Audit assignment

Answers
1 What are the tests of control that might have shown where the
problem was there?
A. Inquiry: This involves asking the client’s personnel for explanations

related to control processes or transactions. For instance, auditors might
inquire about inventory counting procedures at year-end.
B. Observation: Auditors observe the procedures being performed by
the client. For example, they might observe inventory counting
procedures to assess their effectiveness.
C. Inspection: This entails examining supporting documents related to
control procedures. Auditors review records and documentation to verify
compliance with controls1.
D. Re-performance: Auditors re-perform certain control procedures to
validate their effectiveness. This involves independently executing the
control steps to ensure consistency with documented procedures
2. When the control environment is corrupt, what problems would an
auditor experience in uncovering fraud?
1.Lack of Independence: If the control environment is compromised, auditors may find it Difficult to
maintain their independence. A corrupt environment can lead to pressure or influence on auditors,
affecting their ability to objectively assess and report on fraud.
2.Concealment of Evidence: In a corrupt control environment, fraudsters may actively hide evidence
of wrongdoing. Auditors might encounter altered records, falsified documents, or intentionally
misleading information. This makes it harder to detect irregularities.
3.Obstruction and Intimidation: Corrupt individuals within the organization may obstruct audit
procedures or intimidate auditors. They might withhold critical information, limit access to relevant
documents, or even threaten auditors who dig too deep.
4.Lack of Cooperation: When the control environment lacks integrity, employees may be unwilling
to cooperate with auditors. They might fear retaliation or have loyalty to corrupt colleagues. This
resistance hampers the audit process.
5.False Representations: In a corrupt environment, management may provide false representations
about controls, processes, or financial statements. Auditors must be vigilant to identify
inconsistencies or discrepancies.
6.Inadequate Documentation: Corrupt practices often involve inadequate documentation. Auditors
rely on proper records to verify transactions and assess control effectiveness. When documentation
is missing or manipulated, it becomes challenging to trace fraudulent activities.
7.Complex Fraud Schemes: Corrupt environments can breed sophisticated fraud schemes. Auditors
may encounter intricate financial manipulations, collusion among employees, or hidden transactions.
Detecting such schemes requires specialized skills and resources.
8.Fear of Retaliation: Auditors may hesitate to report fraud if they fear retaliation from powerful
individuals involved in corruption. Whistleblower protection mechanisms become crucial in such
situations.
9.Pressure to Ignore Red Flags: In compromised control environments, auditors might face
pressure to overlook red flags or suspicious activities. This could come from management,
colleagues, or external stakeholders with vested interests.
10.Limited Access to Information: Corrupt practices often restrict auditors’ access to relevant data.
They may encounter roadblocks when trying to verify transactions, assess controls, or follow audit
trails.
3.
A. Define accounting system and internal control
1. Accounting System:
o An accounting system refers to the financial reporting mechanism used by a company to record
and manage its financial or accounting records. It encompasses the processes, guidelines, and
procedures that guide the generation of accurate financial documents.
o Key aspects of an accounting system include:
▪ Recording Transactions: The system records all financial transactions, including income and
expenses.
▪ Guided by Accounting Principles: It adheres to a set of accounting guidelines and procedures.
▪ Ready Reference: The generated financial documents serve as a reference for internal and external
stakeholders to make informed business and investment decisions.
o The system can be broadly classified into two categories:
▪ Single Entry: Simpler, suitable for small businesses or individuals. Its records transactions on one
side of the ledger (either debit or credit).
▪ Double Entry: More comprehensive, requiring transactions for both sides of the ledger. Balances
must match between entries, ensuring greater accuracy and reliability.
2. Internal Control:
o Internal control, as defined by accounting and auditing, is a process that ensures an organization’s
objectives in several areas:
▪ Operational Effectiveness and Efficiency: Ensuring efficient use of resources.
▪ Reliable Financial Reporting: Maintaining accurate financial statements.
▪ Compliance with Laws and Regulations: Adhering to legal requirements.
o Key points about internal control:
▪ Risk Management: It controls risks to the organization, both physical (e.g., machinery, property) and
intangible (e.g., reputation, intellectual property).
▪ Detecting and Preventing Fraud: Internal controls play a crucial role in fraud prevention.
▪ Operational Efficiency: Identifying problems and correcting lapses before external audits.
B. What are the key elements of internal control evaluated in
planning? Briefly discuss each.
1. Control Environment
The control environment is how senior management tries to inculcate a strong sense of
ethics and high performance across the whole enterprise. It includes all the standards,
processes, policies, and rules that enable an organization to implement and improve its
internal controls. The control environment provides a foundation so the company’s
other, more specific controls can:
• Support its strategic objectives

