Question

QUESTION 1
While you were involved in the audit of your client White Cross (Pty) Ltd, the following policies, procedures and conditions exist:
1. There is strong segregation of duties in the inventory cycle between receiving inventory, its custody, the issue of inventory and the recording of all movement in the inventory records.
2. The board of directors and senior management meet every six months to identify the challenges facing the company and how successfully they are being addressed.
3. The company’s organizational structure is designed in such a way as to provide the board with a realistic chance of achieving its objectives on an ongoing basis.
4. The human resource department goes to great lengths to define the skills necessary for each job category and to recruit suitable personnel.
5. The financial director meets frequently with the financial accountant to ensure that information required to be disclosed by IFRS is properly accumulated, recorded and processed.
6. Access to the company’s network is controlled by the use of comprehensive logical controls, eg: user IDS’s, user profiles, passwords, and is granted on a need to know basis.
7. The recording in the general ledger of sales, purchases, etc, processed by the computer is achieved by passing journal entries. All journal entries are scrutinized and authorized by 2 senior financial accounting department employees.
8. All transactions keyed into the computer via terminals are subject to a wide range of input controls.
9. The internal audit department conducts frequent reviews of breakdowns in internal control and how these are corrected.
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10. To enter White Cross (Pty) Ltd’s computer facility, warehouse and processing plant, an individual must place his thumb on a biometric scanner.
YOU ARE REQUIRED TO:
a) Briefly describe each of the components of internal control. (10)
b) Indicate to which component each of the policies, procedures or conditions listed in
points 1-10 relate. (10)
c) Explain the difference between an automated control and a manual control (1)
d) Suggest four ways in which computerization (IT) benefits a company’s internal control. (4)

Answer 1

A) In an "effective" internal control system control system, the following five components work to support the achievement of an entitiy's mission, strategies and related business.

1. Control environment

• Integrity and ethical values
• Commitment to competence
• Board of directors and audit committee
• Management's philosophy and operating style
• Organizational structure
• Assignment of authority and responsibility
• Human resource policies and procedures

2. Risk assessment

• Company- wide objectives
• Process- level objectives
• Risk identification and analysis
• Managing change

3. Control activities

• Policies and procedures
• Security(application and network)
• Application change management
• Business continuity/ backups
• Outsourcing

4. Information and communication

• Quality of information
• Effectiveness of communication

5. Monitoring

• Ongoing monitoring
• Separate evaluations
• Reporting deficiencies

This components work to establish the foundation for sound internal control within the company

B)

• 1) Segregation of duties indicates Control environments portion in internal control system. An effective control environment is an environment where competent people will understand their resposibilities, and the limits of their authority.
• 2) Identify the challenges indicates Risk assesment components of internal control system. The main moto of this components is to identify risks to the achievement of the organization and take necessary step to manage those risks.
• 3) Design of organizations internal structure indicates Control Environment components of internal control system. A systematic govorning body and good management system enhance an oganizations control environment.
• 4) Human resource department also a part of Control Environment components of internal control system. Effective human resource policies and procedures enhance an orgaization's control environment. These policies and procedures should address hiring, orientation, training, evaluations, counselling, promotion, compensation and disciplinary actions.
• 5) The financial director meets frequently with financial accountant to ensure that the information required is disclosed properly is an Information and Communication components of internal cotrol system.
• 6) Access to the company's network is controlled by the use of comprehensive logical control is a components of Control Activities under internal control system.
• 7) Recording all the transaction properly is an components of Information and Cummunication components under internal control system.
• 8) Wide range of input control is a components of Monitoring under internal control system.
• 9) Audit department conduct frequent reviews also a components of Monitoring under internal control system.
• 10) The last point is a components of Control activities under internal control system.

C) A manual system is like a bookkeeping system in which records maintainance is done by hand, without using a computer system or any automatic system. Automated system is a combination of both software and hardware which is designed and programmed to work automatically without the need of any human operator to provide inputs and instructions for each operation.

D) Internal control in a computerized environment which has two main catagories , they are application control and general control. The four benefits of computerization in a company's internal control are-

• It can prevent or detect errors during program execution.,
• It can prevent unauthorised ammendment of data files.
• It can ensure the continuity of operation.
• It can generate the report easily as and when required.