L GREBE
SOLLUTIONS TO CG1 An executive director is is a director who is involved in the management of the company and/or is a full-time salaried employee of the company and/or its subsidiary.2. non-e!ecutive director is"the opposite of the above# $. n n independent% non-e!ecutive non-e!ecutive director& is not a representative of a sharehol shareholder der who has the ability ability to control control or signific significantly antly influence influence manageme management nt does not have a direct direct or indirect interest interest in the company company 'includi 'including ng its holding or subsidia subsidiary ry company( company( which is material material to the director or the company. ' holding of )* or more is considered material( has not been employed employed by the company company 'or group( group( in any e!ecutiv e!ecutive e capacity capacity for the preceding preceding three financial financial years is not a member member of the immediate family of an individual who is% or has been during the previous thre three e fina financ ncia iall year years% s% empl employ oyed ed by the the comp compan any y 'or 'or grou group( p( in an e!ecutiv e!ecutive e capacity capacity is not a professio professional nal advisor advisor to the company company is free from any business or other relationship which could be seen to interfere materiall materially y with the individu individual+ al+s s capacity capacity to act independ independently ently does not receive remuneration contingent upon the performance of the company.
,. The chairman of the board& board& hould be and independent independent non-e!ecutive non-e!ecutive director . CEO of the company should should not also fulfil the role of chairman chairman of the board board he role of the chairman chairman should should be formalise formalised. d. he chairman chairman+s +s ability to add value% and his performance against what is e!pected of his role and function% should be assessed every year Note& Note& these these are some some of the main main recom recommen mendat datio ions ns regard regarding ing the chairman. Refer to your 0ing 111 Report for more detail. ). The board board should should&& ompr omprise ise a balan balance ce of power power%% ppoi ppointm ntmen ents ts should be a matter for the board as a whole% assisted by the nominations committee committee.. minimum minimum of two e!ecutive e!ecutive directors directors of which which one should be the E3 and the other the financial director 4ote& these are some of the main recommen recommendati dations ons regardin regarding g the chairman chairman.. Refer Refer to your 0ing 111 Report for more detail 5. he ma6ority ma6ority of directors directors should be non-e!ec non-e!ecutive utive directors. directors. nd of these non-e!ecutive directors% the ma6ority should be independent. 'his will ensure that all power does not invest in one person / small group% and
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who is involved in the business.( t least four times per year. 7irectors should ensure that they have the time available to attend. 4ote& Remember that a board should always appoint audit-% ris8-% nomination- and remuneration committees. 4ote& Remember that a company should always appoint a company secretary as well. 4ote& hese are some of the main recommendations of the 0ing 111 Report. Refer to your 0ing 111 Report for more detail. L GREBE
'29:$-92-2; :$&22( CG1 S!O"T #UESTIONS$ %OA"& O' &I"ECTO"S
a balance of power+= ?ow often should the board of directors meet= '
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TO(IC )$ "E*ENUE AN& "ECEI(TS E@ :& 4ARE 3 RECE4AE R4134 1t is important to 8now the functions and documentation in the revenue cycle before you can audit the cycle. tart by studying the basic functions for any revenue and receipts cycle in section , of Dac8son and tent '29:2&:9/2-:9/$(. 4ow study the more detailed narrative description in section ) of Dac8son and tent '29:2&:9/$-:9/)( for each function mentioned in section ,. 4ote the specificactions and documents in each function as indicated in this e!ample from the te!tboo8 below&
ee Dac8son tent '29:2&:9/,( Order department in a manual system% all orders received by the order department should be entered manually onto a pre-printed% seFuenced% multicopy% internal sales order '13( regardless of how the order is received% e.g. by phone% through the post% fa! or by email the order cler8 will ta8e the 13 to the credit management department to have the 13 signed 'authorised( once the customer+s credit standing has been chec8ed by that department if an order is received from a non-account holder% the credit management department will go through the process of chec8ing the customer+s creditworthiness and setting credit terms and limits as described in ).5 a copy of the 13 will be delivered to the warehouse to act as the pic8ing slipH i.e. the document which informs the warehouse employees as to which goods to select for despatch to the customer a copy of the 13 will be filed in the order department in numerical seFuence and a copy will be sent to the accounting department.
