Assessment task
ACCT6003 – Assessment task 3
Martie’s guidance -check list
1) Comment (Identify) and evaluate internal controls applied by the chosen company during the
audit procedures to identify the operating effectiveness of controls. Give two examples of internal
controls applied by the selected company.
Please refer to week 8 tutorial recording
a. Identify Internal controls
Chapter 6 – gaining understanding of client’s system of internal controls (ASA315)
Entity level controls
Refer to task 2 Part B Question 5 : strength /weakness of 2 internal controls
• Control environment of your company – see chapter 6.3.1
• Entity risk assessment process – see chapter 6.3.2 – look in Company
annual report for risk assessment process, possible separate committee?
• IT / Computerised systems controls – see chapter 6.3.3
• Monitoring controls – see chapter 6.3.5
o Internal audit department
o Separate audit committee
Transaction Level controls
Control activities – see chapter 6.3.3 and
– Physical controls ( lock & key or security guards manual controls)
– Performance reviews ( manual – IT -Dependent)
– Segregation of incompatible duties ( IT dependent or Automated
Application control)
– IT systems – (IT dependent or Automated general access or
application(software) controls including edit, validation, interface controls
b. Evaluate means evaluate if the internal controls are
• Entity level or transaction level
• STONG or WEAK or NON-EXISTANT
Example : Look if separate internal audit committee . department … if yes, then
strong controls, if doesn’t exist then not weak or non-existent control
See textbook ch 6.6
• PREVENTATITVE OR DETECTIVE -chapter 8.1.1
• MANUAL OR AUTOMATED CONTROL – Chapter 8.1.2
Manual = Physical control- a truly IT independent like physical lock & key
AssignmentTutorOnline
Manual = IT Dependent = Senior manager performance / exception/variance report
review
Automated control – General access and Application controls
Example : Look if separate internal audit committee . department … if yes,
then strong controls, if doesn’t exist then not weak or non-existent control
2) Examine the techniques of testing controls that should be applied by the auditing firm. Given
an example for each technique identified.
Refer tutorial week 8 : Techniques of testing controls & week 9 Marties slides – revision for extra
examples – DON’T COPY (Enquiry, Observation, Re-Performance, Inspection for Internal
controls
Chapter 8 – section 8.2
Week 11 slide
3) Determine relevant substantive testing for THREE (3) accounts selected from balance
sheet accounts of the chosen company, such as cash, trade receivables, inventory,
property, plant and equipment (PPE), intangible assets, goodwill, investment, loan,
payables, provisions, leases, long-term liabilities, equity, rAssessment surplus, deferred tax
assets, deferred tax liabilities. You should identify the objectives, substantive tests of
transactions and account balances for each account identified. Refer to relevant ASAs or
other resources.
See tutorial slides for Week 10
See chapter 10
If using Inventory make sure you differentiate between manufacturer below or retailer like
Maggie Beer
EXAMPLE Question 3 : Example using Maggie Beer Holdings Ltd
1st Balance Sheet Account : Inventory
For Maggie Beer Inventory comprises of
– Retail inventory (Purchased and sold at a higher selling Price)
Balance sheet note for Inventory : note 9 page51
Objectives for Auditing Inventory account balance
See Textbook chapter 10.4.1 – please DON’T COPY AND PAST FROM TEXTBOOK … YOU
MUST ONLY WRITE OUT THOSE THAT ACTUALLY APPLY TO YOUR COMPANY!!!
Assertions to be
tested Objective / reason to test that assertion
Existence (E) Inventory being an asset, it is susceptible or at risk to be overstated.
