Exam Focus – June 2009 – ACC F8 (1)

Ok let start out the first posting of our exam focuses series.

Under your examination syllabus, the following areas are considered as part of the internal control system, namely:
1. Revenue and receivables,
2. Purchases and payable,
3. Inventory,
4. Revenue and capital expenditure,
5. Payroll,
6. Bank and cash.

Under audit, you are not required to set up an internal control system. However you are required to check on the internal control system whether it is reliable or it is not reliable. On examining whether the internal control system is reliable or not it depend on the following three key factors namely:

1. Control environment
2. Control Procedure and
3. Control elements

Control Environment
Means the overall attitude, awareness and actions of directors and management regarding the internal control system and its importance to the entity. It encompasses management style, corporate culture, values, philosophy and operating style, the organizational structure, personnel policies and procedures.

Personnel policies and procedure, for example, would include those covering recruitment, retention and dismissal. The organizational structure should have clear lines of reporting responsibility, and the maintenance of an internal control function and audit committee demonstrates a commitment to high-level of control.

The control environment provides a background to detailed control procedures. It does not of itself, of course, ensure the effectiveness of the internal control system as a whole.

Control Procedures
Control procedures are those established to achieve the entity’s specific objectives. In an accounting context these objectives include the proper authorization, timely and accurate recording of transactions in the correct period, the safeguarding of assets and ensuring the existence of assets recorded. They include particular procedures to prevent, detect and correct errors. They differ from entity to entity and are affected by the size of the entity
(You are required to read further on the above topics)

Now the most critical part to understand is the control elements. Control elements mean the “control action” that should exist within the internal control system. Without such control elements in the system, the control will not be effective.

In short these control elements are PAPAMOSS_PR
1. Physical security
2. Arithmetic
3. Personnel
4. Authorisation
5. Management
6. Organization
7. Supervisory
8. Segregation of duties
9. Pre-numbered documents
10. Recording

(You are required to read further above control environment and control procedure)

The most common use elements are physical security, arithmetic, authorization, supervisory, segregation of duties, pre-numbered documents and recording.

For example:
Cash control system: if there is no physical security control on cash, the cash will easily be stolen

urchase control system: if there is no proper authorization procedure item purchase might be improper

Arithmetic: if the figure calculated is wrong how to we ensure earnest of the recording?
Therefore students must understand each and every control elements before going further on the topics of internal control system. Get yourself familiar and revise with it.

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