Question Tag: Internal Control

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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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  • 20 Marks

AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

You are carrying out the audit of the sales system of Sofa Limited, a company that manufactures office furniture. The company has annual sales revenue of N150 million. All the shares are owned by Sofi and her husband Andy. Neither is involved in the running of the business. The chairman is responsible for running the business, but does not own any of the company’s shares.

The bookkeeper maintains all the accounting records and prepares the annual financial statements.

A stand-alone computer is used to maintain the accounting records, including those of the sales system. Standard accounting software is used, which was purchased from an independent supplier. For the sales system, a sales ledger is maintained to which sales invoices, credit notes, cash, and discounts are posted. When sales invoices are posted and credit notes are input into the computer, the value is updated in both the sales ledger and the nominal ledger.

You have determined that the documents and personnel involved in the sales ledger are as follows:

  • When order is received by telephone, it is recorded by the sales clerk in the sales department. This is usually done on a notepad.
  • The sales clerk will then pass the sales order to the stores, to the goods outwards department where the office furniture is kept.
  • If the goods ordered are in inventory, then the goods will be loaded onto one of the delivery trucks. A two-part dispatch note will be prepared to accompany the sales order. This is usually done before the stores have received the sales order from the sales department.
  • The goods are delivered to the customer together with the top copy of the goods dispatch note.
  • The driver on his return will inform the sales department that the delivery has been successful and will maintain the last copy of the goods dispatch note in the stores.
  • At the end of the week, the sales department prepares a sales invoice for the customer.
  • When the post is received, it is opened by a staff of the sales department.
    The person opening the post will both make a list of all the cheques
    received and that same person will then go to the bank and bank the
    cheques. Upon return, the remittances and cheque paying-in book are
    passed to the book keeper for updating the receivables ledger.
  • The receivables ledger is reviewed by the book keeper on a monthly basis
    to see which customers are above their credit terms and will inform the
    sales staff who to telephone and chase their debt.

Required:

a. Identify and describe eight weaknesses in the sales system of Sofa Limited. (8 marks)

b. Provide recommendations to rectify each of the weaknesses identified. (8 marks)

c. Explain why segregation of duties is important in an internal control system. (4 marks)

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  • 40 Marks

AA – May 2021 – L2 – Q1 – Regulatory Framework for Auditing

Analysis of audit risks and control objectives in a joint audit and compliance scenario.

Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing Nigeria Plc. There have been some regulatory and compliance issues for which the company was sanctioned and paid penalties to the Financial Reporting Council of Nigeria.

At the board of directors meeting to consider the last annual report audited by the firm, some of the previous problems caused by the auditors were raised and discussed. Following the reoccurrence of such issues, it was proposed that another audit firm be engaged in addition to the present firm.

To achieve their objective, a bigger firm that has international affiliation was considered to take a leading role in a joint audit arrangement and to ensure appropriate compliance. Your firm has been approached for the appointment. A meeting was scheduled between your firm, Chukwuemeka & Co., and the executive management of GED Manufacturing Nigeria Plc.

After the meeting, your firm was subsequently appointed, and the necessary formalities were properly followed. Your partner has directed that you liaise with Chukwuemeka & Co. to obtain the necessary materials for the preparation of the audit and that you review the prior year working papers to understand the issues. Your assessment of the documents obtained from the other auditor revealed the following, amongst others:

(i) The work done on the process of dispatch of goods and invoicing was not considered sufficient and appropriate.

(ii) The IT operations of the company had weak controls such that it was possible for some staff to override some of the existing controls.

Required:

a. Explain the risks inherent in the dispatch of goods and invoicing. (10 Marks)

b. Discuss the control objectives and principal controls that are relevant to the process of dispatch of goods and invoicing. (10 Marks)

c. Explain the limitations of a joint audit. (5 Marks)

d. Discuss the benefits of audit carried out by an internationally affiliated audit firm. (10 Marks)

e. Explain briefly the importance of audit working papers. (5 Marks)

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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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  • 20 Marks

AA – May 2016 – L2 – Q4 – Internal Control Systems

Identification and improvement of control weaknesses in the sales system of Sofa Ltd.