This audit evidence is gathered to obtain reasonable assurance that all
inventory recorded in the accounting records and general ledger
account OF $3 500 000 physically exists
Inventory is perishable (cheese, milk etc) thus must still “exist” and be
saleable to be included in the inventory valuation
Valuation &
accuracy (v ) To test that the inventory has been valued according to the accounting
policy FIFO as stated in that accounting note and that it is being valued
at the lower of cost and net realisable value (market value) All
inventory that has been damaged or is obsolete as the inventory is
consumable (milk, cheese) has been written down to zero value
Completeness (C ) All actual physical inventory ahs been recorded in the accounting
records, including purchased inventory that in in transit (on the road)
to Maggie Beer that has been purchased Free on Board shipping (
ownership f inventory transfers to buyer as it is shipped because buyer
pays for freight)
• If the terms are FOB shipping point, the goods in transit are
the property of the buyer
• If the terms are FOB destination, the goods in transit are the
property of the seller
Right and obligation
(R&O) Maggie Beer is legal right to all inventory and is free of liens, securities,
pledges
Classification (C)
Presentation (P) Inventory has been properly classified as current and disclosed per the
accounting standards
(If manufacturing business, then must be classified as Raw materials,
Work in Progress and Finished goods)
Objectives for Auditing transactions related to inventory being Cost of Sales
Completeness of
expenses All expenses related to purchase of inventory recorded in accounting
records
Accuracy Expenses (purchase of inventory recorded at correct amount
Cut-off Expenses recorded in correct accounting period
Substantive test of account balances – See chapter 10 – table 10.9
– Make sure you provide: Analytical review type test
– Test of detail for all the assertions( objectoves identified) to be tested as identified
in Objectives
– Remember to reference to ASA or AASB
– (Write your test of details and in bracket indicate which assertion is being tested,
remember it must be relevant to your company
– For Inventory – always to “Attend / observe physical stock count & refer to ASA501
para 4-8
Substantive Analytical Review for inventory
i. Perform inventory turnover ratios to assess if inventory is slow moving and enquire of
management if inventory needs to be impaired for slow moving / obsolete items
(Valuation)
Substantive test of detail for inventory ( balance)
i. Attend the clients physical inventory count at year end and
i. Evaluate managements count instructions and observe that these have been
followed ASA501.4(a)
ii. Inspect the physical inventory whilst attending the count to ascertain existence and
identifying obsolete, damaged or ageing inventory (valuation) ASA501.A6
iii. Perform inventory test counts by
1. Trace from stock count sheet / physical inventory number of unit to the
general ledger inventory account recorded number of units for
completeness ASA501.A7
2. Vouch sample of inventory items from general ledger inventory account to
physical inventory on the floor for existence ASA501.
iv. Enquire about method of inventory valuation (FIFO or Weighted average) and
agree to accounting policy disclosure per Inventory note IN annual report
(Valuation)
v. Trace sample of inventory physical items back to supplier invoices(FIFO) and
agree / recalculate the per unit cost price based on FIFO method of valuation
vi. Enquire how obsolete inventory is identified and recalculate Inventory write down
(impairments) valuation
vii. Review minute of meeting for evidence of inventory pledged or held as security
for loans which can influence right or ownership of inventory (Rights and
obligations)
Substantive test of transactions – See chapter 10 – table 10.8
Purchasing of Inventory (Cost of Sales)
Testing for Cut-off
i. Enquire of management if all internally generated documents are sequentially prenumbered and request last documents to be processed at year end:
a. Last internal inventory purchase order number before year end cut-off and stock
count
b. Last customer invoice and delivery note of inventory sold before year end.
ii. Trace last source documents per cut-off numbers to inventory general ledger to ensure
final transactions processing in the accounting records for completeness
=—–
ACCT6003 – ACCT6003 – ACCT6003 – ACCT6003 – ACCT6003
Martie’s advice – a check list
1) Discuss (identify) and evaluate the internal controls used by the selected organization during the
Audit methods are used to determine the operational efficacy of controls. Please provide two examples of internal
controls used by the chosen company
Please see the tutorial recording from week 8 for further information.
a. Determine internal controls
Chapter 6 – obtaining a grasp of the client’s internal control system (ASA315)
Controls at the entity level
Refer to Part B of Task 2. Question 5: What are the strengths and weaknesses of two internal controls?
• Your company’s control environment – see Chapter 6.3.1
• Process for assessing entity risk – see Chapter 6.3.2 – look in Company
Annual risk assessment process report, maybe separate committee?
• Controls for information technology and computerized systems – see Chapter 6.3.3
• Controls for monitoring – see Chapter 6.3.5
o Internal examination
