Topic: Internal Control Systems

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AA – May 2016 – L2 – Q6 – Internal Control Systems

Identify control activities in a trade payables system and the need for substantive procedures.

Question

Control activities may be defined as policies, procedures, and operations that help to enable management directives to be carried out. These activities are detailed procedures designed to prevent, or to detect and correct errors that may arise in processing information.

Required:

a. Set out the five types of control activities and illustrate each one in the context of purchases or trade payables system. (10 Marks)

b. Explain why, even where tests of controls prove satisfactory, substantive procedures can never be completely eliminated. (5 Marks)

Answer

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Tags: Control Activities, Internal Controls, Purchases System, Substantive Procedures, Trade Payables
Level: Level 2

Topic: Internal Control Systems
Series: MAY 2016

AA – May 2021 – L2 – Q4 – Internal Control Systems

Examination of methods to document internal controls, control activities, and types of IT controls.

Question

A regulatory review was conducted on SINAPE Microfinance Bank Limited in September 2018. During the course of the review, numerous findings and recommendations were made regarding the bank’s compliance with internal and external regulations, policies, and guidelines.

It was noted in the report that processing systems, internal controls over financial accounting, and financial reporting were inadequate. The review of the bank’s processes and transaction recognition procedures was unsatisfactory. Additionally, there were instances where management overrode controls in financial reporting processes.

The regulator required the bank to appoint a reputable firm of chartered accountants to perform a review of the internal control system and make a comprehensive recommendation. Your firm has been appointed by the bank to perform the internal control reviews, and a brainstorming forum has been arranged. You have been nominated to present at the forum.

Required:

a. Describe the principal methods available to record internal control systems. (6 Marks)

b. Identify and discuss categories of control activities. (6 Marks)

c. Explain general information technology controls and application controls. (8 Marks)

Answer

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Tags: Application Controls, Compliance Auditing, Control Methods, Internal Control Systems, IT General Controls
Level: Level 2

Topic: Internal Control Systems
Series: MAY 2021

AA – May 2017 – L2 – SC – Q5 – Internal Control Systems

Examination of internal control meaning, examples, and sources of audit evidence for completeness, ownership, and valuation.

Question

You are the Auditor of Bistro Bottling Limited (BBL), a major manufacturer and distributor of fruit juice drinks based in Lagos. A review of the previous year’s audit working papers revealed some weaknesses in internal controls with regard to safeguarding the company’s non-current assets.

The company uses a combination of both owned and leased motor vehicles for operational activities, including deliveries to customers. It has recently sold some old vehicles and bought new ones in a bid to lower motor vehicle running expenses.

During the planning of the audit, you have decided that motor vehicles will be a key area because of the likelihood of weaknesses in the company’s system of internal control over non-current assets.

You are required to:

(a) Explain with suitable illustration the meaning of Internal Control. (4 Marks)
(b) List FIVE examples of internal controls. (5 Marks)
(c) Identify TWO sources of audit evidence you will obtain for each of the following: completeness, ownership, and valuation, to provide reasonable assurance with regard to the company’s assets and liabilities. (6 Marks)

Answer

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Tags: Audit evidence, Completeness, Dividend valuation, Internal Control, Non-current Assets, Ownership, Valuation
Level: Level 2

Topic: Internal Control Systems
Series: MAY 2017

AA – Nov 2015 – L2 – Q3c – Internal Control Systems

Describing the audit procedures necessary to ensure accurate recording and issuance of inventory at sales outlets.

Question

In respect of inventories held in the sales outlets, describe the audit procedures an auditor should perform to ensure that the inventories have been properly received, issued, and documented.

Answer

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Tags: Audit Procedures, Inventory Control, Risk Management, Sales Outlets
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2015

AA – Nov 2015 – L2 – Q3b – Internal Control Systems

Describing internal control procedures an auditor would expect for inventory management.

Question

Describe TWO internal control procedures an auditor would expect the company to put in place in respect of inventories.

Answer

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Tags: Audit Procedures, Internal Control, Inventory, Risk Management
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2015

AA – Nov 2015 – L2 – Q3a – Internal Control Systems

Discussing the auditor's duties before, during, and after an inventory count.

Question

You are the auditor of a Fast Food Company with many sales outlets. The company operates a central system of purchase and supply. The Goods Received Notes and Delivery Notes were not given utmost importance in the issuing and receiving of inventories. The suppliers’ ledger, stores’ ledger, and bin cards were not updated regularly. The outlet managers often complained of short supplies and shortages recorded against them regularly. Two of the outlet managers even complained directly to the Managing Director of the company concerning the shortages recently recorded against them. As a first step to solving the inherent weakness in the company’s inventory control process, management decided to undertake a physical inventory count.