7o this for each function in the cycle. Refer to section 5 of Dac8son and tent '29:2&:9/5-:9/I( for a description of the documents if necessary.
E@ 2& 14ER4L 34R3L JEARE 47 E 3 34R3L 14 ?E KLE "is+ 1nternal controls 'internal control measures( are management+s responses to ris8s in a business. o% in order to be able to formulate internal controls% you have to be able to identif, the ris+s associated with each function and activity in a business cycle. Go to Dac8son and tent '29:2&:9/:9-:9/:(& these pages repeat the functions and documents e!plained in step : of this forum% but now also include the ris8s and related internal controls. irst wor8 through the mentioned ris8s and see how they logically relate to the functions.
FUNCTION
DOCUMENTS RISKS RECORDS
o record orders from customers and initiate action to fill them.
3
ustomer order M
order may be accepted from a non-account holder.
RECEIVING CUSTOMER ORDERS (ORDER DEPARTMENT)
FUNCTION
DOCUMENTS RISKS RECORDS
3rders will be received in document form 'customer order( or over the telephone. 1nternet orders are dealt with in hapter . @ersons receiving the order need to establish that the customer is a valid customer and that the details of the order are accurate and complete in every respect% e.g. description% Fuantity% delivery address. s this is the initiation of the transaction% it is particularly important to get everything right. 1f customer does not have an account they must be referred to the credit manager who will send the customer a credit application.
1nternal sales order '13(
M
orders may not be acted upon timeously or at all% resulting in a loss of sales and customer goodwill.
M
inaccurate or incomplete order details may be recorded which will result in incorrect deliveries% returns and customer dissatisfaction.
@rice lists
CONTROL ACTIVITIES INCLUDING BRIEF EXPLANATORY COMMENTS :.
record all orders on seFuentially numbered internal sales orders. N1solation of responsibility / pproval% uthorisationO
2.
no orders to be accepted if the customer is not an approved customer% e.g. no account number '4B we are dealing with a credit sales system(. 3rder cler8 will chec8 approved customer list Npproval% uthorisation / egregation of dutiesO
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attach customer order to internal sales order and have second staff member cross chec8 detail 'if practical( Negregation of dutiesO
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for phone orders% order cler8 to& ,.: reFuest customer+s account number ,.2 reFuest customer+s order reference
,.$ confirm all order details% including delivery address and price of goods% by reading order details recorded bac8 to customer Npproval% uthorisation / omparison and reconciliationO ).
order cler8 to sign all 13s to indicate performance of control activities N1solation of responsibilityO
5. on a regular basis% 13s to be seFuence chec8ed 'for completeness(% and matched to delivery notes to identify any orders that have not been acted upon. Npproval% uthorisationO
7o this for each function in the cycle. 1t often happens that a certain control activity is more relevant than others for a function% based on the ris8s in that function. s illustrated above% approval and authorisation is an important
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control activity when receiving customer orders. he control activity of comparison and reconciliation will in turn be important when recording sales. ontrols in a computerised environment are also based on the control activities.
""1$ S!O"T #UESTIONS ON T!E "E*ENUE AN& "ECEI(TS C0CLE :.
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Goods / services are reFuested from an employee of the business% or are selected by the customer to be paid for at an e!it point. ypically there is no order document. he prices of the goods are rung up on a cash register and a total amount owed is calculated% or a cash sale invoice is created on a computer or manually. he customer hands over the cash and is presented with a receipt and change where necessary Before leaving the premises% a security guard may chec8 the goods against the receipt / invoice. he cash is 8ept in the cash till until it is collected for ban8ing. he cash is reconciled and a deposit slip is prepared. he cash is ban8ed. he cash receipts 6ournal is written up and subseFuently posted to the general ledger.
2. 4ame the internal controls that could be introduced to ensure that all cash sales are com.letel, accounted for. a. b.
c.
d.
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omputerised invoices have to be numbered seFuentially here should be adeFuate segregation of duties between the person who issues the invoices and the person who receives the payment. 4o goods may be handed over to customers by the sales staff unless they have been shown a copy of an invoice stamped paidH summary of all the invoices should be reconciled daily
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with the cash receipts. his reconciliation should be chec8ed by a senior person and any deviations should be followed up. he recording in the cash receipts 6ournal should be chec8ed by an independent person and compared with the daily summary of invoices.
