
i) Explain TWO tests of control to be performed by Oboshie Audit Firm to evaluate the effectiveness of Abakah Manufacturing LTD’s internal controls over its financial reporting.
ii) Identify a method that should be used under each test of control in (i) above.
Answer
i) Tests of Control to Evaluate Internal Controls:
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Approval of Transactions:
- To verify that all significant transactions are authorized by appropriate personnel to ensure their validity and accuracy.
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Segregation of Duties:
- To ensure that no single individual has control over all aspects of a financial transaction, thereby reducing the risk of fraud and errors.
ii) Methods for Testing Controls:
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Approval of Transactions – Inspection:
- Select a sample of purchase orders and inspect them to ensure that each has been signed by the authorized manager as evidence of approval.
- Review a sample of high-value transactions to check for the presence of required approval signatures and any accompanying documentation.
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Segregation of Duties – Observation:
- Observe the process of cash handling, including receiving, recording, and reconciling cash transactions, to verify that these duties are performed by different employees.
- Watch the cash receipt process to ensure that the person receiving cash is not the same person recording the transaction in the accounting system, and another individual is responsible for reconciling the bank statements.
- Uploader: Salamat Hamid