Internal Controls, Strengths, Weaknesses, and Auditing Report

This report provides an in-depth analysis of auditing principles, focusing on internal controls within a company's sales activities and accounts receivable processes. The report is divided into two main parts: the first part addresses internal controls, examining the auditor's role in assessing risks and understanding the flow of transactions. The second part delves into the strengths and weaknesses of an internal control system, identifying specific controls such as pre-numbering of sales invoices and authorization processes. The report also highlights weaknesses like inappropriate sales prices and non-receipt of payments, along with their associated risks. Key financial report assertions are considered to mitigate risks. The report references several academic sources to support its analysis.

Running head: AUDITING
AUDITING
Name of the Student
Name of the University
Authors Note
Course ID

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Table of Contents
PART I: Internal Controls..........................................................................................................2
Answer to Question 2.............................................................................................................2
PART II: Strengths and Weaknesses of an Internal Control System.........................................2
Answer to Question 1.............................................................................................................2
Answer to Question 2.............................................................................................................3
Answer to Question 3.............................................................................................................4
Answer to Question 4.............................................................................................................4
Answer to Question 5.............................................................................................................5
Answer to Question 6.............................................................................................................5
References..................................................................................................................................6

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PART I: Internal Controls
Answer to Question 1
It is seen that the responsibility of the client’s financial reporting control is seen to
consider the control environment risk as per the assessment process, information system and
control activities related to the audit process. This particular aspect is further seen to be
related to the monitoring controls (Sun and Liu 2014).
Answer to Question 2
The auditor verifies the understanding of the overall risks of the process of the
company for selecting and testing of the controls which will be able to adequately answer the
risk of misstatement to each relevant assertion. Understanding of the flow of the transactions
are depicted with relevant assertions. This is seen to include the transactions which are
initiated, authorized, processed, and recorded appropriately. The understanding is further seen
to be conducive for identifying the potential misstatements and the factors related to the
unauthorized acquisition use of the assets of the company. The auditor needs to also
understand the way IT affects the company’s flow of the transactions (Boritz, Kochetova-
Kozloski and Robinson 2015).
PART II: Strengths and Weaknesses of an Internal Control System
Answer to Question 1
The three internal controls in the Caroma’ sales activities and accounts receivable
areas are seen with:
 Pre- numbering of the sales invoice and producing more copies only based on it. Use
of the sales invoice to make an entry in the sales journal and update the same in

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accounts receivable subsidiary ledger is seen to be conducive in terms of accounts
receivable section
 Use of the sales invoice to make an entry in the sales journal and updating the same in
sales ledger. Two officers are selected to receive the payment of the customers, they
are responsible for checking the electronic bank receipts and record the receipts in the
prelist
 Sales return and allowances are processed after the authorisation of the financial
controller. The designated officers are responsible to match the receipts in terms of
the remittance advice and forwarding the same to the accounts receivable officer
(Cao, Li and Zhang 2015).
Answer to Question 2
 Pre- numbering of the sales invoice prevents any conflicts pertaining to future sales
returns which may take place due to excess quantity shipped, Excess quantity ordered,
Goods shipped too late or Wrong items shipped
 The preparation of the sales invoice has been able to ensure the maintaining
appropriate records which will be conducive in preventing any future possibility of
material misstatements
 Authorisation of the financial controller for the sales return and allowances are seen
to be based on control measures which will be able to match the relevant items put
forward for sales returns
 The updating the accounts receivable journal has been conducive to prevent any sort
of material misstatement in the which may take place in the accounts receivable
ledger
 Checking the electronic bank receipts and record the receipts in the prelist is seen to
be able to provide the assistance regarding the cash in bank and other liquid assets