'29:$-9)-92 9&$9(
:. ?ow
many members should an audit committee have and what should >the balance
of power+ be= 2. Jember should be suitably s8illed and e!perienced.
Jr P '(
Jrs B P 1 specialist who 8nows the company+s financial systems.
Jr P has previously been the company+s secretary for ) years
Jrs 7 P chairlady.
$. ?ow many times a year must the audit committee meet= ,.
ANSE"S :. t least three members and should consist of only independent non-e!ecutive directors 'because the independence of the audit committee is so 4B#( 2. uitably s8illed and e!perienced&
Jr P yes% it is fair to accept that a '( has the accounting and auditing training and e!perience.
Jrs B P yes% she is an 1 >specialist+ and her 8nowledge of the company+s financial systems Fualifies her to be adeFuately s8illed and e!perienced.
Jr P no% he might have adeFuate 8nowledge and e!perience of the company% he does not have the necessary e!pertise to add value to the audit committee.
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Jrs 7 P no% although her e!perience as chairlady would give her good 8nowledge and insight into the company% her Fualifications aren+t indicated which means that she does not Fualify.
$. t least twice a year. ,. internal audit&
hey should oversee the internal audit function.
he audit committee should meet with internal audit and e!ternal audit at least once a year% and that should happen without management being present.
hould recommend the appointment of the e!ternal auditor.
hould oversee the e!ternal audit process.
4ote& hese are some of the main recommendations of the 0ing 111 Report. Refer to your 0ing 111 Report for more detail.
:. Briefly comment on the composition and membership reFuirements of the ris8 committee. 2.
ANSE"S
:. omposition and membership of the ris8 committee&
hairman of the board may not be chairman of the ris8 committee.
hould consist of at least three members.
hould consist of both e!ecutive and non-e!ecutive directors.
hould have adeFuate ris8 management s8ills and e!perience.
2. hey should consider the ris8 management policy and plan and monitor the ris8 management process. 7
$. 4o# Ris8 is an ever present factor in modern day business. he ris8 management policy and plan should be reviewed constantly and a ris8 management process should always be in place as part of good internal control
L GREBE
TO(IC 2$ AC#UISITIONS AN& (A03ENTS C0CLE E@ :& 4ARE 3 EQ@E471ARE R4134 1t is important to 8now the functions and documentation in the e!penditure cycle before you can audit the c ycle. ollow the approach e!plained in the discussion forum positing on topic , to study the nature of this cycle. he source documents used in the cycle is also important refer to section 5 of Dac8son and tent '29:2&::/)-::/5( for a description of the documents if necessary.
E@ 2& 14ER4L 34R3L JEARE 14 ?E KLE "is+ 1nternal controls 'internal control measures( are management+s responses to ris8s in a business. 1n order to be able to formulate internal controls% you have to be able to identif, the ris+s associated with each function and activity in a business cycle. Go to Dac8son and tent '29:2&::/-::/:$(& these pages repeat the functions and documents e!plained in step : of this forum% but now also include the ris8s and related internal controls. irst wor8 through the mentioned ris8s and see how they logically relate to the functions.
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A(1$ S!O"T #UESTIONS ON AC#UISITIONS AN& (A03ENTS C0CLE 1.4ame the ris+s to control when orderin- goods.
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3rdering of incorrect or unnecessary goods% resulting in liFuidity problems and wastage 3rdering unauthorised goods resulting in losses to the company through fraud ReFuisitions not acted upon or orders not placed timeously or at all 3btaining inferior Fuality goods @aying unnecessarily high prices for goods 3rders placed with suppliers not filled / not timeously filled 3rder forms misused e.g. for placing orders for private purchases.
N%$ 73 K3A 043< ?E 14ER4L 34R3L RE 3R E? 3 ?EE R10 47 4 K3A L140 ?E 14ER4L 34R3L 3 E? R10=
&I& 0OU 4NO ? 14ER4L 34R3L 14 J4AL KEJ 1LLARE7 14 @: RE BE7 34 ?E JE 34R3L 1C11E 3A47 14 3J@AER=
2.List
the creditors masterfile internal controls
ll amendments to be recorded on hardcopy Js P no verbal instructions. Js should be pre-printed% seFuenced and designed in terms of sound document design principles. he Js should be signed by two reasonably senior creditors section / accounting personnel. he Js should also be cross referenced to the supporting documentation.
he seFuence of the logs themselves should be chec8ed for any missing logs. Each logged amendment should be chec8ed to confirm that it is supported by a properly authorised J and hat the detail% e.g. the supplier+s ban8 account number% amounts% etc% is correct he Js themselves should be seFuence chec8ed against the log to confirm that all Js were entered.
