CHAPTER 4 PART A

INTRODUCTION
SUGGESTED SOLUTIONS

I.1 30 marks

SECTION A

1. Components of system of internal controls

(a) Monitoring (1)
(b) Risk assessment (1)
(c) Information system & communication (1)
(d) Control activities (1)
(e) Information system & communication (1)
(f) Control environment (1)

MAXIMUM: 6
2. Objective of segregation of duties
▪ To ensure that an individual does not perform irreconcilable functions, and
▪ that such individual will therefore not be able to make a mistake or commit fraud and
then hide it while performing normal tasks. (2)

3. Guidelines to effect proper segregation of work

▪ No transaction is performed by the same person from beginning to end;
▪ Optimally each irreconcilable function should be performed by different individuals;
▪ The irreconcilable functions that should be separated are:
▪ authorization of transaction,
▪ execution of transaction,
▪ record-keeping of transaction,
▪ control over/safekeeping of asset
▪ There should be identification of responsibility with regard to persons who have
completed work (e.g. by way of stamp or signature);
▪ Person in charge of an asset should not also be in charge of its accounting records.
▪ ANY other valid guideline that is clearly defined.

One mark each, maximum: (3)

SECTION B

1. Of what understanding of Internal Control?

▪ The design of the control measures (with regard to each transaction cycle).
▪ Whether the control measures have been implemented (are in operation). (2)

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2. Used it for what?
▪ Identification of possible types of misrepresentation.
▪ Considering factors that influence the risk of material misrepresentations.
▪ Designing the audit (or substantive) procedures that provide reasonable assurance
that misrepresentations will be detected (creates a basis for the design of auditing
procedures). (3)

NB: It is NOT sufficient to justify a control risk assessment of <high.

3. Influence on audit approach

▪ An understanding of the internal control is always necessary, as it plays a role in our
decision-making regarding our audit approach. (1)
▪ Therefore, despite the audit approach we eventually choose, we first have to obtain an
understanding of internal control. (1)
▪ The level of our understanding will, however, eventually be higher if we decide on a
systems approach (i.e. where our preliminary evaluation of CR is <high) than where we
have decided on a substantive approach. (1)

MAXIMUM: 2
LANGUAGE AND PRESENTATION (ENTIRE SECTION B): 1

SECTION C

NB: this is only a ‘suggested solution’ – marks must be allocated for any other valid control
measures students have identified.

1. Parking area
• The boom is a physical control measure to prevent people from merely driving in and
using the parking area. (1)
• Issuing the parking ticket serves as:
• proof of the “sales transaction” for each vehicle that has entered the parking area
(quantity); and (1)
• basis for the calculation of the money that has to be paid. (1)

MAXIMUM: 3
2. Shoes exhibited
• Only one shoe on exhibit means that a customer cannot steal a PAIR of shoes
(safekeeping of assets). (1)
• Only left shoes are exhibited which serves as a measure to prevent a customer from
stealing a left and a right shoe that looks similar, and then wear them as a pair.(1)
• The fact that the exhibited shoes are very visible, means that if one shoe is stolen, the
‘gap’ will be obvious and therefore quickly noticed. (1)

MAXIMUM: 3
3. Purchasing of shoes
• Segregation of duties: another person, the cashier, is responsible for the ringing up of
the sales transaction and only he has access to the till. (1)
• Transaction is recorded on a cash register, thus record is kept of all sales. (1)

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• Furthermore it has to be recorded on the cash register, in order to obtain change from
the till, if necessary, to give to the customer. (1)
• The customer is involved in the internal control as the value of the transaction is in full
view when the transaction is rung up. It serves as “independent review” and ensures
more accurate “ringing up” of transactions. (1)

MAXIMUM: 3
4. Payment for shoes
• Theft is prevented as the cashier maintains control over the sales item (the running
shoes) until payment has been successfully completed. (1)
• A document is generated upon which the transaction details are recorded – i.e. the
invoice will contain the date, details of goods sold, the value, related VAT, that a credit
card was used etc. (1)
• That Petronella has to sign the credit card slip, serves as acknowledgement to the
bank that she has made the purchase and it can be mail ed against her bank account.
(1)
• Because the cashier only gives Petronella the credit card AFTER she has signed, the
cashier has the opportunity to confirm that Petronella is the owner of the credit card by
comparing the signature on the slip with the signature on the reverse side of the credit
card. (1)
MAXIMUM: 4
LANGUAGE AND PRESENTATION (with regard to the entire Section C): 1

I.5 12 marks

Internal Control Internal Control Objective/s Consequences of

Category Obtained in cases where weaknesses in situations
Answer is “YES”. where the answer is “NO”.
1 Segregation of Duties Authorization & (1)
(1) Validity (1)
2 Independent Review Mistakes in salary and wage
(1) calculations can occur which
can lead to the over and
underpayment of employees.
(1)
3 Authorisation(1) Authorisation (1)
4 Recording Procedures Validity & (1)
(1) Accuracy (1)

