Internal control systems (ICS) – Questions and Answers

Subject Title: Auditing and Assurance Revision Kit

Topic: Internal control systems (ICS)

QUESTION 1
December 2022 Question One C
In the context of the inherent limitations in both internal control and the audit process itself, explain FIVE reasons why even a properly performed audit may not detect errors and fraud. (10 marks)

QUESTION 2
August 2022 Question Two D
Kilimo Sacco has recently automated its loan processing and disbursement activities upon purchase of an Enterprise Resource Planning (ERP) system. You have been requested to review the processing controls of the system.

Required:
Suggest four processing controls that the system should possess upon full implementation. (4 marks)

QUESTION 3
April 2022 Question Three A
(i) You have been appointed to lead your engagement team in auditing a new client. During the planning of the audit, the team emphasised on the need to understand the internal control system maintained by the client.

Required:
Describe four components of the internal control system that would be of interest to your team. (8 marks)

(ii) Identify two limitations of internal control systems. (2 marks)

QUESTION 4
January 2022 Question One A
ABC Ltd. manufactures mineral water and has factories across the East African region. The company’s customer base comprises individuals and retailers who make direct purchases through its website. You are the audit supervisor reviewing the documentation of the company’s internal controls and you come across the following matters:
1. ABC Ltd.’s website allows customers to make orders directly and also pay in advance. The website is not integrated with the stock system. Goods are dispatched to the customers via courier service although the courier company does not file returns with ABC Ltd. to confirm delivery.
2. Over the last 9 months, customers have been complaining about delayed deliveries. Investigations have revealed that sales orders are entered correctly, but not dispatched to the delivery department for action.
3. Customers undergo credit checks prior to being given credit and the limits are set by the sales ledger clerks. Customers also place orders through the sales team who decide on the discount to be granted.
4. There have been various complaints raised on the accuracy of supplier statements given that the accountant who used to handle this docket left the organisation.

Required:
With reference to the internal control system of ABC Ltd.:
(i) Explain five deficiencies in the system. (5 marks)
(ii) Describe five tests of control required to assess if the controls are working effectively. (5 marks)

QUESTION 5
January 2022 Question Five B
With reference to the e-commerce environment, discuss three controls that an entity needs to put in place to safeguard the accuracy, completeness and integrity of financial information. (6 marks)

QUESTION 6
December 2021 Question Four A and B
Relax Hotels and Cottages Ltd. is your new client operating in the hospitality industry.
The company management has indicated to you in the opening meeting that the internal control environment is critical to their business profitability especially during the recent economic downturn. You are required to understand the company’s internal control environment before commencing the audit task.

Required:
In relation to International Standards on Auditing (ISA) 315 “Identifying and Assessing the Risks of Material Misstatement through understanding the Entity and its Environment”;

(a) Explain the term “control environment”. (2 marks)
(b) Discuss six elements of control environment that would be relevant in understanding Relax Hotels and Cottages Ltd. (12 marks)

QUESTION 7
December 2021 Pilot Paper Question Three
You have been assigned to assist your audit senior in auditing a new client, Happy Land Limited. During the course of you reviewing and understanding the company’s internal control system, you discovered the following information:

1. The company has an internal audit department.
2. Bank reconciliation is undertaken by the internal audit department.
3. Purchase invoices are being approved for payment at branches and a list of approved invoices sent to head office for payment. The invoices, supporting documentation and suppliers statements are retained at the branches.
4. Excess cash is now invested by the finance director in short term securities.
5. A physical inventory has not been carried out for non-current assets and reconciled with the non-current assets register.
6. While visiting a production plant, it was noted that access to the inventory store room was unrestricted. It was discovered that the staff responsible for making test counts and agreeing to inventory on hand with the perpetual records, resigned and a replacement had not yet appointed.

Required:
(a) Explain five control deficiencies in Happy Land Limited. (10 marks)
(b) Recommend a control to address each of these deficiencies. (5marks)
(c) Describe a test of control the auditor should perform to assess if each of these controls, if implemented, is operating effectively to reduce the identified deficiency.
(5 marks)
QUESTION 8
September 2021 Question One A
Controls in an entity’s information technology system may consist of a combination of automated controls and manual controls.

Required:
(i) Evaluate eight risks that automated controls pose to an entity’s internal control system.
(8 marks)
(ii) Analyse four circumstances in which manual controls may be more suitable for use in an entity. (4 marks)

QUESTION 9
May 2021 Question Two B
Evaluate four methods of ascertaining a client’s accounting and control system. (8 marks)

QUESTION 10
November 2020 Question Three A
(i) Distinguish between “tests of control” and “substantive tests”. (4 marks)
(ii) Describe six tests of control that an auditor might carry out in the course of his audit assignment. (6 marks)

QUESTION 11
November 2019 Question Five A
You have recently been appointed as the auditor of Sugo Ltd. for the financial year ended 30 June 2019

Required
Examine eight reasons why it is important for your audit firm to review Sugo Ltd’s internal control system prior to undertaking verifications of transactions (8 marks)

QUESTION 12
May 2019 Question One
The Finance Director of Usonga Ltd. has informed you that some fraud took place during the year in the company’s payroll department. A number of fictitious employees were set up on the payroll and wages were paid into one bank account that belonged to two supervisors who have recently resigned. One of the supervisors had the sole responsibility for setting up new entrants in the payroll system, while the other supervisor processed and authorised bank transfer requests for wages and supplier payments.
The finance director has requested your audit firm for recommendations on how to improve controls in this area to prevent this type of fraud recurring. Usonga Ltd. has recently established a Human Resources department.

