Audit Strengths of Internal Control Samples †MyAssignmenthelp.com

Question: Discuss about the Audit Strengths of Internal Control. Answer: Strengths of internal control of the acquisition The strengths of internal control of the acquisition and disposal of tangible non-current assets of B Ltd are as follows: Proper approvals The company has its departments and every department is managed by a designated manager who raises his request for purchase of a new asset in a purchase requisition form. This form is then checked by the purchasing officer. If the purchasing officer finds the request as valid, he acknowledges and approves the same and then sends it to the finance department. This is a great procedure followed by the company which follows two stages of approval- first by the departmental manager and then by the purchasing department (Coram et. al, 2011). Hence, when the process moves through a two-way step then it is easy to check and verify the entire matter. Moreover, in such cases, the chances of deviations are less. Delegation of duties The financial accountant then approves the acquisition of assets of over $5,000 but up to $10,000 only. Beyond $ 10,000 purchase is approved by the board of directors only. In absence of any information, the assets costing less than $5,000 is assumed to be approved by the financial accountant only. This reduces the burden of the board of directors to some extent. As the accountant is concerned with the financial data so the onus of the approval resides with him and not the board of directors. Proper recording of transaction- The approved purchase order is then sent to the supplier and the head office if any. Once the asset is delivered, it is checked by the receiving clerk as per its specifications and once satisfied, the clerk issues a barcode to the asset. Both the things including the invoice and the barcode attached asset is now recorded in the database. This practice allows the company to claim warranties or guarantee if required (Niemi Sundgren, 2013). Also, it reduces any damages, theft or loss of the asset due to proper recording of the asset. Further, any falsification is negated as an error is removed at the earliest. This practice enhances the overall procedure of the company and deviations can be negated at the earliest. No misuse of asset The departmental manager now records the asset using a copy of purchase order, request letter and the barcode received in the case, to find any discrepancy from his original order. This shows the best internal policy as to the recording of the asset first at the head office level and then at the department level (Coram et. al, 2011). This minimizes the non recording of the asset or any misuse of the asset. Hence, any misstatement cannot happen as the recording and verification are done in two major steps. Such a practice leads to a better form of practice where recording happens in a sequential manner. Updation of registers In case there is a need for asset disposal, the departmental manager fills up a form and sends it to the finance department which is then sent to the head office for approval and updation in the asset register. This shows that the department cannot carry out the purchase or disposal of the asset at its own will. In both the cases, approval is required (Holland Lane, 2012). Monthly reconciliations There is a monthly reconciliation of the asset register and the entries therein with the journal register by the departmental manager and this shows that the departmental managers have to acknowledge the asset register and its reconciliation every month. This minimizes the scope of any mismanagement or misuse of the assets of the company (Niemi Sundgren, 2013). When the reconciliation process is into operation then it becomes easy for the management to trace the deviations and leads to a better form of practice. Moreover, any omitted entry can be traced and rectification can be made at the earliest. Appropriate calculation of depreciation- There is also a policy of the company to calculate monthly depreciation at the rates input by the departmental manager. So the company can charge monthly depreciation instead of annual depreciation or any other method and allows depreciating or amortizing the asset in an even manner throughout the year (Parker et. al, 2011). Hence, the method that will lead to a better form of practice will bring more success to the company. Procedures for testing the internal control of the system Following are the procedures to test the internal controls of the system of purchase and disposal of assets which can be termed as a walkthrough, which means that the total system of the purchase and disposal should be gone through and should be thoroughly checked for any error: The management should purchase an asset at its own level and introduce the same in the purchasing department and should check what the actions are taken by the departmental managers, the purchase department manager and at the finance department level (Roach, 2010). In case, the departmental manager does not question the purchase or does not raise a query of not finding an approved invoice, requisition letter or any other supporting documents, there is a weakness at the departmental level. A dummy bill should be presented to the finance department for payment. If the finance department approves the bill and sends it to the head office without the requisition letter received from the departmental manager or the purchasing department, there is lack of internal control at the finance level. This can be highly problematic for the entire organization because a deviation in any form will misstate the entire entries. Further, the financial statements will fail to provide accurate entries (Mock et. al, 2013). Also, if the finance department does not seek approval of Board of directors in case the bill exceeds $ 10,000, the finance department should be questioned on why they are exceeding their payment limits which show a lack of internal control at the finance level. In case the management disposes an asset without the approval of the department manager and the finance department or if the department manager fails to reconcile or identify the sale of the asset at the month end reconciliation, then there is a material mistake in the monthly reconciliation by the manager as he has failed to find out that there has been a disposal of the asset (Parker et. al, 2011). The disposal of the asset means the asset is no longer into operation and if left unnoticed will lead to a material issue. This will impact the overall functioning and reporting. Once the departmental manager finds a discrepancy in the asset register, he should immediately raise a concern of the same and report about it to the management. In case of the failure, the management should come to know that the internal controls placed are weak and need to be revived (Mock et. al, 2013). Hence, such a weakness should be rectified at the earliest because the same can lead to a different issue i n terms of reporting and entries. In any of the above cases, the management shall have to initiate a dummy entry or fake transaction in the system to find out whether or not it is identified or reported and what is the response time of the reporting of the error. In case if the identification is done within time limits, the department can be given an acknowledgment. On the other hand, in case the reporting time is beyond the time limit or no reporting is done, the management should immediately take measures to correct the same and place new internal controls in the company (Holland Lane, 2012). When the time is taken to rectify an error or a mistake exceeds the time frame then it will reflect the deficiency in the system and the procedure of internal control. Each and every ledger should be checked for checking the complete procedure of purchase and disposal of assets. The registers for purchase should be checked and it should be seen that they have been signed by the authorized signatory. It should be seen whether these registers are timely checked by the head of departments on a periodic basis and are duly signed at every check time. The registers should be timely assessed and reconciled with the original entries so that any deficiencies can be negated and any omission can be rectified (Church et. al, 2008). This will lead to a better form of practice. The amount wise checking of purchase of asset should be done so that it can be checked that who has given approval for what amount of asset. The financial accountant should not give approval for purchase beyond $ 10000 valued asset and these needs to be checked from the approval registers. The asset register should be verified with the purchase invoices and all the details should be matched. The date of purchase should be correct so that the depreciation is charged accordingly for that period only for which the asset has been used during the year. The reconciliation statements should also be thoroughly checked (Hoffelder, 2012). No entry should be missing from the asset register as it is a very important part of the documentation of the company. References Church, B, Davis, S McCracken, S. (2008). The auditors reporting model: A literature overview and research synthesis. Accounting Horizons, 22(1), 69-90. Coram, P, Mock, T. J, Turner, J. Gray, G. (2011). The communicative value of the auditors report. Australian Accounting Review 21(3), 235-252. Hoffelder, K. (2012). New Audit Standard Encourages More Talking. Harvard Press. Holland, K Lane, J. (2012). Perceived auditor independence and audit firm fees, Accounting and Business Research. 42(2), 115-141. Mock, T. J., Bdard, J, Coram, P., Davis, S, Espahbodi, R. Warne, R. (2013). The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory, 32, 323-351. Niemi, L Sundgren, S 2012, Are modified audit opinions related to the availability of credit? Evidence from Finnish SMEs, European Accounting Review, vol. 21, no.4, pp. 767-796. Parker, L, Guthrie, J Linacre, S. (2011). The relationship between academic accounting research and professional practice, Accounting. Auditing Accountability Journal, 24(1), 5-14. Roach, L. (2010). Auditor Liability: Liability Limitation Agreements. Pearson.