AVAILABLE: 10
MAXIMUM: 10
LANGUAGE AND PRESENTATION: 2

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I.9
Part (a) & (b)

Number of the Internal control Control

internal control activity objective(s)
measure-
1 Authorisation and Validity
approval
2 Documentation and Completeness and
Record procedures & Validity
Segregation of duties.
3 Authorisation and Validity
approval
4 Segregation of duties Validity
5 Access control Validity
6 Documentation and Validity
Record procedures
7 Monitoring Accuracy,
Completeness,
Validity

Available 18
Maximum marks 15

I.15 24 marks

PART 1 – DEFINITION OF INTERNAL CONTROL

The process designed and effected by management to provide reasonable assurance
about achievement of entity’s objectives relating to:(1)
o reliability of financial reporting (1)
o effectiveness and efficiency of operations (1)
o compliance with laws and regulations (1)
AVAILABLE: 4
MAXIMUM: 3

PART 2 RISK ASSESSMENT IN A SYSTEM OF INTERNAL CONTROL

(ISA315 Appendix A par 3)
The risk assessment process is the way that management of an organisation:
o identifies risks relevant to the business (1)
o estimates the significance and likelihood of the risk occurring (or assesses the
risk) (1)
o Decides on actions to respond to or manage the risk. (1)
AVAILABLE: 3
MAXIMUM: 3

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PART 3 – SEGREGATION OF DUTIES
The term segregation of duties is based on the principle that that the various actions or
procedures that are carried out regarding a transaction should be divided amongst different
employees in order to separate irreconcilable/incompatible functions. (1)

The irreconcilable functions that should be separated are:

o Initiation of transaction, (½)
o authorisation of transaction, (½)
o execution of transaction, (½)
o record-keeping of transaction and (½)
o control over/safekeeping of assets. (½)
AVAILABLE: 3½
MAXIMUM: 3

PART 4 – RISKS WHEN SEGREGATION OF DUTIES IS LACKING

o Fraud (as a Consequence of the fact that one person can do something un towards
and cover it up later in the process) (1)
o Error (as if one person makes a mistake, there is no check later in the process to
correct the mistake. (1)
AVAILABLE: 2
MAXIMUM: 2

PART 5 – CONTROL OBJECTIVES AND CONTROL ACTIVITIES

Number of Control activity categories Internal control objectives

controls
5.1 Authorisation Validity (1)
(1)
5.2 Monitoring Completeness (1)
(1) Accuracy (1)
Validity (1)
5.3 Record procedures Completeness (1)
(1)
5.4 Segregation of duties Validity (1)
(1)
5.5 Access control Validity
(1) (1)
5.6 Independent review Accuracy
(1) (1)
AVAILABLE: 6 AVAILABLE: 8
MAXIMUM: 6 MAXIMUM: 6

Communications skills: Layout in parts (1)

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S1.19 20 marks

Number Internal control category Internal control objective(s)

of control (categories)
1 Authorisation 1 Authorisation 1
2 Record procedures 1 Completeness 1
3 Segregation of Duties 1 Authorisation 1
Validity 1
4 Independent review 1 Accuracy 1
5 Independent review 1 Accuracy 1
Validity 1
6 Access Control 1 Authorisation 1
7 Independent review 1 Classification 1
Summarisation & posting 1
8 Monitoring 1 Completeness 1
Accuracy 1
Validity 1
Max 2
9 Monitoring 1 Completeness 1
Accuracy 1
Validity 1
Max 2

AVAILABLE 9 AVAILABLE 14
MAXIMUM 9 MAXIMUM 10

AVAILABLE 23
MAXIMUM 19
Communications skills – layout and structure (1)

TOTAL 20

I.20 (SUGGESTED SOLUTION) 13 marks

CONTROL OBJECTIVES AND ACTIVITIES
Internal control Control Internal control
activity(ies) objective(s)
a) All credit sales are subject to a pre- Authorisation and Validity (1)
approval process by the credit manager approval (1)
to ensure that customers are creditworthy
or have sufficient credit available.
b) When cakes are collected by the Documentation & Validity (1)
customer the cake decorator and the record procedures
customer inspect that the cake agrees to Accuracy (1)

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 the approved order and the customer (1)
signs the approved order before the cake
may leave the premises.
c) All cash received is locked away in the Access control Validity (1)
cash register drawer and no cash may be (1)
accepted unless a receipt is issued. Doumentation &
record procedures
(1)
d) The debtors ledger is reconciled to the Monitoring Validity (1)
general ledger on a monthly basis. (reconciliation)(1) Accuracy (1)
Completeness (1)
e) On a regular basis the financial manager Independent Accuracy (1)
reviews the sales journal that has been review (1)
prepared by the accountant.
AVAILABLE: 6 AVAILABLE: 8
MAXIMUM: 12

Communication skills: Layout and structure (Table per written instructions) (1)