Required:
(a) Explain three types of control that Usonga Ltd. could put in place to reduce the risk of the above fraud recurring. For each control, describe how it would mitigate the risk.
(12 marks)
(b) Describe four procedures which you would perform to assess whether Usonga Ltd. is a going concern. (8 marks)

QUESTION 13
May 2019 Question Three C
As an audit assistant engaged in the audit of Samawati Ltd., you have been assigned the audit of non-current assets. The company has a substantial number of items of plant and machinery in its books of account.

Required:
(i) Summarise two objectives of an internal control system over the company’s non-current assets. (2 marks)

(ii) Discuss three internal control procedures you would recommend to the company to safeguard its investments in non-current assets. (6 marks)

QUESTION 14
May 2019 Question Five A
Describe three components of an entity’s internal control system. (6 marks)

QUESTION 15
May 2018 Question Four A
Explain the internal control objectives in each of the following cases relating to credit sales:
(i) Credit approval. (2 marks)
(ii) Receipt of sales order. (2 marks)
(iii) Invoicing of goods dispatched. (2 marks)
(iv) Entry into the debtor’s ledger. (2 marks)

QUESTION 16
November 2017 Question Two B
Citing a relevant example in each case, explain the following control procedures:
(i) Segregation of duties. (3 marks)
(ii) Authorisation and approval. (3 marks)
(iii) Physical controls. (3 marks)

QUESTION 17
May 2017 Question One B
Your firm has been appointed as the auditor of Fanaka Limited for the year ended 3 1 December 2016.

Explain why each of the following matters which you have noted during the audit should or should not be included in the letter to the management and those charged with governance.
(i) The company upgraded the accounting system which upon testing you noted that the system did not carry over all the balances accurately. The differences in credit and debit balances considered separately were material to the financial statements but when offset against each other, they were immaterial. (2 marks)

(ii) The new accounting system had a functionality that allows online approval of transactions by the various signatories but it had not been activated. The signatories continued to approve transactions manually and all the transactions sampled were duly approved. (2 marks)

(iii) The company supplying stationery to Fanaka Limited was owned by the wife of the procurement manager. However, you confirmed that the appropriate procurement procedures were followed. (2 marks)

(iv) The bank reconciliations were required to be signed by the preparer (Financial Accountant) and approved by the finance manager. You noted that 6 out of the 12 bank reconciliation statements were not signed by the Financial Accountant but had been approved by the Finance Manager. However, you confirmed that the reconciliation statements were accurate. (2 marks)
(v) The company was involved in a restructuring exercise that resulted in the discharge of 25% of the staff. You got to learn that the affected staff had filed a suit in court to challenge their dismissal but the matter had not been heard. However, the management was keen to have the suit heard in order for them to present the issue for reporting in the next financial year when it would be possible to establish if there was a reputable contingent liability. (2 marks)

QUESTION 18
May 2017 Question Four A
Explain three factors to consider while designing an effective system of internal control.
(6 marks)
QUESTION 19
November 2016 Question Three A
Examine five possible frauds in the area of purchases that an Internal Control System should be designed to prevent and detect. (10 marks)

QUESTION 20
November 2016 Question Five B
Summarise four substantive procedures that you would perform in respect of bank overdraft (10 marks)

QUESTION 21
November 2016 Question Five C
Highlight four matters that an auditor is likely to include in a management letter
(4 Marks)
QUESTION 22
May 2016 Question Four C
Shujaa Ltd. is in the process Of implementing a computer based accounting system. As their auditor, you have been requested to advise on the appropriate controls to be implemented to prevent unauthorised changes to the data tiles.

Required:
Suggest six controls that the management of Shujaa Ltd. should consider. (12 marks)

QUESTION 23
November 2015 Question Four A
In the context of International Standard on Auditing (ISA) 315-Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment, describe five components of an entity’s internal control system. (10 marks)

QUESTION 24
September 2015 Question Three A
Smiling Windows Co. (SW) is a window cleaning company. Customers windows are cleaned monthly. The window cleaner then posts a stamped addressed envelope for payment through the customer’s front door.

SW has a large number of receivables balances. These customers pay by cheque or cash which is received in the stamped addressed envelopes through the post. The following procedures are applied to the cash received cycle:
1. A junior clerk from the accounts department opens the posts and if any cheques or cash have been sent, she records the receipts in the cash received log and then places all the monies into the locked small cash box.
2. The content of the cash box are counted each day and every few days these sums are banked by whichever member of the finance team is available.
3. The cashier records the details of the cash received log into the cash received day books and also updates the sales ledger.
4. Usually on a monthly basis the cashier performs bank reconciliation which he then files. If he misses a month then he catches this up in the following months’ reconciliation.

Required:
(i) Explain three deficiencies in the system. (3 marks)
(ii) Suggest controls to address each of these deficiencies. (3 marks)