Question

You are working on the audit of Chip Ltd and have completed your review of controls over cash receipts. You have noted the following controls: Control 1: Handling of cash is entirely separate from the accounting department. Control 2: Before the accounting department posts sales invoices to the accounts receivable master file, cash receipts are matched to specific sales invoices. Control 3: The accounting department have a procedure whereby all recorded cash receipts are independently checked to ensure they are recorded correctly. Control 4: Cash is deposited every day at the bank. RequiredFor each of the four (4) ‘Controls’ above: Identify the assertion(s) that this control will have an effect on in the financial report; AND provide an example of a procedure that could be used to test each control.

Answer 1

Dear Reader/Student,

First of all, let's understand what internal control is and what internal check is.

Internal Control is the process designed, implemented and maintained by those charged with governance and management to provide REASONABLE assurance about the reliability of financial reporting (that the financial statements are free from material misstatement either due to fraud or error), efficiency and effectiveness of operations, safeguarding of operations and compliance with applicable laws.

Internal Check is operation when work of one person is checked by another person and no single person is allowed to record all the aspects of a transaction.

The answer is as follows:

1-Handling of cash is entirely separate from the accounting department- Preventive internal control, it is always a good internal check to maintain segregation of duties especially in areas where manipulation of asset is very easy(small volume but high value inventory, cash).

Examples to test the control

a)- Ensure cash holder maintains an electronic daily cash book of opening balance, inward and outward with particulars and closing balance record. Compare daily closing cash balances between the cash book and books of account.

b)-Surprise checks to ensure that the cash holder's electronic cash book confirm actual physical cash balance.

----------------------------------------------------------------------------------------------------------------------------------------------------------

2-Before the accounting department posts sales invoices to the accounts receivable master file, cash receipts are matched to specific sales invoices-Error in control, cash receipts from receivables should be matched with sales invoices to ensure referencing in ledger which helps in keeping track of overdue invoices.

Examples to test the control

a)-Getting contra statement from debtor and comparing the same with the ledger in our books of account to ensure accuracy of entries and correcting discrepancy if any.

b)-Monthly monitoring of overdue accounts receivable so that any incorrect reference can be tracked easily.

----------------------------------------------------------------------------------------------------------------------------------------------------------

3-The accounting department have a procedure whereby all recorded cash receipts are independently checked to ensure they are recorded correctly-This control is very useful to combat against teeming and lading fraud. An independent check will ensure that the amount recorded in books tie with physical cash received and the ledger in which entry is posted is also accurate.

Examples to test the control

a)-Review of the work performed by supervisor(who independently checks the cash receipts) and scrutinizing where required.

b)-Reperforming the process in dummy database and comparing the end results.

c)-Seeking balance confirmations for voluminous receivable at regular intervals(say monthly)

----------------------------------------------------------------------------------------------------------------------------------------------------------

4-Cash is deposited every day at the bank-Good control to avoid petty theft of cash and to control unnecessary cash expenses.

Examples to test the control

a)-Review of the bank deposit slips and comparing the same with physical cash reduction.

----------------------------------------------------------------------------------------------------------------------------------------------------------

• Assertions

1. Transactions and events

• Occurrence — The cash transactions recorded have actually taken place during the period.
• Completeness — All the cash transactions that ought to have been recorded were actually recorded.
• Accuracy — The transactions were recorded at the appropriate amounts.
• Cutoff — The transactions have been recorded in the correct accounting period

2. Accounts balances as of period end

• Existence — Cash balances existing in books ties with actual cash balance.
• Rights and Obligations — Chip Ltd legally controls rights to its cash.
• Valuation and Allocation — Cash balance that are included in the financial statements are appropriately and any adjustments (for theft, petty loss) are appropriately recorded.

3. Presentation and disclosure

• Occurrence — The cash balance disclosures are accurate and in line with reporting framework.
• Completeness — All relevant disclosures necessary for cash balance have been included in the financial statements.
• Classifications — Cash balance in financial statements are clear and appropriately presented.
• Accuracy and Valuation — Cash balance information is disclosed at the appropriate amounts.

Kind Regards