RISK ASSESSMENT & INTERNAL CONTROL

REVIEW NOTES:

Symbols on computerized accounting system

PSA 330 states than when an auditor obtain audit evidence about the operating effectiveness of
controls during interim period, the auditor should determine what additional audit evidence
should be obtained from the remaining period.
 If controls have significant changes obtain evidence about the nature and extent
 If controls have not changed since last tested – test the operating effectiveness of such
control every third audit.

REVENUE/RECEIPT CYCLE ( Sale of goods/services and collection of cash/receivables)

 Sales documents includes sales order, credit memos ( for reversal of A/R due to
adjustments or returns), sales invoices, delivery receipt
 Bar code scanners – required for an automated perpetual inventory system
 Credit memos should be approved by credit manager and not be sales manager
( department)
o Final approval by sales department manager will allow irregularities.
 INTERNAL CONTROLS FOR REVENUE CYCLES
o Prenumbered documents – ensures that all transactions are taken up and
recorded.
 EFFECTIVE INTERNAL CONTROL
o Segregation of duties
o Prenumbered documents
o Daily sales summaries compared daily to postings on A/R
 Effect of unrecorded sales on account
 Will not be billed (unrecorded liabilities)
 Will not be confirmed since not on record
 Online sales order processing systems – real time, just-in-time

EXPENDITURE/DISBURSEMENTS CYCLE
 Documents includes Purchase Order, Supplier’s Delivery Receipt, Receiving report,
checks, check voucher
 Blanket PO – a standing order to buy specified items at a designated price from a
particular supplier for a set period of time.
 HOW TO PREPARE PO
o Canvas from at least three suppliers.
o Negotiate price and terms.
o Employee ordering the goods should not approve vendor’s invoices for payment
o Make sure all ordered goods are received by duly filled up receiving report.
 o Competitive bidding is done to avoid purchasing agents from committing
irregularities.
 Petty cash funds for small amounts e.g. less than 1,000 if replenished two times a week
causes an auditor to intensify investigation.

PRODUCTION CYCLE
Raw materials - Store room  Factory

Document – Materials requisition slips

 Strong internal control for mass production e.g. 10 different products = perpetual
inventory system ( use of stock cards)
o Periodic counts must be made
 Cost of internal control should not exceed the benefits
 All issuances of raw materials must be based on approved requisition forms.

INVESTING CYCLE
 Investment activities includes purchase of PPE, investment securities, marketable
securities
 A procedure to monitor PPE is to restrict access to equipment
o Establish accountability
o Periodic physical inspection by internal audit staff/assigned staff
 Audit procedures includes
o Auditor tours entity’s production facility
o Direct observation of asset condition
 Auditor may discover that necessary facility maintenance is not
performed.
 Custody of cash securities (Investment Securities) is under Treasury
 Marketable securities should be kept in bank’s safety deposit box

FINANCING CYCLE
 Includes selling of bonds/notes
 All direct borrowings should be approved by the Board of Directors.
 Auditors confirms the amount issued with the bond trustee
 Cash and stock dividends must be approved by the BOD

HUMAN RESOURCES CYCLE

 Paychecks should be physically distributed by someone who does not authorize or
record payroll.
 Personnel department approves changes in pay rates, deductions from employees’
salaries
 INTERNAL CONTROL WEAKNESS
o Paychecks are distributed by the employee’s supervisor
 Cash payroll control – each employee should be asked to sign a receipt
 On line payroll system