ACTY 7209 Advanced Auditing: Internal Controls and Audit Procedures

This report addresses tests of controls and substantive audit procedures within the framework of New Zealand Auditing Standards. It examines three case studies, identifying requisite tests of control, substantive procedures, and internal control deficiencies. The first case study focuses on deficiencies in a company's wages system, suggesting improvements like biometric attendance, unique employee numbers, and validation teams. The second case study outlines substantive audit procedures for accounts payable, including balance verification, invoice vouching, creditor reconciliation, analytical procedures, and balance sheet presentation checks. The third case study discusses inventory auditing, emphasizing stock inspection as a control test and physical count observation as a substantive procedure, along with pre-stock count procedures and improvements to the inventory counting system.

Advanced Auditing
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Background and Abstract............................................................................................................................2
Question 1: Test of control..........................................................................................................................3
Question 2: Substantive Procedures-Accounts payables.............................................................................4
Question 3: Substantive Procedures-Inventory...........................................................................................5
References...................................................................................................................................................7
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Background and Abstract
A report has been prepared on the test of controls and the audit procedures as per New Zealand
Auditing standards being implemented by the company in different circumstances and how the internal
control of the company plays an effective role in the proper management of the company. Three case
studies have been given and for each one of them the requisite test of control, the substantive
procedure to be employed and the inefficiencies in the internal control have been pointed out. A test of
control may be defined as the audit procedure to test the effectiveness of the internal control of the
entity as to how it prevents and detects the material misstatements, errors and frauds (Belton, 2017).
Based on its results, the auditors may or may not opt to rely on the same and then apply the requisite
audit procedures. The audit procedures can be in the form of observation, documentation, inquiry,
confirmation, etc.
Question 1: Test of control
i. In the given case, there are a lot of deficiencies in the wages system of the company Brown
Co. Some of them are listed below:
a. Each of the employee enters their unique number in the keypad, with this there is a
chance of proxy attendance in case somebody is not monitoring the same. One person
may enter the attendance for other employee number as well (Alexander, 2016).
b. The supervisor gives the temporary employee number for the new employees and this
may create mismatch and issues in attendance in case same temporary employee
number is given to two or more employees in the given period.
c. The two staff from the wages department are authorised to make the changes in the
computerised system with respect to holidays, illness and setting up and maintenance of
the records. This may lead to serious discrepancies and irregularities in case these two
employees use unfair means and edit the attendance records unethically (Werner,
2017).
d. Once the computerised wages system calculates the gross pay, net pay and the
deductions, there should be a person who validates the same and then passes the same
for final payment but in the given case, automatically it is paid to the employees in their
bank account. Due to this, if at all there is any system issue, the same would not be
corrected and the salary would be wrongly processed.
Due to all the above-mentioned factors, there might be deficiencies and irregularities in the processing
of the wages and there are huge chances of manual manipulation of the employee master, attendance
and wages data.
ii. For the deficiencies pointed out above, one of the measures or the internal control that
would be effective in overcoming all the deficiencies are as follows:
a. There should be a card swiping system or a biometric for the employee’s attendance
with the chip in the ID cards, which would remove the deficiency of proxy attendance.
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b. The company should have the system of giving the permanent unique employee
numbers to the new employee on the very first day and there should be no system of
the temporary employee numbers as the same can create duplicate entries and unique
numbers thus would help in avoiding reconciliation issues (Meroño-Cerdán, Lopez-
Nicolas, & Molina-Castillo, 2017).
c. No manual intervention should be allowed with respect to the leave correction, holidays
and editing the attendance as there are higher chances of making advantage of the
same and manipulating the employee records, therefore all these holidays and leave
should be directly entered in system and approved by the respective managers.
d. There should be a team of salary processing who cross checks the input and output of
the system and validates and approves the same before any payment is made to
employees in their bank accounts. This will avoid issues and errors, if any (Kewell &
Linsley, 2017).
Thus, for each of the shortcomings mentioned above in the first part, a correction in the internal control
and methods and processes is warranted which has been shown below.
Question 2: Substantive Procedures-Accounts payables
i. The test of controls are the audit procedures that are being applied to check the
effectiveness of the internal control within the organization as to whether there are still
chances of misstatements and frauds or they are overtly effective. They serve as one of the
most useful tool for audit planning (Kangarluie & Aalizadeh, 2017). The substantive audit
procedures are one of the audit procedures being applied by the auditors to collect the
audit evidences and check the accounts of the entity. It aims to do vouching on the incomes
and expenses and the verification of the assets and liabilities in order to collect sufficient
and appropriate audit evidences to give the audit opinion.
ii. a. In the given case, the audit of the company Metco that has been trading for last 50 years
is being done. The trade payables have decreased from $974564 in 2017 to $567000 in
2018. The substantive audit procedures in this regard and the objective of each of the
procedures has been stated below:
1. The validity of the opening balances needs to be checked if the same has been correctly
brought down to current year and also the trial balance needs to be taken from client
and the balance of the payables needs to be checked with the general ledger.
