3-17 (continued) 5-43 (continued)

1
Audit Answers
Contents
3-3 LO2    3
3-38 LO10    3
3-17 LO5    4
3-20 LO5    5
4-2 LO2    6
4-8 LO3    6
4-14 LO3    7
4-23 KPMG (LO 1, 2, 3)    7
5-1 LO1    8
5-6 LO3    8
5-43 ERNST & YOUNG UK (LO 1, 2, 6, 7, 8)    9
References:    11
3-3 LO2
Internal control can be defined as a process which is designed by the management, board of directors and other members of an entity in such a manner that can help in the achievement of objectives of the company and all the reporting requirements are fulfilled along with all the compliances followed. There are various processes and procedures that are followed for conducting various activities and keep a check on the proper implementation of these processes and procedures. Internal control procedures help an organization to indentify the risks related to financial reporting.
Important elements related to internal control:
· Risk Assessment: Effective Internal control in an organization helps in assessing the risks associated with any misstatements that may arise in true and fair financial reporting.
· Control Environment: it is the responsibility of the management and employees of an entity to maintain an ethical environment with a sense of responsibility in the organization.
· Control Activities: Various tools which can be manual or automated can be used to reduce and prevent the risk which can harm the achievement of objectives of an entity.
· Information and Communication: Exchange of useful information can be done with proper integrity and authenticity between different levels.
· Monitoring: a review can be conducted of the activities and processes and procedures followed.
3-38 LO10
The main objective of an external auditor is to express a true and fair view independently on the financial statements of an enterprise. In order to express a true and fair view, the external auditor is required to build an understanding regarding the internal control system adopted by the company. This understanding helps him in determining and analyzing the risks of material misstatements which can arise in the financial statements and on the basis of this external auditor will develop the audit procedures which would help him in conducting the audit smoothly and in an appropriate manner.
3-17 LO5
a. Walkthrough can be defined as a process where a transaction is followed from starting to its processes and how it reached the financial statements by the management and the auditors of the company in order to determine whether proper processes and controls have been applied and followed. The assessment of controls over sales and cash flow is important because a clear picture regarding the recording of transactions can be identified by the management and various other users and if any errors are there, they can be made right accordingly.
b. Eight Elements of ineffective control:
i. Segregation of duties is not there in brown company.
ii. The person who is responsible for processing the cash also has access to pending cash records, this can lead to manipulations.
iii. Deferred payments are not handled properly.
iv. No documents are attached as evidence with the journal entries
v. Many services are clubbed with bookkeeping services.
vi. Bank reconciliations are not done according to the bank statements.
vii. Proper records are not maintained for the payments and revenues; everything is done on cash basis.
viii. Services that are provided to the clients are not separated properly.
c. Six elements of effective control:
i. Objectives and responsibilities of the organization are communicated properly to each and every person.
ii. Contract files are reviewed by the clerks for the purpose of ascertaining the status.
iii. Periodic payments related to the contracts were indentified properly and the payment slips related to...