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Timing of communication
Early communication permitted; Written communication no later than 60 days after audit report release date (including matters communicated orally during the audit)
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Requirements of Reporting Significant Deficiencies
- Must communicate the significant deficiencies and material weaknesses identified in the audit
- May communicate lesser matters
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Form and Content of Report on Internal Control Issues
- Restrict distribution of report
- Required to be in writing
- Never states that no significant deficiencies were found
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Material Weaknesses
Deficiency (or combination of deficiencies) in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected and corrected on a timely basis.
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Significant deficiency
Deficiency (or combination of deficiencies) in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance
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Characteristics of Internal Auditors Auditor Must Assess if Activities Are Deemed Relevant
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Competence
- Education
- Certification
- Experience
- Performance evaluations
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Objectivity of Internal Auditors
Level to which internal auditors report (organizational status)
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Auditing Procedures when Internal Auditors Provide Direct Assistance
- Assess internal auditor's competence and objectivity
- Must supervise, review, evaluate, and test internal auditor's work
- Independent auditor has final responsibility
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Audit Procedures Related to Internal Auditors
- Inquire about organizational status, access, and professionalism
- Review documentation of internal auditors' processes
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Access to assets and records
Limited to authorized personnel
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Transaction cycles
1) Revenue/receipts; 2) Expenditures/disbursements; 3) Payroll; 4) Inventory; 5) Fixed assets; 6) Investing/financing
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Why group by transaction cycle?
Control risk is generally assumed to be constant within a category of transactions as all transactions are processed the same way.
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Transaction Cycle
A group of essentially homogeneous transactions
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SCARE
1) Segregation of duties; 2) Comparisons; 3) Access; 4) Records; 5) Execution of transactions
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Records Controls in Revenue/Receipts Sales
- Sales invoices are pre-numbered
- Shipping documents for outbound shipments are pre-numbered
- Receivers are pre-numbered
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Internal Control Objectives Related to Revenue/Receipts Sales
- Goods and services provided in accordance with management's orders
- Terms of sale are in accordance with management's orders
- Credit terms and limits are properly established
- Deliveries of goods and services result in accurate and timely billings
- Sales discounts and billings are in accordance with management's authorization
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Comparisons in Revenue/Receipts Sales
- Aged accounts receivable trial balance to general ledger
- Monthly statements to customers
- Sales invoices to sales order to shipping documents
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Access Control in Revenue/Receipts Sales
- Computer passwords limit access
- Cash receipts are handled by someone without access to accounts receivable record keeping
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Segregation of Duties in Revenue/Receipts Sales
- Independent employee should review customer statements
- Credit to customers is granted by independent department
- Returns are accounted for by independent clerk in shipping/ receiving
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Execution of Transactions Controls in Revenue/Receipts Sales
- Management should review terms of sale and note approval
- Management should establish "general" approval of sales within certain limits and "specifically" approve sales over limits
- Management should specifically approve all adjusting journal entries
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Objectives of Internal Control in Cash Receipts
- Access to cash receipts records and accounts receivable records is limited to authorized personnel
- Detailed cash and account balance records are reconciled with control accounts and bank statements monthly
- All cash receipts are recorded in period received
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Access Controls in Cash Receipts Cycle
- Employees with access to cash should be bonded
- Access to cash receipts should be limited to those authorized
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Segregation of Duties for Cash Receipts
Handled separately:
- Opening mail, handling checks received, and preparing remittance listing
- Making deposit (daily)
- Applying payments received to customer accounts
- Preparing bank reconciliation on a timely basis
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Comparisons in Cash Receipts Cycle
- Initial cash receipts listing to total in cash receipts journal to bank deposit
- Cash accounts reconciled to bank statements by independent person
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Execution of Transaction Controls in Cash Receipts
- Adjusting journal entries should be approved by management
- Bank reconciliations should be reviewed
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Records Controls in Expenditures Cycle
- Pre-numbered purchase orders
- Pre-numbered checks
- Appropriate physical control over unused checks
- Supporting documents should be canceled as paid
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Vouchers Payable System
Keeps track of individual transactions without summarizing amounts owed by vendor
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Segregation of Duties in Expenditure Cycle
- Separate purchasing department
- Purchasing personnel independent from receiving and recording
- Bank reconciliations are prepared by someone not having other involvement in handling cash receipts, disbursements, or record-keeping
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Accounts Payable System
Keeps track of payables by the name of the vendor
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Execution of Transaction Controls in Expenditures Cycle
- All adjusting entries approved by management
- Only authorized personnel can order goods and services
- Should indicate received goods before payment
- Two signatures should be required on checks
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Access Controls in Expenditure Cycle
- Cash disbursement employees should be bonded
- Access to cash disbursements or related documents should be limited to authorized personnel
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Segregation of Duties in the Payroll Cycle
Following activities should be performed by different people:
- Establishing and maintaining employee files
- Timekeeping
- Payroll preparation
- Check distribution
- Reconciling payroll bank account
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Records Controls in Payroll Cycle
- Maintain current and accurate payroll information
- Pre-numbered payroll checks
- Separate bank account for payroll transactions
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Execution of Transactions Controls in Payroll Cycle
- Payroll should be authorized by responsible official
- Computations verified by independent person
- Overtime payments approved by management
- Payroll for management appropriately reviewed and approved
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Access Controls in the Payroll System
- Access to personnel files limited to authorized personnel
- Access to payroll checks limited to authorized personnel
- Personnel with access to payroll checks should be bonded
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Comparisons in Payroll Cycle
Payroll checks to payroll register
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Segregation of Duties in Manufacturing Cycle
- Separate authorization, bookkeeping (recording), and custody of inventory
- Sales returns should be counted by receiving clerk and a receiver prepared
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Objectives of Internal Controls in Fixed Assets Cycle
- Transactions recorded in accordance with management's authorization
- Estimates used to record depreciation, etc. are reasonable
- Appropriate property insurance in force
- Supporting details records properly maintained
- Management approves adjusting journal entries
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Objectives of Internal Control in Production/Manufacturing Cycle
- Resources obtained and used recorded timely
- Transfers of finished goods recorded timely
- Related expenditures are appropriately classified
- Access to inventory restricted
- Comparison of actual inventory to recorded amounts
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Internal Control Objectives in Investing/Financing Cycle
- Transactions recorded in accordance with management's authorization
- Investment assets reasonably secure from loss
- Supporting detailed records maintained and compared to general ledger
- Management approves adjusting journal entries
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Execution of Transaction Controls in Manufacturing Cycles
- Acquisition and distribution of inventory in accordance with management's authorization
- Should establish general approval of transactions with specified limits and require specific approval for amounts over limits
- Any adjusting entries approved by management
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Access Controls in Manufacturing Cycle
Access to physical inventory and to inventory records and documents limited to authorized personnel
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Records Controls in Manufacturing Cycle
- Pre-numbered purchase orders
- Pre-numbered receivers
- Consider perpetual inventory system for high dollar items
- Adequate support for general ledger accounts
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Comparison Controls in Manufacturing Cycle
- Actual inventory to recorded inventory
- Underlying accounting records to general ledger
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