Auditing and Assurance: Internal Controls and Deficiencies Report

This report provides an in-depth analysis of auditing and assurance principles, focusing on the internal control systems of a store. It examines various controls implemented for sales and cash receipts, including authorization, recording of transactions, physical controls, segregation of duties, and supervisory controls. The report details the controls in place to ensure efficient transaction processing and the safeguarding of assets. It also identifies deficiencies in the existing controls, such as the absence of duty rotation and an internal audit department. Furthermore, the report evaluates specific transaction scenarios, highlighting missing controls and unmet audit objectives related to sales, purchases, inventory, and cash handling. It suggests corrective actions and additional controls to strengthen the internal control environment, ensuring the accuracy of financial records, preventing fraud, and promoting operational efficiency. The conclusion emphasizes the importance of a robust internal control system and the selection of appropriate controls for effective business operations.

Running head: AUDITING AND ASSURANCE 1
Auditing and assurance
Student Name
Institution

AUDITING AND ASSURANCE 2
Introduction
Auditing and assurance refer to the independent examination of financial statements and
other related financial records. The main purpose is usually to ensure that the business
transactions are carried out according to the set policies and procedures so that it can run
smoothly and efficiently. The business should set in place internal controls that will ensure the
management policies are followed, and any deviations are corrected using the right measures
(Feng, et al.2014). The internal controls ensure the business assets are protected, prevent and
detect errors and fraud, ensure completeness and accuracy of the accounting and transaction
records and to ensure financial records are prepared in time.
A
The store has put in place various controls to ensure sale transactions are carried out well
to the satisfaction of the store owner and the customers. The first control is authorization and
approval. Before sale clerk can issue any commodity on credit basis, the supervisor authorizes
and approves such transaction. This helps the store to deal with bad debts which occur due to
issues products to customers who are not credit worthy. The second control is the recording of
transactions. The store efficiently records the sale transactions well. The store has pre numbered,
three copy multicolored receipts. In case of credit transaction, one receipt is given to the
customer, the other one is kept by the sales clerk, and the other one sends to the cashier for
reconciliation purposes. The third control employed by this store is physical controls. The store

AUDITING AND ASSURANCE 3
management has located the cash register at the entry of the store to prevent theft of the clothes
from the store.
The fourth control implemented by the store management is segregation of duties.
Various duties in this store are performed by various employees. There is no particular point
when one employee is responsible for initiating and completing the transaction, for instance, the
sale clerk initiates the transaction, the gives the receipts and invoices to the cashier. The
supervisor of the store oversees packaging of the clothes into boxes to ensure no extra clothes are
sold without being accounted for and that the packed clothes have being invoiced well by
confirming the price tags. The last control employed by this store is supervisory controls. The
store is run by a responsible supervisor who has been employed in the organization for over ten
years. The supervisor ensures that day to day activities are run according to the set management
policies and reports any unusual transactions to the store owner for necessary actions.
B
The store has also put in place controls that will safe guard the cash related transactions.
The first control is the segregation of duties. In this store, the sale clerk initiates transactions and
then gives the invoices and the cash to the cashier. The accountant does not handle cash in this
store. The supervisor reconciles the transaction of each sale clerk, and after satisfactory
adjustments, the supervisor deposits the cash in the bank's lock box. The second control used is
personnel controls. The supervisor who has been employed in this store for the last ten years is
responsible for depositing cash into the bank's lock box. The owner of the store trusts the
supervisor and that is the reason he deposits the cash.

AUDITING AND ASSURANCE 4
The third control is the arithmetical and accounting controls. The accountant who is
responsible for entering the cash records into the computer system. The accountant then
compares the final output with the supervisor’s summary and sales clerks’ daily summary and
then reconciles the difference. The counter checking ensures that cash in not lost when being
handled by various personnel in the store.
The fourth control used is computerization of activities. The repetitive tasks in this store
are computerized to minimize errors that are associated with human mistakes due to being tired
or even losing concentration. The accountant at the end of each day is given summaries which
are counter checked then entered keyed into the computer. The computer then updates the
accounts receivables, inventory, and general ledger. This computerization improves accuracy and
minimizes chances of fraud occurring. The fifth control is the control of documents. The store
has a pre numbered sales slips. After the sale clerk prepares sales invoices in the triplicate copies,
he keeps one and gives the rest to the cashier. If it is a cash sale, the three slips are given to the
cashier together with the invoices. Documents are kept by the relevant personnel.
C
The available deficiencies in the sales and cash receipts are the store does not embrace
rotation of duties which is a very critical control. The other deficiency is that the store does not
give the staffs annual leaves to investigate them in their absence. The accountant should be sent
on a compulsory leave so that the integrity of their work can be ascertained (Toone, Rice, &
Piégay,2014). The store also does not have an internal audit department which is very critical in
strengthening the controls employed by the store.
8.26.

