Auditing

the finance
and
accounting
functions
Learning Objective
D O LO R S I T A M E T
1. Consider the system and functions that are likely constitute this activity

2. Examine each functions and highlight the relative control objectives and risk and control issues arising from those
activities.

System/Function Components of the

Financial and Accounting
Environment
Two of the number of ways how the auditor can define the constituent elements of finance and accounting within an
organization.

Functionally - based upon the discrete accounting departments that are in place
Financial Cycles – revenue cycle, expenditure cycle, or treasury cycle.
Treasury Sales Tax (VAT) accounting
Accounts Payable Inventories
Accounts Receivable Product/Project Accounting
General Ledger/Management Transactions Petty Cash and Expenses
Fixed Assets (and Capital Changes) Financial information and reporting
Budgetting and Monitoring Investments
Bank accounts and banking arrangements
Payroll Taxation

Control Objectives - Treasury

(a) To ensure that the organization’s funds are appropriately managed with the aim of providing adequate levels of working
capital.

(b) To ensure that suitable and secure investments, financial instruments, etc. are utilized to the maximum benefit of the
organization and within the constraints of the prevailing laws and regulations.

(c) To ensure that treasury staff are suitably experienced and qualified, and operate within the limits of established policy and
practices.

(d) To ensure that treasury activities are monitored as part of an overall view of risk management.

(e) To prevent the processing of unauthorized and fraudulent transactions.

Risk and Control Issues

Taxation
Risk and Control issues for treasury

Key Issues

1.1 Has senior management (i.e. the board) established and issued a written policy governing treasury operations, authorized
transaction types, financial limits, etc.?

1.2 Has management established and clearly communicated their objectives for the treasury function? 1.3 Have

formal written treasury procedures been established which support the aims of the agreed treasury policy? 1.4

Have adequate independent and timely treasury monitoring facilities been established?

1.5 Has management provided suitably trained treasury personnel and the other necessary resources to ensure that their
objectives are achieved?
Detailed Issues
2.1 Are the Treasury Policy and operational procedures regularly reviewed, maintained and kept up to date?

2.2 What mechanisms prevent unauthorized treasury transaction types being processed? 2.3 Would

unauthorized or fraudulent transactions be highlighted, reported and promptly reacted to?

2.4 How are unauthorized staff prevented from initiating and processing unauthorized treasury transactions?

2.5 What prevents the processing of unauthorized and invalid transaction types?

Payroll
In most cases it is likely that personnel costs will represent the greatest proportion of total overheads for an
organization. The scope of the following review points incorporates the initial authorized set-up of new employees, the
processing of suitably authorized amendments (such as salary increases, holiday payments, bonuses), periodic payroll
runs, payment arrangements, the correct accounting for taxation and national insurance deductions, reconciliation of
the payroll, and the removal of employees from the payroll. The payroll function has strong functional links with the
human resources (or personnel) department.

Control Objectives
(a) To ensure that only valid employees are paid and at the correct and authorized rate.

(b) To ensure that the calculations of all payments and deductions are correct and in accord with the relevant taxation
and other regulations and requirements.

(c) To ensure that all deductions are correctly disbursed.

(d) To ensure that unauthorized access to the payroll system and data is prevented.

(e) To ensure that all payroll transactions are accurately reflected in the accounting system.

(f) To ensure that regular and accurate management and statutory information is produced
Risk and control issues
1 Key Issues

1.1 What mechanisms prevent payroll payments being made to invalid or unauthorized persons?

1.2 How does management ensure that amounts paid via the payroll are correctly calculated?

1.3 How does management confirm that income taxation and other deductions are accurately calculated and
disbursed?

1.4 Is management provided with accurate payroll cost data on a regular basis to support their decision making, etc.?

1.5 How does management verify that all payroll transactions are correctly reflected in the accounting system in the
proper accounting period?
Detailed Issues
2.1 Is the payroll system adequately protected from either misuse or unauthorized access?

2.2 What mechanisms prevent the set-up of fictitious employees on the payroll system? 2.3

How does management ensure that only valid employees are being paid via the payroll?

2.4 What prevents the set-up of incorrect or inaccurate payroll data (e.g. salary rates)? 2.5

Are payroll salary rates correct in relation to agreed pay scales/national rates, etc.?

Accounts Payable
In this area, auditors should be taking an overview which incorporates related processes such as linking to the original
purchase orders or instructions, confirmation of the receipt of goods/services, confirming the accuracy and validity of
invoices, obtaining the authority to pay, maintenance of accurate creditor records, and account settlement.
Control Objectives
(a)To ensure that all payments are for valid and suitably approved creditor accounts for goods and services actually
received.

(b) To ensure that all payments are correct and accurately reflected in the accounting system.

(c) To ensure that the prevailing sales tax or VAT regulations are correctly complied with. (d)

To ensure that good relationships are maintained with key suppliers.

Risk and Control Issues

(e) To prevent the possibility of supplier or staff malpractice
1 Key Issues
1.1 How does management ensure that only valid invoices are paid where the goods and services have been correctly and
fully received?

1.2 What mechanisms prevent the payment of inaccurately priced/calculated or duplicated invoices?
1.3 Are all invoices authorized prior to payment and confirmed as being within the agreed budget?

1.4 How does management ensure that the application and accounting treatment of VAT (or local sales tax) and duty is
correct and in accord with the prevailing legislation or requirements?

1.5 What processes ensure that the values of paid accounts and outstanding invoice liabilities are accurately and completely
reflected in the accounting system?
2 Detailed Issues

2.1 Is the organization adequately protected from the payment of invalid or fraudulent invoices? 2.2 What would
prevent staff from introducing false invoices into the system and these subsequently being paid? 2.3 Are all

invoices identified, recorded, trailed and accounted for?

2.4 How does management ensure that the goods and services being charged for have actually been fully received?

2.5 What prevents payment of invoices where the goods were returned or proved to be unsatisfactory?

Accounts Receivable
This area of activity has linkages to the vetting of customers for their stability and sales order

processing. Control Objectives

(a) To ensure that all income generating activities are identified and accurately invoiced to customers.

(b) To ensure that all invoices are paid and the income is correctly identified and accounted for and reflected in the
accounts.

(c) To minimize the extent of debt and provide for the prompt follow-up of overdue accounts.

(d) To maintain the integrity of the accounts receivable system and data

Risk and Control Issues

1 Key Issues

1.1 How does management ensure that all goods delivered and services performed are identified and duly invoiced to
customers?

1.2 What steps are taken to avoid trading involvement with financially unstable or unsuitable customers?

1.3 What procedures ensure all the required invoices are correctly raised using the appropriate prices and discounts,
and that they are recorded, dispatched and accounted for within the accounting system?
1.4 How is management certain that all customer remittances are correctly identified recorded and accounted for?

1.5 Is management provided with adequate, timely and accurate information on potential and actual debt cases to
enable prompt reaction?
2 Detailed Issues

2.1 Are all goods and services provided by the organization accurately identified as the basis for subsequent customer
billing?

2.2 How does management verify that all invoices are raised using the correct/ appropriate prices and discounts?

2.3 What processes prevent the generation of duplicate invoices?

2.4 What would prevent the generation and dispatch of an incorrectly completed invoice?

2.5 Are all invoices and credit notes identified and accounted for?