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IN*ENTO"0 AN& ("O&UCTION C0CLE
GREB E
TO(IC 5$ IN*ENTO"0 AN& ("O&UCTION Kou should by now be familiar with the way in which to approach the business cycles when studying the nature of the cycle and internal contro. Refer to the discussion of topic , again if necessary. 7amage% loss and theft are big ris8s when it comes to inventory% so note the physical security controls over inventory in a warehouse. Related to the ris8 of theft% is the >e!istence+ assertion. 4ote how emphasis is placed on the e!istence of inventory when substantive procedures are performed. ycle counts 'regular inventory counts( performed by a company as part of their internal control over inventory means that differences between actual inventory on hand in the inventory warehouse and perpetual inventory records can be identified timorously and corrected before big financial losses are incurred. Kear end inventory counts are performed by the auditor as part of substantive procedures to satisfy the e!istence assertion. '29:$-9,-9$ :9&):( Inventor, counts C,cle counts Just have freFuent comparisons and reconciliations of actual assets to theoretical assets so that discrepancies can be timeously identified and investigated% and then preventive measures put in place to prevent the problem re-occurring. ompanies with large stoc8 performs cycle counts 'if operate perpetual inventory system of inventory(. (rocedures of c,cle count &
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:. time of the count must be planned at the start of the year 2. items to be counted must be identified P can be done different ways e.g. random samples% items susceptible to theft% high value items% section of warehouse or entire stoc8 divided into sections so that all the items are counted at regular intervals during the year $. physical inventory is then counted using acceptable method of counting and sound count controls ,. physical count number then compared to theoretical number on the perpetual inventory records and discrepancies entered into a seFuenced inventory ad6ustment form ). all discrepancies must be investigated by internal auditor and inventory controller 5. ad6ustments to records must be done by someone independent of custody% receiving and issue of stoc8 and only after warehouse manager has reviewed the ad6ustment forms and authorised them by signing I. perpetual inventory records must be reviewed periodically by senior warehouse personnel and any ad6ustments must be traced bac8 to authorised inventory ad6ustment forms ;. overall analysis of discrepancies over a period must be conducted to identify trends 'e.g. if freFuent discrepancies in one section of warehouse only% then need to investigate that(.
IN*1$ S!O"T #UESTIONS ON T!E IN*ENTO"0 AN& ("O&UCTION C0CLE :.
Give the .rocedures to be followed when conducting a .h,sical ,ear6end inventor, count.
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he count staff should be divided into teams of two% with one member of the team being completely independent of all aspects of inventory. ll teams should be given a floor plan of the warehouse which should clearly demarcate the inventory locations for which they are to be held accountable. ll inventory should be counted twice. s items are counted they should be neatly mar8ed by the counters. E.g. second counters should use a different coloured mar8er. lternatively the tag system can be used.
The count controller 7and assistants8 should&
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ign each count sheet and all alterations. he inventory controller should chec8 that this procedure has been carried o out and should seFuence test the inventory sheets to ensure that all sheets are accounted for. ount teams will only be formally dismissed once the count is complete and o all Fueries have been attended to. N%$ 14C: < B3A ?E @?K1L 3A4 @R3E7ARE. 73 43 3RGE B3A ?E 3?ER B1 @R141@LE 3 7?ERE 3 A? @L4414G 47 @RE@R134% 7E1G4 3 134ERK 47
TO(IC 9$ (A0"OLL AN& (E"SONNEL Refer to the discussion of topic , again if necessary to remind yourself of how to approach the business cycles when studying. 7o you 8now what the biggest ris8s are for both the wages and salaries cycles=
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((1$ S!O"T #UESTIONS ON (A0"OLL AN& (E"SONNEL C0CLE :.