Required:
a. Itemize the duties of the auditor in relation to inventories count under the following headings:
i. Before the count.
ii. During the count.
iii. After the count. (9 Marks)

Answer

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Tags: Audit evidence, Audit Procedures, Internal Control, Inventory Count
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2015

AA – Nov 2015 – L2 – Q1b – Internal Control Systems

Identifying internal control weaknesses in a company and recommending audit tests to ensure effectiveness.

Question

Success Nigeria Limited is a company engaged in haulage business. The services provided by the company, which has over 100 trucks in its fleet, include lifting of petroleum products from the depots to the filling stations of its clients spread over many locations.

The Central Store for spare parts for repairs of the trucks is located at the Head Office. The inventory operation is handled by the Personal Assistant to the Managing Director in addition to his normal schedule of duties in the Managing Director’s office. Spare parts supplied are received by the Personal Assistant who keeps them in the Central Store without raising any Goods Received Notes for the items. The invoices and delivery notes brought by vendors are submitted to the accounts department directly for payment. Because of the pressure of work in the Managing Director’s office, the Personal Assistant to the Managing Director does not maintain any inventory records. Whenever there is a need for spare parts required for truck repairs, a pre-printed requisition form is completed by the mechanic in charge of the repair. The form is submitted to the Personal Assistant who supplies the spare parts from the Central Store. The mechanic collects the parts without any acknowledgment of receipt. The requisition forms collected for all the spare parts supplied are kept in one of the cabinets in the Personal Assistant’s office, and they are collated by the Accountant on a monthly basis whenever he is to prepare the management accounts.

At the end of the financial year, December 31, 2014, the Accountant conducted an inventory count of the items in the Central Store for the purpose of using the value for the preparation of the financial statements for the year ended December 31, 2014. The Managing Director observed later while reviewing the financial statements that the repairs and maintenance account did not reflect the true position of the repair works carried out on the trucks during the year.

Required:
i. Describe FIVE Internal Control weaknesses from the above scenario. (5 Marks)
ii. Recommend controls required to address the identified weaknesses in (i). (5 Marks)
iii. Describe the audit tests to be carried out to assess if each of the controls is operating effectively. (5 Marks)

Answer

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Tags: Audit Procedures, Control weaknesses, Internal Control, Risk Management
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2015

AA – Nov 2015 – L2 – Q1a – Internal Control Systems

Explanation of internal control, its objectives, and the components that support it.

Question

Knowledge of internal control is a very basic audit skill. While auditors are not responsible for the institution of internal controls, they are responsible for providing management with information about how internal control is operating.

Required:
i. Illustrate what internal control is. (4 Marks)
ii. Describe THREE categories of internal control objectives. (6 Marks)
iii. Describe FIVE components of Internal control. (5 Marks)

Answer

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Tags: Auditing, Control Environment, Control Objectives, Internal Control, Risk Management
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2015

AA – Nov 2016 – L2 – Q3b – Internal Control Systems

This question explains four categories of control activities, focusing on their roles in ensuring effective internal control within an organization.

Question

State and explain FOUR categories of control activities.

Answer

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Tags: Control Activities, Information Processing Controls, Performance Reviews, Physical Controls, Segregation of Duties
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2016

AA – Nov 2016 – L2 – Q3a – Internal Control Systems

his question identifies and evaluates internal control issues at Clear View Cinemas, including cash handling, ticketing, and reconciliation processes.

Question

Clear View Cinemas Nigeria Limited operates in the entertainment industry in five different locations. Access into the Cinema Hall is based on tickets purchased at the point of entry. The entity’s ticketing process is manually driven. At the beginning of every day, the ticketing staff collects and signs for manual tickets from the Accountant. Unused tickets are returned to the Accountant, while the ticketing staff prepares a sales report for the day, which is reviewed and signed off by the Accountant. Concession items such as popcorn and soft drinks are also sold to customers. Both the ticketing and concession transactions are paid for in cash. All cash received is handed over to the Accountant who posts the transactions to SAGE Line 50 Application at the end of every day’s transactions. In view of the Company’s prime location and level of awareness, it records a high volume of transactions daily.
To ensure there are no delays in payment of routine bills and also reduce exposure to bank charges, the Accountant disburses cash from daily collections and the balance is lodged into the bank on an irregular basis. Bank reconciliation statements are prepared at the end of the financial year in readiness for the audit.