• Assure reliable financial reporting to stakeholders
• Improve business efficiency and effectiveness
• Facilitate compliance with all applicable laws and regulations
• Safeguard assets from the effects of careless errors or malicious activities
An effective control environment includes these seven important factors:
• Integrity and ethical values

• Commitment to competence
• Audit committee or board of directors
• Management philosophy and operating style
• Organizational structure
• Assignment of authority and responsibility
• Human resource policies
These factors demonstrate the organization’s commitment to responsible and ethical

operations. A strong tone from the top is crucial to build a strong control environment.
Senior managers must reiterate the importance of internal controls and establish the
expected standards of conduct throughout the organization. Only then can the
environment help to:
• Align business processes with applicable laws, regulations, and industry-standard

practices
• Attract and retain competent staff
• Increase accountability throughout the organization in pursuit of objectives
•
2. Risk Assessment
Risk assessment is the basis for risk management. For effective risk assessment,
management must identify possible changes in the internal and external environment
that may impede the organization’s ability to achieve its goals. Managers must also:
• Act in a timely manner to manage the effect of these changes

• Consider risk tolerance when assessing acceptable risk levels
• Consider risk severity after considering its velocity, persistence, impact, and likelihood
The COSO internal control framework suggests that risk assessment should be a
“dynamic and iterative process” – meaning, risk assessments should happen at regular
intervals. The risk assessment should also include sub-processes for risk identification,
risk analysis, and risk response.
3. Control Activities
Control activities are the specific actions that allow the enterprise to mitigate risk and
achieve its objectives. These actions are usually described in standards, policies, and
control procedures, and are communicated to all stakeholders.
Control activities can be preventive, detective, or corrective. They are performed at all
levels of the business and at various stages of business processes.
4. Information and Communication
Information is an important element in an internal control system because it supports

the other components and allows the organization to achieve its objectives. Effective,
clear, and honest communication is required to assure that the necessary information is
available whenever required to manage and optimize the internal control system.
Communication then disseminates the information, so the relevant stakeholders can

carry out daily internal control activities. For example, if an audit identifies a major
flaw in cybersecurity, the audit findings should then be communicated to the IT
department, the CISO, and perhaps even the board or legal team. Those executives will
then (ideally) understand their responsibilities for assuring that the findings are
addressed and internal controls work as expected.
5. Monitoring Activities
Internal or external auditors must regularly monitor the internal control system to verify
that it is functioning properly. They should also evaluate the findings and communicate
internal control deficiencies to top management and the board.
C. What procedures (in addition to previous experience with the client) are used to
evaluate internal controls?
Here are some procedures commonly used to evaluate internal controls:
1. Understanding and Documentation:
o Auditors review process documentation, flowcharts, and policies to understand the controls in place.
o They document the design of controls and how they are implemented within the organization.
2. Walkthroughs:
o Auditors trace transactions through the entire process (from initiation to completion).
o This verifies that controls are operating as described in the documentation.
3. Inquiry and Observation:
o Auditors inquire with personnel about their roles and responsibilities related to controls.
o They observe the application of controls to confirm their existence and effectiveness.
4. Risk Assessment:
o Evaluating the risk analysis supporting controls is crucial.
o Auditors assess the extent to which controls address identified risks.
5. Testing Control Activities:
o Auditors perform substantive testing of control activities.
o This involves testing specific controls to ensure they operate effectively.
6. Recommendations for Improvement:
o Based on the evaluation, auditors make recommendations to enhance the internal controls system.
o These recommendations contribute to improving the control environment for future audits.

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Answers

A. Inquiry: This involves asking the client’s personnel for explanations

• Support its strategic objectives

An effective control environment includes these seven important factors:

• Integrity and ethical values

These factors demonstrate the organization’s commitment to responsible and ethical

• Align business processes with applicable laws, regulations, and industry-standard

• Act in a timely manner to manage the effect of these changes

4. Information and Communication

Information is an important element in an internal control system because it supports

Communication then disseminates the information, so the relevant stakeholders can

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