You have been assigned to the audit of Carson Ltd and are currently involved in

Question

You have been assigned to the audit of Carson Ltd and are currently involved in a review of control procedures in the cash disbursements area. As part of your review you have noted the following procedures:

1. A pre-numbered cheque requisition is prepared by the clerk for all payments

2. The cheque requisition requires the clerk to indicate that he has performed the following procedures for each payment: Checked the additions on the invoice, Ensured that the details on the invoice have been matched to a delivery note by the warehousing department , Ensured that a valid purchase order exists for the goods

3. The cheque requisition with supporting documentation (invoice and any other relevant correspondence) is forwarded to the financial controller for approval

For each of the three (3) controls identified above:
1. State what the control is designed to prevent or detect
2. State which assertion the control provides evidence for
3. Identify one procedure which could be used to test the control

Explanation / Answer

A pre-numbered cheque requisition is prepared by the clerk for all payments -

1. Control designed to prevent and detect - Documentation procedures (i.e., documents provide evidence that transaction has occured through pre-numbering the document)

2. Assertion the control provides evidence - Occurence and Existence (Proper documentation leads to evidence that transaction has occured which is related to entity)

3. One procedure which could be used to test the control - Check all cheques correspond with the payment made (i.e., bank statement)

The cheque requisition requires the clerk to indicate that he has performed the following procedures for each payment: Checked the additions on the invoice, Ensured that the details on the invoice have been matched to a delivery note by the warehousing department , Ensured that a valid purchase order exists for the goods -

1. Control designed to prevent and detect - Segregation of Duties (When one person is responsible for all the work, the chances of irregularities and errors occur)

2. Assertion the control provides evidence - Completeness and Accuracy

3. One procedure which could be used to test the control - To understand the process, one sample should be choose and design effectiveness of the process. Subsequently, pick few samples depending on the population and check whether their operative effectiveness is as per the process described above.

The cheque requisition with supporting documentation (invoice and any other relevant correspondence) is forwarded to the financial controller for approval -

1. Control designed to prevent and detect - Approving Authority

2. Assertion the control provides evidence - Authorization (Means cash disbursement should be approved by proper level of management

3. One procedure which could be used to test the control - Categorization of cheque requisition with respect to different amount and every sample picked up should be approved with proper level of management.

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