AUDITING AND ASSURANCE 5
1. Personnel controls were missing because the company did not employ competent
employees who can perform their duties well. Internal check systems are also missing that could
have checked for any errors in work done by other staff and this could have prevented the entry
of wrong detail in the master file. The objective of ensuring goods are sold at the authorized
prices and ensuring that all sales are recorded accurately and completely have not been met. This
can be corrected by controls such as routine test, having internal check system and supervisory
controls.
2. The absent controls are authorization and approval controls, recording of transaction
controls and personnel controls. The audit objectives not met are that ensure that purchase
invoices and purchase orders are required for all entries in the books, all the purchase invoices
should have numerical serial numbers and that all purchase orders and goods received notes
should be recorded on a daily basis. The control to rectify this is control of documents.
3. The missing controls in this transaction include personnel controls and segregation of
duties. The auditing objectives not met include ensuring that transactions are recorded in the
correct accounting period. This will ensure that the company has correct financial statements that
can be relied upon by investors when making decisions and that stock count takes place on a
regular basis to avoid inconveniences. Routine test controls and segregation of duties can be used
to rectify the problem.
4. The absent controls are supervisory controls, internal check system and control of
documents. The audit objectives not met are that the accounts payable system should ensure that
a valid receiving report number is provided before any transaction can be successful. The other
objective not met is that purchase order and receiving notes should be reconciled with purchase
invoices before any payments can be made. The other objective not met is that the purchase

AUDITING AND ASSURANCE 6
orders and goods received notes should be recorded on a daily basis to prevent paying for goods
which have not been received by the company. The controls that can rectify this kind of
transaction is internal check system and arithmetical and accounting controls.
5. The missing controls in this transaction are physical controls segregation of duties and
supervisory controls. The transaction related audit objectives not met is that the company should
have physical controls that will prevent loss and theft of the goods and inventory of the
company. Another objective not met is that goods being received should be inspected to ensure
they meet the required standard and that they are in correct quantity. The other objective not met
is that the company did not have counter checks that will ensure that the report forwarded to the
accounting department is correct. The other objective not met is that stock count should be done
on a regular basis and that accounting records should be reconciled with physical stock. The
controls that can be used to correct this transaction is physical controls, supervisory controls and
arithmetical and accounting controls.
6. The absent controls are physical controls and personnel controls. The transaction related
audit objectives not met include that the auditor should be present when the stock taking is taking
place to prevent poor description of stocks and miscounting. The physical count should be done
on a regular basis and that the goods received should be checked to ensure that they conform to
the ordered goods description. The controls to counter check this kind of transaction are physical
controls and internal check systems.
7. The missing controls are authorization and approvals and supervisory controls. The
transaction related audit objectives not met include ensuring that goods are sold at the authorized
prices and that day to day activities should be supervised by a competent supervisor who ensures

AUDITING AND ASSURANCE 7
juniors carry out their duties according to the set policies, prices, and procedures. The controls
that can be used include authorization and approval controls and supervisory controls.
8. The absent controls are the segregation of duties and internal check systems. The audit
objective not met include that independent person should ensure the arithmetical accuracy of
purchase voices, before paying the purchase invoices, the independent person should confirm the
existence of the vendors and that purchase orders and goods receipt note should be reconciled
with purchase invoices to avoid ‘ghost vendors in the vendor master file. The controls to prevent
this kind of transactions include segregation of duties and internal check system to prevent
inappropriate payments.
Conclusion
The business should at all times employ the internal control system that will help it in
ensuring that the company does not lose its valuable resources. The company should also ensure
that it provides the necessary control environment that will ensure the control systems work as
expected. The controls include personnel controls, physical controls, authorization and approval,
rotation of duties, segregation of duties, internal check system, the internal audit, organizational
charts, supervisory control and arithmetical and accounting controls. The company should
choose the most appropriate controls for its operations.

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References
Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over
financial reporting affect a firm's operations? Evidence from firms' inventory
management. The Accounting Review, 90(2), 529-557.
Toone, J., Rice, S. P., & Piégay, H. (2014). Spatial discontinuity and temporal evolution of
channel morphology along a mixed bedrock-alluvial river, upper Drôme River, southeast
France: Contingent responses to external and internal controls. Geomorphology, 205, 5-
16.