August 2008 AUD L5 A DIRECTORS' SYSTEMS 1 Communication and information Risk assessment Control environment Control activities Monitoring Directors’ and control (cont.) The COSO model for IC

August 2008 AUD L5 A DIRECTORS' SYSTEMS 2 Directors’ and control (cont.) The COSO 2 model for IC

October 2008 AUD L9a IC 1 INCOME CYCLE Introduction 3 Control Activities (Procedures) DOCUMENTS COMPUTER controls ARITHMETIC REVIEW RECONCILIATION COUNTS EXTERNAL information ACCESS Authorisation Recording Custody 'CARDCARE' 'ARC'

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 4 Can the ‘audit trail’ be followed (both ways)? – FS  Assertion  ETB  NL  Prime books  Source documents – Source documents  Prime books  NL  ETB  Assertion  FS ‘Walk through’ tests

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 5 Do all recorded ‘control activities' (procedures) exist? – Examples of controls being: An authorisation of a sale, A check of a casting, A reconciliation of a control a/c… ‘Walk through’ tests (cont.)

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 6 Narrative notes Flowcharts ICQ’s – Internal control questionnaires Controls based ICE’s / ICEQ’s – Internal control evaluation (questions) Risk based Recording systems

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 7 ICQ’s A series of questions asking if expected IC’s exist – Written so that answers indicate if YES = a strong control if NO = a weak control All controls would be included An ICQ would usually be drawn up for each income and asset cycle – The major cycles are sales, purchases, wages, cash, inventory, non-current assets

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 8 ICQ’s (cont.) All appropriate internal controls should be included in an ICQ Each answer (yes or no) must be considered individually as (in terms of likely material misstatement) - – some controls are not as important as others – some may be irrelevant

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 9 ICE’s Rather than considering all expected IC’s, the ICE is based on the likelihood of error or fraud in each cycle – ‘Key (or control) questions’ are established Each key question has a supporting bank of detailed questions Some ICE’s are written so that answers indicate - – if YES = strong control – if NO = weak control

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 10 ICE’s An ICE too would usually be drawn up for each income and asset cycle Example (Sales cycle) – Objective: Are all sales invoices recorded? A key question in the sales cycle – Supporting question: Are invoices sequentially numbered?

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 11 Flowcharts Organisation charts Audit trail / information flowcharts Document (and control) flowcharts Systems (computer) flowcharts Boss Manager 1Manager 2PA

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 12 Flow charts for auditors - general rules No standardisation in auditing profession Main general rules – FLOWLINE DIRECTION – Non-standard SYMBOLS should be explained – GHOSTED SYMBOLS ( ) – NARRATIVE COMMENTARY – MOVEMENT is that of TIME (and SPACE)

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 13 One dimensional flow charts 1D charts move in time Ideal for systems based on algorithmic logic (computers) and simple auditing charts

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 14 Two dimensional flow charts 2D charts move in time & space Ideal for auditors, where IC evaluation is important Each ‘function’ (ordering, sales, goods in…) is laterally placed and internal controls identified

February 2007 AUD L6b/c SYSTEMS DOCUMENTATION 15 Two dimensional flow charts Time Ordering Sales Warehouse Accounts…

What Does Generally Accepted Accounting Principles - GAAP Mean? The common set of accounting principles, standards and procedures that companies use to compile their financial statements. GAAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information.

What Does Generally Accepted Auditing Standards - GAAS Mean? A set of systematic guidelines used by auditors when conducting audits on companies' finances, ensuring the accuracy, consistency and verifiability of auditors' actions and reports.