:.4ame the documents used in the payroll and personnel cycle
o o o o o o o o o o o
Employment contracts / employee file @ayroll amendment form List of employees loc8 card Batch control sheets and batch registerS 7eduction tables and returns @ayroll P wage 6ournal @aypac8ets% payslips% salary advices Anclaimed wage register
2. 2. Name the human resources 7.ersonnel8 internal controls to be im.lemented
ll reFuests for the appointment or dismissal of employees should originate from the section ma8ing the reFuest% e.g. factory% stores% administration% etc% and should be in writing and a motivation provided. ReFuests should be signed by the section head and countersigned by the o section manager after reference to the budget. pecifications of the position and the s8ills reFuired will be agreed by the section and personnel. hanges to pay rates% promotions to higher employment grades and any o other changes in service conditions% should be decided upon by the personnel department / wage committee after& 7ue consultation with interested parties% e.g. the union representatives onsideration of relevant laws and regulations% e.g. overtime% pay rates% minimum wage regulations. uch changes should be documented and authorised by the authorising o body 'e.g. wage committee( ll amendments to employee+s details arising from the above should be o promptly committed to seFuenced ayroll amendment forms which should be cross-referenced to the supporting documentation and authorised by a senior member of the personnel section. rom time to time the file of @s should be reviewed for validity and gaps in seFuence. ound personnel practices should be followed to obtain honest% competent o personnel 1nterviews% bac8ground chec8s% etc. A file should be +e.t for each em.lo,ee and should include& o opies of relevant @s he employment contract @erformance appraisals and disciplinary warnings @ersonal details including Fualifications% bac8ground information o
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@re-printed% properly designed P preferably seFuenced P cloc8cards should be prepared for each employee on the valid employee list. Blan8 cloc8cards should be sub6ect to strict stationery controls. N%$ 4 K3A 4JE ?E R10 14C3LCE7 <1? ?AJ4 RE3ARE 47 4 K3A L140 ?E 34R3L 1C11E ? J11GE E? R10=
Refer to the discussion of topic , again if necessary to remind yourself of how to approach the business cycles when studying.
GREBE
he ris8 of theft of assets is a big ris8 in this cycle% for e!ample the physical safeguarding of fi!ed assets such as motor vehicles of a company. nother e!ample of this is the bigh ris8 of theft of a companyTs monetary assets 'money stolen from the ban8 account(. 73 K3A 043< ?E 14ER4L 34R3L 14 3J@AER1E7 E4C1R34JE4 3CER B40 3A4% 1.E. @?K1L E 34R3L 'Dac8son tent 29:2& ;/:I-;/:;( 47 @<3R7 34R3L 'Dac8son tent 29:2& ;/29(= '29:$-9,-9$ ::&9)(
GREBE '29:$-9)-:9 9&,I( L GREBE
Hi Can you please give an example of what a uestion an! suggeste! solution will loo" li"e fo# any $y$le fo# $ompute#i%e! envi#onment espe$ially inte#nal $ont#ols&i thin" ' have the i!ea of how manual envi#onment wo#"s&
()C*+,),-. ,)./.) 7ear student Good Fuestion - important for the e!am. @lease refer to your study guide% for e!ample act on pg 5I-5; and act ) on pg ;9-;:.
Js L Grebe '( 7epartment of uditing '29:$-9)-:9 9&,;( L GREBE his aspect of internal control is important and will be as8ed in the e!am.
14
GREBE
E:A3INATION (A(E" ; 3A"4S ALLOCATE& TO EAC! TO(IC
he following table indicates the main topics in the study guide% together with the appro!imate percentage of mar8s that will be allocated to each topic in the final e!am paper. Remember that this is o!" a #$i%e!ie& the a't$a! mar( a!!o'atio ma" )ar" s!i#ht!"* (ercenta-e of mar+s allocated To.ic
opic
to.ic :&
orporate
Governance
in the exam .a.er and 2)* ompliance and non-compli
tatutory Jatters
0ing 111 reFuirements in a scenario.
opic 2& 1nternal ontrol
2)* 1nternal controls in a com environment 'computer controls(.
opic $& Business ycles opic ,& Revenue and Receipts ycle opic )& cFuisitions and @ayments ycle opic 5& 1nventory and @roduction ycle opic I& @ayroll and @ersonnel ycle 15
Relevant to all cycles. )* 29* 'incl also computer environm :)* )*
opic ;& inance and 1nvestment ycle
'29:$-9)-:9 :9&:(
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