UNIVERSITY OF THE GAMBIA

AUDITING 2 ASSIGNMENT

NAME:

MUHAMMED LOUM

MAT#: 22124343

Lecturer: MR HARUNA FATAJO

Table of content

 Introduction

❖ Prepare a letter to Mr. Njie containing your recommendations for good internal control procedures for: Cheque payments & Petty cash
❖ Discuss the audit implications, if any, of the unwillingness of Mr. Jah to participate in the cheque signing procedures and petty cash function.
❖ Explain the limitations of internal control systems.
❖ Describe two advantages and two disadvantages of using narrative notes to document accounting and control systems.
❖ REFERENCE
Introduction

The first part of this briefing note has been prepared to in relation to some of the internal control procedures in our company and
recommendations. The other part relating to the notes include limitations to existing control mechanisms and other alternatives which might
enhance better audit functions.

1. "Internal control is a process, effected by an entity's board of directors, management, and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives relating to operations, reporting, and compliance.” .
…Committee of Sponsoring Organizations of the Treadway Commission, May 2013

The objectives of internal controls for cash disbursements are to ensure that cash is disbursed only upon proper authorization of
management, for valid business purposes, and that all disbursements are properly recorded.

While it is impossible to guarantee that these objectives will be met at all times for all transactions, the following practices provide
reasonable assurance that they will usually be accomplished.

Segregation of Duties

Segregation of duties means that no financial transaction is handled by only one person from beginning to end (University of Pennslvania,
2020). For cash disbursements, this might mean that different people authorize payments, sign checks, record payments in the books, and
reconcile the bank statements. If the organization is a small in size in term of human capital, possibly one staff person, this principle can be
hard to put into practice. You might consider having one person, such as the paid staff member, sign checks and assign a different person,
such as the board treasurer, to review disbursements, bank statements, and canceled checks on a monthly basis.

Authorization and Processing of Disbursements

You will want to develop policies regarding who in your organization can authorize payments. Some organizations designate this function
solely to the executive director to ensure that a single person is paying attention to monies going out of the organization. In other cases, a
department head might authorize purchases for that department, as long as they are within the department's budget. In most organizations,
once the board approves the budget, it does not need to authorize individual purchases within that budget. However, unbudgeted purchases
would require additional approval. Also, in very small organizations, the board treasurer or board president may be asked to authorize all
purchases. Even larger organizations have policies requiring the board to authorize significant expenditures, such as purchases for computers
or other assets. It is important to agree and formally define what constitutes a significant expenditure and how these purchases will be
handled.

Cheque Signing

In many cases, it is useful to require two signatures on cheques, especially for purchases over a certain amount. Even though cheques require
two signatures, three or four people might have cheque signing authority to ensure that two signers are available to make disbursements.
Since there are four directors this will assuage the pressure on your time at most two can be available at any point in time to sign cheques.
The number of authorized signers should be kept to a minimum and each classified accordingly with a manadate, while ensuring that daily
business is not unnecessarily hampered.

The purpose of this internal control is to make sure that there are deliberate decisions made about who to pay, how much to pay, and when to
pay bills. If more than one signer is not regularly available, and this inhibits your ability to meet your obligations, you might consider having
a call current account. This means that the board establishes a policy regarding the amount of money which can be available in the current
account at any one time, say D1500. All other money is kept in a separate account which the cheque signer does not have access to. The
cheque signer is allowed to pay bills until that amount is substantially depleted. At that time, the treasurer or other board members may
review the disbursements and make sure that they are within the guidelines established by the board. Once these disbursements have been
reviewed and accepted, the authorized board representative then transfers enough money to bring the current account back to its maximum
balance.

Petty Cash

•Petty cash should be kept in a locked, secure place. Access to the petty cash fund should be restricted to the custodian and a back-up person.
Petty cash should be disbursed only by the custodian (or a back-up person in the custodian's absence).
•Original receipts should be required in order to disburse petty cash. The original receipts should be approved and signed by an appropriate,
authorized individual, such as the supervisor of the person to be reimbursed. The following information should be noted on the original
receipt: what was purchased (if not obvious on the receipt), the business purpose, and account and fund to be charged. Receipts should be
maintained in the petty cash fund box for reconciling.

•The petty cash fund should not be used for personal expenses, personal loans, or the cashing of personal checks.

•Petty cash should be reconciled periodically. The sum of cash on hand plus original receipts plus any outstanding reimbursements should
equal the original amount of the fund. The reconciliation should be completed by or verified by someone other than the custodian.

•Periodic, surprise counts of the petty cash fund should be performed by someone other than the custodian, such as a supervisor. These
periodic counts should be documented and the documentation maintained in conjunction with the record retention policy. In the event of an
unexplained petty cash shortage, see the section on “Suspected Theft or Misuse of Assets”.

•Managers should periodically review the need for petty cash funds. If funds are no longer needed, the fund should be closed. Contact the
Accounting Services Department to close funds or increase as and when needed.

