QUESTION 1 (25 MARKS) While you were involved in the audit of your client White

Question

QUESTION 1 (25 MARKS)
While you were involved in the audit of your client White Cross (Pty) Ltd, the following policies, procedures and conditions exist:
1. There is strong segregation of duties in the inventory cycle between receiving inventory, its custody, the issue of inventory and the recording of all movement in the inventory records.
2. The board of directors and senior management meet every six months to identify the challenges facing the company and how successfully they are being addressed.
3. The company’s organizational structure is designed in such a way as to provide the board with a realistic chance of achieving its objectives on an ongoing basis.
4. The human resource department goes to great lengths to define the skills necessary for each job category and to recruit suitable personnel.
5. The financial director meets frequently with the financial accountant to ensure that information required to be disclosed by IFRS is properly accumulated, recorded and processed.
6. Access to the company’s network is controlled by the use of comprehensive logical controls, eg: user IDS’s, user profiles, passwords, and is granted on a need to know basis.
7. The recording in the general ledger of sales, purchases, etc, processed by the computer is achieved by passing journal entries. All journal entries are scrutinized and authorized by 2 senior financial accounting department employees.
8. All transactions keyed into the computer via terminals are subject to a wide range of input controls.
9. The internal audit department conducts frequent reviews of breakdowns in internal control and how these are corrected.
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10. To enter White Cross (Pty) Ltd’s computer facility, warehouse and processing plant, an individual must place his thumb on a biometric scanner.
YOU ARE REQUIRED TO:
a) Briefly describe each of the components of internal control. (10)
b) Indicate to which component each of the policies, procedures or conditions listed in
points 1-10 relate. (10)
c) Explain the difference between an automated control and a manual control (1)
d) Suggest four ways in which computerization (IT) benefits a company’s internal control. (4)

Explanation / Answer

A) In an "effective" internal control system control system, the following five components work to support the achievement of an entitiy's mission, strategies and related business.

1. Control environment

2. Risk assessment

3. Control activities

4. Information and communication

5. Monitoring

This components work to establish the foundation for sound internal control within the company

B)

C) A manual system is like a bookkeeping system in which records maintainance is done by hand, without using a computer system or any automatic system. Automated system is a combination of both software and hardware which is designed and programmed to work automatically without the need of any human operator to provide inputs and instructions for each operation.

D) Internal control in a computerized environment which has two main catagories , they are application control and general control. The four benefits of computerization in a company's internal control are-

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