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 Matching the receipts in terms of the remittance advice and forwarding the same to
the accounts receivable officer is seen to be helpful for recording the appropriate
remittance which are made in advance (Hines et al. 2015)
Answer to Question 3
The main assertions addressed with each control have been identified as follows:
 The necessary assertions need to be maintained as per making the necessary changes
in the sales invoice
 Sales journal and sales ledger needs to be addressed for making use of the sales
invoice
 The necessary adjustment for the sales return and allowances needs to be made in the
sales account and sales return account
 Accounts receivable subsidiary ledger needs to be updated appropriately for using of
the sales invoice to make an entry in the sales journal
 The electronic bank receipts and record the receipts in the prelist needs to be
maintained in the cash flow statement
 Remittance advice and forwarding the same needs to be ensured in the accounts
receivable (Guénin-Paracini, Malsch and Paillé 2014)
Answer to Question 4
The three internal control weaknesses in the processing of transactions of Caroma’s
sales and accounts receivable area are stated below as follows:
 Inappropriate sales prices, discounts and credits
 Sales being incorrectly recorded or not recorded
 Non-receiving of the payments (Rahmina and Agoes 2014)

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Answer to Question 5
 The account balance risk for sales prices, discounts and credits has been considered
with range of discounts offered without the management approval
 In case the sales were manually entered, there may be several instances associated to
prenumbering of the invoices
 The non-receiving of the payment is needed to ensure that the receivables are credited
and corrected on the customer’s account receivable (Amir, Kallunki and Nilsson
2014)
Answer to Question 6
 The key financial report assertion of the risk needs to be taken into consideration with
appropriate discounts and credits which will be prevent any instance of further
material misstatement
 The manual entry of the sales data need to ensure with maintaining an appropriate
Accounting Information System, this will be able to ensure proper numbering of the
invoices
 The non-receiving of payment needs to be maintained by issuing a continuous
reporting method which will be able to prevent any delay in the customer’s account
receivable account (van Buuren et al. 2014)

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References
Amir, E., Kallunki, J. P. and Nilsson, H. (2014) ‘The association between individual audit
partners’ risk preferences and the composition of their client portfolios’, Review of
Accounting Studies, 19(1), pp. 103–133. doi: 10.1007/s11142-013-9245-8.
Boritz, J. E., Kochetova-Kozloski, N. and Robinson, L. (2015) ‘Are fraud specialists
relatively more effective than auditors at modifying audit programs in the presence of fraud
risk?’, in Accounting Review, pp. 881–915. doi: 10.2308/accr-50911.
van Buuren, J., Koch, C., Amerongen, N. van N. and Wright, A. M. (2014) ‘The use of
business risk audit perspectives by non-big 4 audit firms’, Auditing, 33(3), pp. 105–128. doi:
10.2308/ajpt-50760.
Cao, L., Li, W. and Zhang, L. (2015) ‘Audit mode change, corporate governance and audit
effort’, China Journal of Accounting Research, 8(4), pp. 315–335. doi:
10.1016/j.cjar.2015.05.002.
Guénin-Paracini, H., Malsch, B. and Paillé, A. M. (2014) ‘Fear and risk in the audit process’,
Accounting, Organizations and Society, 39(4), pp. 264–288. doi: 10.1016/j.aos.2014.02.001.
Hines, C. S., Masli, A., Mauldin, E. G. and Peters, G. F. (2015) ‘Board risk committees and
audit pricing’, Auditing, 34(4), pp. 59–84. doi: 10.2308/ajpt-51035.
Rahmina, L. Y. and Agoes, S. (2014) ‘Influence of Auditor Independence, Audit Tenure, and
Audit Fee on Audit Quality of Members of Capital Market Accountant Forum in Indonesia’,
Procedia - Social and Behavioral Sciences, 164, pp. 324–331. doi:
10.1016/j.sbspro.2014.11.083.
Sun, J. and Liu, G. (2014) ‘Audit committees’ oversight of bank risk-taking’, Journal of
Banking and Finance, 40(1), pp. 376–387. doi: 10.1016/j.jbankfin.2013.12.015.

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