2. The vouching of the purchase bills and invoices must be done for the selected auditors
with the help of necessary supporting (Chron, 2017).
3. Reconciliation of the liabilities with the monthly statement of the creditors as well as
confirming the account balances with the creditors directly.
4. Perform various analytical audit procedures with respect to accounts payable and all the
other related accounts. This includes variance analysis and trend analysis, outstanding
analysis, ageing analysis.
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5. The presentation in the balance sheet and the disclosure of the same in the notes t
accounts should also be checked (Dichev, 2017).
b. For the substantive procedures mentioned above in part a, the purpose of each of the
procedures is mentioned below respectively.
1. Checking the balance with trial balance helps in ensuring accuracy and valuation of the
payables.
2. This helps in ensuring that the creditors do actually exist and thus confirming on the
aspects of existence, accuracy, cut off, occurrence, valuation and obligation (Grenier,
2017).
3. Direct confirmation from creditors and checking of the monthly balances of the
creditors statement will help in ensuring that there is a completeness in recording of
transactions, the balances are matching, there are no reconciliation issues, the cut off
has been taken correctly and that the valuation has been made appropriately. It also
helps in ensuring that there is an existence of liability and no window dressing has been
done.
4. The analytical procedures help in ensuring that the comments and reasons for any
exceptional variance and onetime items are properly captured and are then disclosed in
the financial statements (Lessambo, 2018).
5. This will help in ensuring that the disclosures are being correctly made and the users are
not having any ambiguity while going through the financial statements.
Question 3: Substantive Procedures-Inventory
i. With respect to the audit of South City, a construction company involved in the building of
houses, offices and hotels, one test of control that should be applied is inspection of the
stock and the inventory (all the finished goods, work in progress and the raw materials) in
the warehouse. This test of control will help in ensuring that the stock in the books of
accounts and that in the warehouse are same and equal and there is no discrepancy.
The substantive procedures, which needs to be applied here, is to observe the physical
count procedure of the inventory. This will help in established if the method employed is
correct and if there are any deviations or chances of frauds and errors. This will also help in
checking what are the internal controls in this aspect (Knechel & Salterio, 2016).
ii. The four audit procedures that the auditor is expected to perform prior to attending the
stock count at client’s premises are mentioned below:
a. Reconciling the inventory as shown in the trial balance and the ledger books and what
has been carried down from the last years.
b. The auditor should also be reconciling the purchases of inventory from bills and whether
the same has been completely recorded.
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c. The cut off analysis needs to be done to check if after the cut-off date each month, any
inventory has been taken in the books and what is the treatment of the same. The
shipping transaction needs to be checked in this aspect (Fay & Negangard, 2017).
d. The auditor also needs to check on the internal controls as to how the inventory is
procured and recorded in books and what is the policy of the company about the
valuation of the inventory (Defond & Lennox, 2017).
iii. The two deficiencies in the current inventory counting system along with the measures to
be adopted to overcome the deficiency has been stated below:
a. Information in the stock count sheet is being recorded in pencil and therefore the
amendments can be made later on, this might lead to frauds, errors and material
misstatements in the future and anybody can manipulate the numbers later on so to
avoid such situation, any input should be recorded with pen or in permanent ink (Saeidi,
2012).
b. At the end of the stock count, the stock taking sheets are not being signed therefore
there is no such conclusive evidence as to who performed the stock count and on whom
the responsibility is to be placed so going forward in order to overcome this issue, the
stock sheet should be signed by the person doing the inventory count.
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References
Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-
431.
Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd. Retrieved from https://www.routledge.com/Competitive-Strategy-Creating-
and-Sustaining-Superior-Performance/Belton/p/book/9781912128808
Chron. (2017). five-common-features-internal-control-system-business. Retrieved december 07, 2017,
from http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
Defond, M., & Lennox, C. (2017). Do PCAOB Inspections Improve the Quality of Internal Control Audits?
Journal of Accounting Research, 55(3), 591-627.
Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), 617-632. Retrieved from https://doi.org/10.1080/00014788.2017.1299620
Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud.
Journal of Accounting Education, 38, 37-49.
Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), 241-256.
Kangarluie, S., & Aalizadeh, A. (2017). 'The expectation gap in auditing. Accounting, 3(1), 19-22.
Kewell, B., & Linsley, P. (2017). Risk tools and risk technologies. The Routledge Companion to Accounting
and Risk, 15.
Knechel, W., & Salterio, S. (2016). Auditing:Assurance and Risk (fourth ed.). New York: Routledge.
Lessambo, F. (2018). Audit Risks: Identification and Procedures. Auditing, Assurance Services, and
Forensics, 3(1), 183-202.
Meroño-Cerdán, A., Lopez-Nicolas, C., & Molina-Castillo, F. (2017). Risk aversion, innovation and
performance in family firms. Economics of Innovation and new technology, 1-15.
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Saeidi, F. (2012). Audit expectations gap and corporate fraud: Empirical evidence from Iran. African
Journal of Business Management, 6(23), 7031-41. Retrieved from search.proquest.com
Werner, M. (2017). Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, 25, 57-80.
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