(a) New markets and products
(b) . Current and prospective financial requirements, and increased gearing
(c) Frequent change in accounting staff
(d) Transactions with related parties
(e) Increased gearing
(f) Inadequate security of IT system
(g) Entity may not have the personnel or expertise to deal with new products. Also there is increase product liability. Furthermore. the demand may not been accurately estimated.
(h) Loss of financing due to inability to meet requirements. Such factors may bring into question the validity of going concern assumption.
(i) Excessive stafftumover is an indication offrauds and errors (j) Transaction with related parties may be motivated for profiit sharing or events for fraud
(k) Increased gearing my be indication of going concern problem

Control risks

(a) Management is dominated by one person
(b) Manager remuneration is related to points
(c) Weak control environment. There may be greater intervention of manager to specify accounting treatment and greater manual intervention for data processing.
(d) Commission based on profits may have a temptation for the manager to overstate profits. In the absence of audit committee, the evaluation of manager’s attitude is difficult.
(e) Weak control environment may adversely affect internal controls as the data and transaction files are exposed to improper changes or by allowing unauthorized transactions to be processed.
f) Trading on internet
Increased control risk because: (i) system breakdown may have impact on going concern (ii) frauds are more common due to complexity (iii) failure of internet service provider (iv) spread of virus (v) some of the employees or customers may discover how to circumvent the controls (vi) stolen credit cards
(g) Control accounts and subsidiary ledgers
Significant differences between controls accounts and subsidiary ledgers
indicate material misstatements in the financial statements
(h) No formal code of ethics. Manager suspects buyers for taking commission from suppliers

Purchases and payabies

Control weakness
Purchases orders are not always authorized
Consequences

Unauthorized purchases may be made resulting in over stocking of some items

Recommendations

In order to provide reasonable assurance that only authorized purcha are entered in the books, all purchases orders over an specified amo should be appropriately authorized

Control weakness

Goods achieved notes (GRNs) are not prepared

Consequences

1. Suppliers may be paid for good not received by the entity
2. Goods may be stolen and not accounted for
3. Supplier may supply excessive quantities than ordered or there be short delivers.
4. It would be difficult to maintain reliable perpetual inventory cards
5. Liabilities may be incurred but omitted from books

Recommendations

Controls over purchases will be improved if:

– Goods received are independently counted, weighed or measured and a GRN be prepared which should form a basis for entries in the receipt column of the inventory ledger card.

sales invoices should be independently compared with dispatch notes t,

Control weakness

Age analysis of debtors is not prepared.

Consequences

– Follow up of receivables is not effective
– Adequate allowance may not be made for doubtful accounts

Recommendations

– Monthly age analysis should be prepared, independently reviewed and overdue accounts be followed up
– Aging analysis should be considered in making allowance for doubtful accounts

Control weakness

Inadequate controls over collections from receivables

Consequences

Cash received form customers may be misappropriated

Recommendations

– Duties of mail opening should be rotated and segregated from functions of receivable ledger and cashier
– All cheques received should be crossed
– All remittance received through post should be listed in the mailroom immediately and deposited into bank promptly and intact
– Statement of account be mailed regularly
– The date when cash is received form customers and the date when cash is deposited into bank account should independently compared.

Payroll

Control weakness

– Time records and piece work are not independently compared with personal records and checked for arithmetical accuracy. Payroll summary is not independently verified.
– Details of employees left are communicated to payroll department through e-mail.

Consequences

– Dummy names may be entered on payroll
– Employees may be paid for work not done.

Recommendations

– Time records and piece work should be supervised by a responsible official and independently compared with personal records
– Payroll summary should be approved by a senior official
– Payments for overtime and payments to causal workers should be approved.
– Control shall exist to confirm that all e-mail sent are received by payroll department. This may be achieved by assigning serial numbers.

Cash payments
Control weakness

– Unused cheque books are not kept under lock and key
– Only one person signs the cheques
– Documents are not canceled by PAID stamp after payment

Consequences

– Unauthorized payments may be made
– Cash may be misappropriated

Recommendations

– Unused cheque books should be kept under lock and key At least two signatories should be required to sign the cheques
– At least two signatories should be required to sign the cheques
– Supporting document should be marked with PAID stamp after payment, to prevent misuse of documents

Fixed assets

Control weakness
Fixed assets register has not been maintained
Consequences

– Depreciation charge may be misstated. Depreciation may be charged on assets fully written off
– Fixed assets may be stolen

Recommendations

– A fixed assets register should be maintained with details of date of purchase, date or disposal additions, charge for the year. accumulated depreciation, date of disposal, additions, charge favour the year, accumulated depreciation, depreciation method. residual value, supplier, warranty, location
– Physical assets should be regularly compared with the fixed assets register (completeness)
– Items form fixed assets register should be regularly checked wi physical assets (existence)

We will be pleased to discuss contents of this report with you at yo convenience and, if requested, provide assistance in the implementation of our recommendations.

Best regards
AB&Co.
Chartered Accountants

Posted on November 3, 2015 in Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

Share the Story

Back to Top
Share This