Audit & Assurance: Limitations, Internal Controls, and Ethical Threats

Audit & Assurance

TABLE OF CONTENTS
QUESTION 1.............................................................................................................................3
QUESTION- 2...........................................................................................................................4
QUESTION 3.............................................................................................................................5
QUESTION 4.............................................................................................................................6
QUESTION 5.............................................................................................................................8
REFERENCES.........................................................................................................................10

QUESTION 1
a.
Five inherent limitations of internal controls are stated below:
Management judgement: With respect to the nature and the extent of risk which the
company chooses to assume along with the nature and the extent of the internal controls it
decides to impose. For instance, the management might adopt a low risk exposure to the
extent of loss of non-current assets through the way of implementing an ongoing system of
monitoring and inspection of the non-current assets which is then centred around the
operation of a expansively exhaustive non-current asset register.
Inappropriate management override of controls: The management might purposefully
override the existing controls therefore, rendering the stated control systems to be ineffective
(Camilleri, 2018). For example, the sales director of a corporate chooses to extend the credit
term for the long standing customers with the purpose of creating a customer goodwill in
contrast to the stated credit control procedures.
Human judgement: It involves faulty decision making or the human mistake or error that
leads to breaking down the internal control. For instance, error in respect to the designing of
the computer processing controls.
Collusion by two or more people: It involves authorization of power among two or more
people such as among the factory worker, factory manager and the wage data processing
clerk to claim and the process the fraudulent payment in respect to the overtime wages
(Ibrahim, Diibuzie and Abubakari, 2017).
Cost benefit consideration: Under this, pragmatic approach is required to be followed
particularly in small companies. For instance, the expense of employing new accounting
employees for the purpose of ensuring adequate segregation of duties in the important areas
might outweigh the maximum benefit which is to be derived from the internal control
systems.
b.
To: Audit Team
Subject: Internal control identified
Based upon eth information provided in respect to the Dartmouth Construction Ltd there
are five internal controls which has been found within the payroll department of Dartmouth
Construction Ltd which are described below.
 Collusion by two or more people: There are large number of people working within
Dartmouth Construction Ltd and is having 20 office staff at its head office, 20
regional staff apart from eth 350 construction workers. The payroll department

works for all which results into requiring effective internal control system for
handling large number of workers and heads.
 Cost benefit consideration: The regional sales staff starts the enquiries for the
construction work and are generally paid low as basic salary along with monthly
commission payment which is based upon the sales made by them.
 Human judgement: The directors of the firm receive a yearly bonus which is a
certain percentage of the increase in the profit. This is generally paid 3 months after
the year after the preparation of the financial statement. This requires human
judgement which might result into errors.
 Failure to understand or take action: The each of the construction worker is
required to use a phone app through which they mark their attendance at the site.
The payroll department download that data to calculate pay and tax for each of the
worker. Under this, there are chances of failure to understand the system by the
workers.
 Inappropriate management override of controls: Since, there are have twenty office
staff at their Head office who are paid monthly while there are twenty regional sales
staff with lower pay and the roles and responsibilities of these two might collide or
interrupted which results into inappropriate management of controls.
Thank You.
QUESTION- 2
a) Contents of an unmodified audit report
An unmodified audit report is one that is issued by the auditor showing that the
financial statements of the company are providing true and fair view in respect of its financial
health. The contents of the report are similar as per the format prescribed by the auditing
principles. Some essential elements of the report are:- Title- The first requirement is the title depicting that the report is presented by the
independent auditor. Addressee- To whom the auditor's report is addressed as per the law or regulations. Introductory paragraph- It contains the details related to the financial statements of
the entity, period of accounting and explanatory accounting policies. Management's responsibility for the financial statements- It shall quote the
responsibility of management in terms of preparation of the statements as per the
financial reporting framework, managing internal control related to frauds, errors and
material misstatements (Louwers and et.al., 2018). Auditor's responsibility- Specifies that the audit is conducted in accordance with
International Standards on Auditing and fulfils ethical requirements by maintaining
reasonable assurance.