Required:
As the Auditor in charge of this engagement, identify and evaluate the relevant internal control issues in the above scenario.

Answer

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Tags: Bank Reconciliation, Cash Disbursement, Cash Handling, Cinema Operations, Internal Controls, Manual Ticketing
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2016

AA – Nov 2019 – L2 – Q4 – Internal Control Systems

Justify the effectiveness of internal control systems and discuss their characteristics, types, and components.

Question

During the review of the internal control activities of VIDA Plc., the Chairman of the Audit Committee stated in his concluding remarks that in any organization, we may conclude that an entity has an effective control environment if management is committed to accurate financial reporting with the support of an effective internal control system.

The control process assists the organization to embark on proper data analysis and information management that will enable the business and its employees to function effectively. Control focuses on activities before, during, and after daily operations to ensure safeguards and management of assets to enable the organization to achieve its aims and objectives. An effective and efficient system of internal control will give great returns to shareholders and ensure transparent financial reporting.

Required:
Justify the above statement by identifying and explaining:

Characteristics of an effective internal control system (8 Marks)
Different types of internal control systems (6 Marks)
Main components of internal controls (6 Marks)

Answer

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Tags: Effective Control Environment, Financial Reporting, Internal Control
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2019

AA – Nov 2020 – L2 – Q1c – Internal Control Systems

Discuss the limitations of internal controls and how they affect an organization’s ability to prevent errors and fraud.

Question

Explain the limitations of internal controls.

Answer

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Tags: Fraud, Human Error, Internal Controls, Limitations
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2020

AA – Nov 2020 – L2 – Q1b – Internal Control Systems

Identify weaknesses in an insurance process and list controls to address them.

Question

Identify the weaknesses in the process and a control that might address each weakness.

Answer

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Tags: Controls, Insurance Audits, Weaknesses
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2020

AA – May 2018 – L2 – Q3 – Internal Control Systems

Discusses limitations of internal control systems and issues when small entities rely heavily on senior management.

Question

Internal Control Systems are never foolproof. All systems, no matter how effective they may appear to be, have several limitations.

Required: a. Discuss briefly FOUR limitations of internal control systems in an organization. (8 Marks) b. Explain the problems that may arise when control systems rely excessively on the involvement of senior management in small entities. (12 Marks)

Answer

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Tags: Audit Systems, Control Limitations, Internal Control, Management Control, Risk Mitigation
Level: Level 2

Topic: Internal Control Systems
Series: MAY 2018

AA – Mar/July 2020 – L2 – Q5 – Assurance Services and Due Diligence for Hallmark Ltd

List control objectives and activities for cash sales and bank lodgments.

Question

List TWO control objectives and THREE control activities that should be put in place for each of the following:
i. Cash sales. (5 Marks)
ii. Lodgments into bank. (5 Marks)

Answer

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Tags: Bank Lodgments, Cash Sales, Control Activities, Control Objectives, Internal Control
Level: Level 2

Topic: Internal Control Systems
Series: MAR/JULY 2020

AA – Nov 2018 – L2 – Q1b – Internal Control Systems

Identifies weaknesses in ACB Limited's internal control and provides recommendations for audit tests to detect errors and frauds.

Question

ACB Limited is a transport and logistics company which commenced business on January 1, 2012 and has over 250 trucks in its fleet. The operations of the company cover all the six geopolitical zones in the country. The company operates an in-house workshop as a separate business unit under the supervision of a Workshop Manager and it handles repairs of the company’s trucks and other third-party vehicles as well. All the spare parts needed for the repairs of trucks are supplied directly from the company’s central store located very close to the workshop. The company purchases spare parts mostly in bulk and keeps them in a central store for supply to the workshop when the need arises. The following procedures are followed from the purchase stage to the consumption of spare parts for repairs of trucks:

Request for the spare parts to be purchased is sent by the storekeeper to the procurement department on monthly basis for approval. The storekeeper then collects an IOU and goes to the open market together with a mechanic to purchase the items. Cash invoices collected for the spare parts purchased are attached with the IOU retirement form which is submitted to the Accountant at the end of each month. The Accountant makes entries of the spare parts purchased into the ledger on a monthly basis.

