Test Of Controls And Audit Procedures: Three Case Studies

Definition of test of control in auditing

A report has been prepared on the test of controls and the audit procedures as per New Zealand Auditing standards being implemented by the company in different circumstances and how the internal control of the company plays an effective role in the proper management of the company. Three case studies have been given and for each one of them the requisite test of control, the substantive procedure to be employed and the inefficiencies in the internal control have been pointed out. A test of control may be defined as the audit procedure to test the effectiveness of the internal control of the entity as to how it prevents and detects the material misstatements, errors and frauds (Belton, 2017). Based on its results, the auditors may or may not opt to rely on the same and then apply the requisite audit procedures. The audit procedures can be in the form of observation, documentation, inquiry, confirmation, etc.

1. In the given case, there are a lot of deficiencies in the wages system of the Brown Co. Some of them are listed below:
2. Each of the employee enters their unique number in the keypad, with this there is a chance of proxy attendance in case somebody is not monitoring the same. One person may enter the attendance for other employee number as well(Alexander, 2016).
3. The supervisor gives the temporary employee number for the new employees and this may create mismatch and issues in attendance in case same temporary employee number is given to two or more employees in the given period.
4. The two staff from the wages department are authorised to make the changes in the computerised system with respect to holidays, illness and setting up and maintenance of the records. This may lead to serious discrepancies and irregularities in case these two employees use unfair means and edit the attendance records unethically(Werner, 2017).
5. Once the computerised wages system calculates the gross pay, net pay and the deductions, there should be a person who validates the same and then passes the same for final payment but in the given case, automatically it is paid to the employees in their bank account. Due to this, if at all there is any system issue, the same would not be corrected and the salary would be wrongly processed.

Due to all the above-mentioned factors, there might be deficiencies and irregularities in the processing of the wages and there are huge chances of manual manipulation of the employee master, attendance and wages data.

1. For the deficiencies pointed out above, one of the measures or the internal control that would be effective in overcoming all the deficiencies are as follows:
   1. There should be a card swiping system or a biometric for the employee’s attendance with the chip in the ID cards, which would remove the deficiency of proxy attendance.
   2. The company should have the system of giving the permanent unique employee numbers to the new employee on the very first day and there should be no system of the temporary employee numbers as the same can create duplicate entries and unique numbers thus would help in avoiding reconciliation issues(Meroño-Cerdán, Lopez-Nicolas, & Molina-Castillo, 2017).
   3. No manual intervention should be allowed with respect to the leave correction, holidays and editing the attendance as there are higher chances of making advantage of the same and manipulating the employee records, therefore all these holidays and leave should be directly entered in system and approved by the respective managers.
   4. There should be a team of salary processing who cross checks the input and output of the system and validates and approves the same before any payment is made to employees in their bank accounts. This will avoid issues and errors, if any(Kewell & Linsley, 2017).

Thus, for each of the shortcomings mentioned above in the first part, a correction in the internal control and methods and processes is warranted which has been shown below.

1. The test of controls are the audit procedures that are being applied to check the effectiveness of the internal control within the organization as to whether there are still chances of misstatements and frauds or they are overtly effective. They serve as one of the most useful tool for audit planning(Kangarluie & Aalizadeh, 2017). The substantive audit procedures are one of the audit procedures being applied by the auditors to collect the audit evidences and check the accounts of the entity. It aims to do vouching on the incomes and expenses and the verification of the assets and liabilities in order to collect sufficient and appropriate audit evidences to give the audit opinion.
2. In the given case, the audit of the company Metco that has been trading for last 50 years is being done. The trade payables have decreased from $974564 in 2017 to $567000 in 2018. The substantive audit procedures in this regard and the objective of each of the procedures has been stated below:
3. The validity of the opening balances needs to be checked if the same has been correctly brought down to current year and also the trial balance needs to be taken from client and the balance of the payables needs to be checked with the general ledger.
4. The vouching of the purchase bills and invoices must be done for the selected auditors with the help of necessary supporting(Chron, 2017).
5. Reconciliation of the liabilities with the monthly statement of the creditors as well as confirming the account balances with the creditors directly.
6. Perform various analytical audit procedures with respect to accounts payable and all the other related accounts. This includes variance analysis and trend analysis, outstanding analysis, ageing analysis.
7. The presentation in the balance sheet and the disclosure of the same in the notes t accounts should also be checked(Dichev, 2017).
8. For the substantive procedures mentioned above in part a, the purpose of each of the procedures is mentioned below respectively.
9. Checking the balance with trial balance helps in ensuring accuracy and valuation of the payables.
10. This helps in ensuring that the creditors do actually exist and thus confirming on the aspects of existence, accuracy, cut off, occurrence, valuation and obligation(Grenier, 2017).
11. Direct confirmation from creditors and checking of the monthly balances of the creditors statement will help in ensuring that there is a completeness in recording of transactions, the balances are matching, there are no reconciliation issues, the cut off has been taken correctly and that the valuation has been made appropriately. It also helps in ensuring that there is an existence of liability and no window dressing has been done.
12. The analytical procedures help in ensuring that the comments and reasons for any exceptional variance and onetime items are properly captured and are then disclosed in the financial statements(Lessambo, 2018).
13. This will help in ensuring that the disclosures are being correctly made and the users are not having any ambiguity while going through the financial statements.