You are carrying out the audit of the sales system of Sofa Limited, a company that manufactures office furniture. The company has annual sales revenue of N150 million. All the shares are owned by Sofi and her husband Andy. Neither is involved in the running of the business. The chairman is responsible for running the business, but does not own any of the company’s shares.

The bookkeeper maintains all the accounting records and prepares the annual financial statements.

A stand-alone computer is used to maintain the accounting records, including those of the sales system. Standard accounting software is used, which was purchased from an independent supplier. For the sales system, a sales ledger is maintained to which sales invoices, credit notes, cash, and discounts are posted. When sales invoices are posted and credit notes are input into the computer, the value is updated in both the sales ledger and the nominal ledger.

You have determined that the documents and personnel involved in the sales ledger are as follows:

  • When order is received by telephone, it is recorded by the sales clerk in the sales department. This is usually done on a notepad.
  • The sales clerk will then pass the sales order to the stores, to the goods outwards department where the office furniture is kept.
  • If the goods ordered are in inventory, then the goods will be loaded onto one of the delivery trucks. A two-part dispatch note will be prepared to accompany the sales order. This is usually done before the stores have received the sales order from the sales department.
  • The goods are delivered to the customer together with the top copy of the goods dispatch note.
  • The driver on his return will inform the sales department that the delivery has been successful and will maintain the last copy of the goods dispatch note in the stores.
  • At the end of the week, the sales department prepares a sales invoice for the customer.
  • When the post is received, it is opened by a staff of the sales department.
    The person opening the post will both make a list of all the cheques
    received and that same person will then go to the bank and bank the
    cheques. Upon return, the remittances and cheque paying-in book are
    passed to the book keeper for updating the receivables ledger.
  • The receivables ledger is reviewed by the book keeper on a monthly basis
    to see which customers are above their credit terms and will inform the
    sales staff who to telephone and chase their debt.

Required:

a. Identify and describe eight weaknesses in the sales system of Sofa Limited. (8 marks)

b. Provide recommendations to rectify each of the weaknesses identified. (8 marks)

c. Explain why segregation of duties is important in an internal control system. (4 marks)

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  • 40 Marks

AA – May 2021 – L2 – Q1 – Regulatory Framework for Auditing

Analysis of audit risks and control objectives in a joint audit and compliance scenario.

Chukwuemeka & Co. (Chartered Accountants) has been auditors to GED Manufacturing Nigeria Plc. There have been some regulatory and compliance issues for which the company was sanctioned and paid penalties to the Financial Reporting Council of Nigeria.

At the board of directors meeting to consider the last annual report audited by the firm, some of the previous problems caused by the auditors were raised and discussed. Following the reoccurrence of such issues, it was proposed that another audit firm be engaged in addition to the present firm.

To achieve their objective, a bigger firm that has international affiliation was considered to take a leading role in a joint audit arrangement and to ensure appropriate compliance. Your firm has been approached for the appointment. A meeting was scheduled between your firm, Chukwuemeka & Co., and the executive management of GED Manufacturing Nigeria Plc.

After the meeting, your firm was subsequently appointed, and the necessary formalities were properly followed. Your partner has directed that you liaise with Chukwuemeka & Co. to obtain the necessary materials for the preparation of the audit and that you review the prior year working papers to understand the issues. Your assessment of the documents obtained from the other auditor revealed the following, amongst others:

(i) The work done on the process of dispatch of goods and invoicing was not considered sufficient and appropriate.

(ii) The IT operations of the company had weak controls such that it was possible for some staff to override some of the existing controls.

Required:

a. Explain the risks inherent in the dispatch of goods and invoicing. (10 Marks)

b. Discuss the control objectives and principal controls that are relevant to the process of dispatch of goods and invoicing. (10 Marks)

c. Explain the limitations of a joint audit. (5 Marks)

d. Discuss the benefits of audit carried out by an internationally affiliated audit firm. (10 Marks)

e. Explain briefly the importance of audit working papers. (5 Marks)

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