The mechanic in charge of the repair of a damaged truck sends to the storekeeper a memo requesting the supply of spare parts. The mechanic collects the spare parts from the store on the basis of the memo he sent to the storekeeper. He prepares a list of items supplied on a monthly basis and sends it to the Accountant for posting into the ledger. The spare parts supplied are posted by the Accountant into the spare parts consumption ledger at the end of each month. The storekeeper takes inventory of the spare parts in the store at the end of each year jointly with some mechanics who provide technical advice during the exercise.

The spare parts collected are used by the mechanic in charge of the damaged truck brought for repairs. The mechanics in the workshop prepare a list of spare parts collected and used for the various trucks repaired by each of them for submission to the Workshop Manager. The Workshop Manager prepares and sends his monthly report which contains a list of trucks repaired and the spare parts consumed to the Managing Director.

Your firm was appointed to carry out an audit of the company’s accounts for the last four years of operation. From the preliminary discussion the Managing Director had with you, you were informed that the operations of the workshop in the last four years resulted in a loss which he said was a result of a lack of controls in the handling of the purchase, storage, and consumption of spare parts in the workshop.

Required:
i. Identify three internal control weaknesses in the above scenario with respect to the procurement of spare parts, storage, and supply of spare parts in the store, and the consumption of spare parts in the workshop. (9 Marks)

ii. Recommend appropriate internal controls that would address the identified weaknesses. (6 Marks)

iii. Explain the audit tests to be carried out to assess if the recommended controls would work effectively to prevent or correct errors and detect occurrences of fraud in the system. (5 Marks)

Answer

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Tags: Audit Testing, Control Recommendations, Internal Controls, Procurement, Weaknesses Identification
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2018

AA – Nov 2018 – L2 – Q1a – Internal Control Systems

Explain control environment and control procedures and discuss the five elements of internal control as per ISA 315.

Question

Auditors are required by International Standards on Auditing (ISA) to understand and assess a client’s system of internal control. Consequently, auditors must use their judgment to determine whether to test all or part of the internal control system as part of their response to the assessed risk of material misstatement in the financial statements to be audited.

Required:
i. Explain the following terms:

Control environment
Control procedures
(5 Marks)

ii. State and explain the five elements of internal control as identified by ISA 315.
(5 Marks)

Answer

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Tags: Control Environment, Control Procedures, Internal Control, ISA 315, Risk Assessment
Level: Level 2

Topic: Internal Control Systems
Series: NOV 2018

AA – Mar/Jul 2020 – L2 – Q3 – Internal Control and Audit Importance for Big Man Nigeria Ltd

Explanation of internal control, objectives, features, and responsibilities of management, board, and auditors.

Question

Big Man Nigeria Limited is registered with the Corporate Affairs Commission. The services to be rendered are awaiting regulatory approval. Pending that approval, directors of the company have been funding the operations of the company through the parent company for the past four years. However, the newly appointed chairman of the company’s board of directors believes there is the need to organize the company strategically so as to make it more attractive to investors.

Your father’s friend, Mr. Ado, has been appointed as the Managing Director of the company, and he is interested in appointing an accountant to keep the books of accounts of the company. The present financial operation of the company does not show a good internal control structure. Added to this, Ado is thinking of recommending to the board of directors the need to appoint an external auditor.

The Managing Director, who is not an accountant, has requested for your advice on the need for an adequate internal control system in a company.
Explain to Mr. Ado, the following:
a. Meaning of internal control. (4 Marks)
b. Objectives of internal control. (6 Marks)
c. Features of a good internal control system. (4 Marks)
d. Regarding internal control, the responsibilities of:
i. Management; (2 Marks)
ii. Board of Directors; and (2 Marks)
iii. External auditors. (2 Marks)
(Total 20 Marks)

Answer

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Tags: Board of Directors, External Auditors, Internal Control, Management
Level: Level 2

Topic: Internal Control Systems
Series: MAR/JULY 2020

AA – Mar/Jul 2020 – L2 – Q6 – Internal Control Weaknesses in Debtors’ Recovery

This question addresses weaknesses in internal control systems, control objectives, and activities for cash sales and bank lodgements.

Question

In a medium-sized trading organisation, the accountant was given the additional responsibility of pursuing recoveries from debtors. On one occasion, when an insurance claim of N1 million was received, the accountant credited it to the account of a debtor to cover up a previous misappropriation of N1 million he had recovered in cash from the debtor.

Required:
(a) Identify and describe the weaknesses in the internal control system which led to this situation. (10 marks)

Answer

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Tags: Bank Lodgements, Cash Sales, Control Activities, Control Objectives, Internal Control, Weaknesses
Level: Level 2