March/ June 2021

Scenario 1

(a) Describe method of internal control system, advantages and disadvantages

Method Explanation Advantages Disadvantages

Narrative note NN consist of written description
of the system detailing what
occurs in the system at each
stage and related control at each
stage.
Flowchart FC are diagrammatic illustration
of internal control system
demonstrating the sequence of
events and standard symbols are
used to signify the controls.
Questionnaire ICQ/ ICEQ contain a list of
questions for major transaction
cycle.
ICQ: to assess whether control
exists
ICEQ: to assess the effectiveness
of control in place
+ simple to record
+ discussion with staff
members written up as note
+ facilitate the understanding
of all audit team members
especially for junior
+ Easy to view the entire
system in one diagram as all
are presented together
+ Due to the use of standard
symbols , effective in
identifying missing controls
+ Quick to prepare, timely
method
+ If drafted thoroughly, all
controls are considered and
recorded.
+ Thus, missing control and
deficiencies are clearly
highlighted by audit team.
+ time consuming
+ cumbersome if IC is complex
+ difficult to identify if IC are
missing in NN
+ Difficult to amend. The whole
chart may need to be
redrawn if an amendment is
required
+ Still need a NN to accompany
the flowchart, time
consuming
+ The client may manipulate
the answer if they aware for
particular answer that
auditor is looking for
+ Unusual control may not be
included on standard
questionnaire and hence may
not be identified.

(b) 4 key control and test of control

No. Key control Test of control

1. All staff are required to clock in and out using
sequentially numbered key card which
contains unique employee number and
name. Sequence check are carried out by HR
supervisor on regular basis.
Carry out the sequence check to identify the
gap in sequence on sampling basis.
Review detail check carried out by HR to see
if they identify any gap in sequence and
review the evidence of review

This reduce the risk of fictitious employee

being set up and paid.
This ensure that employees are only paid for
hours they have actually worked.

2. Clock in process are monitored by camera Review the log of record for sample of weeks
and weekly check is done by HR record the to identify who reviewed the footage and to
reviewer name on spreadsheet. ensure that the footage are reviewed by HR
 This reduce the risk that one employee
fraudulently clock in for other employees
attendance.
3. Payroll system automatically calculate gross
pay, deduction and net pay.
This reduce the risk of error occurring and
input data such as wages and deduction
recorded incorrectly
4. Payroll clerk recalculates sample of
employee’s gross pay to net pay. Payroll
supervisor then review the check and
evidence with supervisor signature.
5. Payroll system is pw protected, pw is
changed by payroll mgr on monthly basis.
This reduce the risk of unauthorized assess
to sensitive data and fraud of unauthorized
changes being made
Control deficiencies and recommendation (12 mks)
Control deficiencies
1 Department managers are required to
approve all employees’ holiday forms,
however, this does not always occur.
This could result employees taking
unauthorized leave which leads to inefficient
processing due to shortage of manpower.
2 The financial controller prepares the bank
transfers for the payroll and also authorises
these to be paid.
The lack of segregation of duties may lead to
FC increasing the payment to favorable
person deliberately
3 The payroll clerk amends the payroll and an
edit report of changes is produced but this
report is not reviewed.
This increase the risk that fraud and error
may not be identified promptly. This may
result in error being made in the payment to
Input dummy data into the system to verify
that the system is operating effectively.
Review the signature of supervisor as
evidence of review.
Reperform the calculation from gross to net
pay, compare the result to payroll system
and calculation by the clerk.
Attempt to log in to payroll system using old
password and confirm the system has
rejected the access.
recommendation
Employee should be informed that they will
not be able to take leave without approval
and their holiday should be approved in
written confirmation.
Payment for unused holiday should be
authorized by the manager.
The bank transfer prepared by FC should be
reviewed and approved by a senior lever,
such as financial director. The review and
authorization should be evidenced.
A responsible official should review the edit
report, compare with new joiner or leaver
form so that any discrepancies are identified
promptly. The review should be evidenced
with the reviewer signature.
 new joiner or leaver and incorrect accounting
record for employee cost.
4 The HR department is responsible for All staff appointments should be proceed by
processing joiners and leavers, but due to HR to ensure that the necessary procedure
staff illness, the operations manager has are followed.
processed temporary new drivers and
notified payroll If done by OM, the record should be
reviewed by HR and authorize it before
The OM may not carry out all the required forwarding to payroll dept.
step and may not keep appropriate
documents resulting incorrect wages and
deduction being recorded.
5 Only overtime in excess of five hours per All OT should be authorized by a responsible
week needs authorisation by the operations official and the authorization should be
manager evidenced in written confirmation.
This means that employee could claim to
work OT for 5 hours without authorization
resulting to make payment to employees for
hours not worked.
6 Where cash wages are paid, the driver is only The pay packet should only be distributed
required to provide their name to collect upon sighting the photographic ID of the
their pay packet. employee and employee should sign upon
receiving the pay packet.
Payment without a proof of identity could
result incorrect payment being made to
incorrect employees
7 The operations manager decides on the Approved parameter should be established
bonus to be paid to delivery drivers each by BOD. Bonus should be determine by
quarter and there are no approved director level. Approved bonus should be
parameters for the bonus levels. communicated in writing.
This could lead to inappropriate bonus being
paid to the employees. OM may make
fraudulent pay.
8 Delivery drivers must take breaks throughout Monitor the activity of the drivers through
the day which are not monitored electronic devices to ensure that prescribed
break are taken
Longer break >> being paid for hours not
worked
Do not take break >> breaching the law and
may result in fine