1. With respect to the audit of South City, a construction company involved in the building of houses, offices and hotels, one test of control that should be applied is inspection of the stock and the inventory (all the finished goods, work in progress and the raw materials) in the warehouse. This test of control will help in ensuring that the stock in the books of accounts and that in the warehouse are same and equal and there is no discrepancy.

The substantive procedures, which needs to be applied here, is to observe the physical count procedure of the inventory. This will help in established if the method employed is correct and if there are any deviations or chances of frauds and errors. This will also help in checking what are the internal controls in this aspect (Knechel & Salterio, 2016). 

1. The four audit procedures that the auditor is expected to perform prior to attending the stock count at client’s premises are mentioned below:
2. Reconciling the inventory as shown in the trial balance and the ledger books and what has been carried down from the last years.
3. The auditor should also be reconciling the purchases of inventory from bills and whether the same has been completely recorded.
4. The cut off analysis needs to be done to check if after the cut-off date each month, any inventory has been taken in the books and what is the treatment of the same. The shipping transaction needs to be checked in this aspect(Fay & Negangard, 2017).
5. The auditor also needs to check on the internal controls as to how the inventory is procured and recorded in books and what is the policy of the company about the valuation of the inventory(Defond & Lennox, 2017). 

• The two deficiencies in the current inventory counting system along with the measures to be adopted to overcome the deficiency has been stated below:

1. Information in the stock count sheet is being recorded in pencil and therefore the amendments can be made later on, this might lead to frauds, errors and material misstatements in the future and anybody can manipulate the numbers later on so to avoid such situation, any input should be recorded with pen or in permanent ink(Saeidi, 2012).
2. At the end of the stock count, the stock taking sheets are not being signed therefore there is no such conclusive evidence as to who performed the stock count and on whom the responsibility is to be placed so going forward in order to overcome this issue, the stock sheet should be signed by the person doing the inventory count. 

References

Alexander, F. (2016). The Changing Face of Accountability. The Journal of Higher Education, 71(4), 411-431.

Belton, P. (2017). Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd. Retrieved from https://www.routledge.com/Competitive-Strategy-Creating-and-Sustaining-Superior-Performance/Belton/p/book/9781912128808

Chron. (2017). five-common-features-internal-control-system-business. Retrieved december 07, 2017, from https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html

Defond, M., & Lennox, C. (2017). Do PCAOB Inspections Improve the Quality of Internal Control Audits? Journal of Accounting Research, 55(3), 591-627.

Dichev, I. (2017). On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), 617-632. Retrieved from https://doi.org/10.1080/00014788.2017.1299620

Fay, R., & Negangard, E. (2017). Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, 38, 37-49.

Grenier, J. (2017). Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), 241-256.

Kangarluie, S., & Aalizadeh, A. (2017). ‘The expectation gap in auditing. Accounting, 3(1), 19-22.

Kewell, B., & Linsley, P. (2017). Risk tools and risk technologies. The Routledge Companion to Accounting and Risk, 15.

Knechel, W., & Salterio, S. (2016). Auditing:Assurance and Risk (fourth ed.). New York: Routledge.

Lessambo, F. (2018). Audit Risks: Identification and Procedures. Auditing, Assurance Services, and Forensics, 3(1), 183-202.

Meroño-Cerdán, A., Lopez-Nicolas, C., & Molina-Castillo, F. (2017). Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, 1-15.

Saeidi, F. (2012). Audit expectations gap and corporate fraud: Empirical evidence from Iran. African Journal of Business Management, 6(23), 7031-41. Retrieved from search.proquest.com

Werner, M. (2017). Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, 25, 57-80.