Test of controls Control activities

Objectives Evaluate the effectiveness of control Reduce the risk of

activities.
Objects Control Activities.
How If audit trail does exists: Inspect
documentation associated with the
transaction for evidence of the control.
Where no audit trail exists:
-Observation
-Inquiry of the control
-Re-performance.
Example Evaluaste salaries and wage rate in
operation is effectiveness or not.
management.
Risk.
-Segregation of duties
-Authorization and approvals
-Verification
-Physical control
-Control over standing data
-Reconciliations
-Supervisory.
Salaries and wage rate are
verified by someone outside
of the payroll process.

Test of controls Substantive Tests

Objectives Evaluate the effectiveness of control
activities.
Objects Control Activities.
How If audit trail does exists: Inspect
documentation associated with the
transaction for evidence of the control.
Where no audit trail exists:
-Observation
-Inquiry of the control
-Re-performance.
Example The audit can run backups and try to
restore the system to normal operation,
or manually perform a financial
calculation to ensure it is effectiveness.
To provide reasonable
assurance of validity and
propriety of financial report or
indentify of monetary errors/
misstatements..
Financial reporting
-Analytical procedures
-Tests of details of balances
and transactions
Re-perform a company's
procedures to make sure they
perform as planned.

7.16.
a. The weakness in Supermo’s internal control concerning the purchases and payments
functions:
-When goods are received, the receiving department just stamp “order received”, lack of
review document.
-The accuracy of suppliers’ invoices is not checked. This may result in making payments
is inaccurate. Therefore, checking the mathematical accuracy of suppliers’ invoices
assures that the billing is correct.
-The payment voucher is not canceled after making the payment, it can be used to
commit fraud by requesting to make the payment again.
- There is a lack of segregation of duties in that the financial accountant has cash
payments duties and performs the bank reconciliation.
b.Explain why each is a weakness and provide a recommendation as to how to overcome
the weakness.
-The receiving department does not check whether the goods match the purchase order
before creating the receiving record. As the goods when delivered may be damaged or not
of the correct quantity or quality as requested on the purchase order. Therefore, goods
need to be inventoried and reconciled with the purchase order.
-The supplier's invoice should be reconciled and checked for accuracy before making a
payment voucher to avoid unnecessary payments.
-It is possible for goods to be resubmitted and the same item to be paid twice if
supporting documentation for payments is not canceled. The cancellation of supporting
documents should happen simultaneously with the bank transfer.
- There is no division of responsibility between making payments and receiving the
monthly bank statement, prepares a bank reconciliation and investigates any reconciling
items. The tasks are all performed by financial accountants, facilitating frauds related to
embezzlement of public funds. Therefore, the financial accountant may be able to
misappropriate funds without being found out. The bank reconciliation should be carried
out by someone independent of payments and receipts functions to provide a cross-check
on these operations.