Question

Consider the type of information and evidence that should be gathered when completing the audit of the internal control activities related to the warranty reserve account at Hamilton. To do so, please ask yourself about the type of information that would be helpful to determine whether the internal control activities were operating effectively. How can you be sure that the information gathered is reliable? In addition, how can you be sure that the evidence is appropriate in this situation? Finally, what evidence could be gathered that might reveal that the internal controls were NOT operating effectively?

Answer 1

Type of information that would be helpful to determine whether the internal control activities were operating effectively are:-

1} No single person should have independent control over any important aspect of the business.

2} The duties of the members of the staff should be rotated without any previous notice.

3} Every staff should be encouraged to go on leave at least once in a year.

4} Persons have physical custody of the assets must not have access to the books of account.

5} The financial and administrative powers should be distributed very judiciously among different officer.

6} To prevent loss or misappropriation of cash, mechanical devices, such as the automatic cash register, should be employed.

7} Accounting procedures should be reviewed periodically.

8} Procedures should be laid down for periodical verification .

Information gathered is reliable:-

1} Transactions are executed through general or specific management authorisation.

2} All transactions are promptly recorded in an appropriate manner to permit the preparation of financial information and to maintain accountability of assets.

3} Assets and records are safeguarded from unauthorised acces, use or disposition.

4} Assets are verified at reasonable intervals and appropriate action is taken with regard to its discrepancies

Inherent limitations of Internal control system:-

1}Management consideration that a control should be cost effective.

2}Possibility that person responsible for exercising control could abuse that authority.

3}Manipulation by management with respect to transactions or estimates and judgements required in the preparation of financial statements.

4} As surprise test is conducted and there found any deficiency in the control system.