Internal Control

Internal Audit plans and performs internal audits, and investigates financial irregularities. Internal audits assist management by providing
independent and objective analyses of activities and controls. Audit scopes can range from a single process to all business activities in a
division, department, or school. Internal Audit is not responsible for internal controls, but plays a significant role in recommending controls
and providing consultation and advice on controls.

Components of Internal Controls

Internal Control consists of five interrelated components derived from basic processes as follows:

Control Environment – The core of any financial institution is its people. They are the engine that drives the organization. Their individual
attributes (integrity, ethical values and competence) and the environment in which they operate determine the success of the institution.

Risk Assessment – the organization need to be aware of risks surrounding it. They must set objectives that integrate key activities so the total
organization operates in concert. They also must establish mechanisms to identify, analyze, and manage the related risks.

Control Activities – Control policies and procedures must be established and executed to help ensure that actions necessary to achieve the
institution’s objectives are effectively carried out.

Information and Communication – Surrounding these activities are information and communication systems. These enable the
organization’s people to capture and exchange the information needed to conduct, manage, and control its operations.

Monitoring – The entire process must be monitored and modified as necessary. Thus, the system can react dynamically to changing
conditions.

…Committee of Sponsoring Organizations of the Treadway Commission, May 2013

2. Control Environment:
Internal Audit plans and performs internal audits, and investigates financial irregularities. Internal audits assist management by providing
independent and objective analyses of activities and controls. Audit scopes can range from a single process to all business activities in a
division, department, or school etc.

Limitations of internal controls:

1. Automated controls
For many audit teams there is still a tendency to audit ‘around’ computer. There are sentiments that suggest dependency on manual controls,
which have many duplicative manual processes that form part of the internal control framework to ease implementation rather than
automated controls. Entities with increasing volumes of data need to successfully manage and implement automated controls for purposeful
audit procedures at any point in time.

2. Changing working environment

In the simplest term it means entities are challenged even with the basic things like segregation of duties; whereas the absence of an
employee from workplace can lead to breach of internal controls if opportunities prevail to do so.

Data integrity and confidentiality are no longer functions of physical controls, for example being in an office and connected to a network,
rather they are logical controls of authentication, virtual private networks, and encryption. Some of our bases of confidentiality have
changed. Many traditional (and perhaps more manual) controls are now no longer effective. Automation is a necessity.

3. Skill sets
As internal control continues to transform, so the skill sets of those charged with it need to expand. An appreciation of technology and data
are no longer ‘nice to have’, rather, they are necessities (ACCA/PwC, 2021). The question of which skills should be developed to remain
relevant as acountancy and finance, internal audit or other professionals is one which indicate the level of the skill shortage and its impact on
project-related work.
Narrative notes

Narrative notes consist of a written description of the system; they would detail what occurs in the system at each stage and would include
any controls which operate at each stage. Advantages of this method include:

– They are simple to record; after discussion with staff members, these discussions are easily written up as notes.

– They can facilitate understanding by all members of the internal audit team, especially more junior members who might find alternative
methods too complex.

Disadvantages of this method include:

– Narrative notes may prove to be too cumbersome, especially if the ad,ministrative and distribution system is complex.

– This method can make it more difficult to identify missing internal controls as the notes record the detail but do not identify control
exceptions clearly.

Other alternative methods

Questionnaires

Internal control questionnaires (ICQ) or internal control evaluation questionnaires (ICEQ) contain a list of questions; ICQs are

used to assess whether controls exist whereas ICEQs test the strength or effectiveness of the controls.

Advantages of this method include:

– Questionnaires are quick to prepare, which means they are a timely method for recording the system.

– They ensure that all controls present within the system are considered and recorded; hence missing controls or deficiencies are clearly
highlighted by the internal audit team.

Disadvantages of this method include:

– It can be easy for the staff members to overstate the level of the controls present as they are asked a series of questions relating to
potential controls.

– A standard list of questions may miss out unusual controls of entity.

Flowcharts

Flowcharts are a graphic illustration of the internal control system for the sales and despatch system. Lines usually demonstrate the sequence
of events and standard symbols are used to signify controls or documents.

Advantages of this method include:

– It is easy to view the sales system in its entirety as it is all presented together in one diagram.

– Due to the use of standard symbols for controls, they are easy to spot as are any missing controls.

Disadvantages of this method include:

– They can sometimes be difficult to amend, as any amendments may require the whole flowchart to be redrawn.
– There is still the need for narrative notes to accompany the flowchart and hence it can be a time consuming method.
References

ACCA / PwC. (2022, April 1). Finance Functions: Seizing the Opportunity. Retrieved from https://www,aacaglobal.com/gb/en/proffesional-
insights/pro-aacountants-the -future/finance-functions-seize-opportunity

Committe of Sponsoring organization of the Treadway Commission. (2017). Internal Control- Integrating with Strategy and Performance.
Retrieved from https://www.coso.org/Documents/990025P-Executive-ummary-final-may20.pdf

Guide to Internal Controls. (2017, January). Washington University in St. Louis.

University of Pennslyvannia. (2020). Office of Internal Audit. Retrieved from https://oacp.upenn.edu/audit/audit101/internal-controls-

guidance/operational-internal-controls