Audit and

Financial Control
 Audit

Internal Controls

Internal External Purpose

Components

What is Audit? Responsibilities

an official inspection of an organization's accounts

or matters typically by an independent body.
Internal Control
A process to ensure:

➔ Reliability of financial
statements
- Accuracy and completeness of accounting
records
- Timely preparation of reliable financial
information

➔ Effectiveness and efficiency of

operations
- Safeguarding assets
- Orderly conduct of business
- Detection of fraud and errors
➔ Compliance with laws and
regulations
Example:
- Physical control (lock and key) in the
store or warehouse
- Periodic inventory counts to ensure the
stock levels physically match the books
 Internal Check
An element of internal control:

➔ No task is performed by a single

person from start to finish

➔ Work performed by each person

Example: is counter-checked by another
- No single individual to count the
physical stock in the warehouse
Components of Internal Control

Controls

Non-
Existent
Existent

Effective Ineffective Obsolete Process

Components of Internal Control
The control Risk Information Control Monitoring
environment assessment system activities of controls
process

The overall attitude Process of identifying - Identify and ACCA MAPS - Assessing the
of the management and responding to record all - Authorisation quality of
Cultural norms and risks transactions - Comparison internal
values of the - Proper - Computer Controls controls over
organisation - Identification classification - Arithmetic controls time
of risk of transactions - Maintaining trial - Redesigning if
- Checking - Proper balance & CAs needed
significance monetary - Accounting
- Possible values Reconciliations
frequency - Correct - Physical Control
- How to accounting - Segregation of
manage period duties
- Proper
financial
statements
Components of Internal Control

The control Risk Information Control Monitoring

environment assessment system activities of controls
process

Controls

Non-
Existent
Existent

Effective Ineffective Obsolete Process

Other Types of Controls

Preventive Detective Corrective

Controls Controls Controls

- To prevent the error or - To detect if fraud or error - To rectify the problems if

fraud from happening has been committed already occurred
- E.g. Authorisation of - E.g. reconciliations - E.g. management action
transactions by checking and follow up procedures
required documents
Information Technology & Internal Controls
Financial Controls
Used to check financial data

IT Based Ledger facilities

Operational Controls
Day to day operations

Automated order
processing system
General Controls Application Controls
➔ Physical controls ➔ Completeness
➔ Hardware & Software ➔ Authorisation
configuration
➔ Identification
➔ Logical Access
➔ Validity
➔ Disaster recovery
➔ Forensic checks
➔ Output controls
➔ Technical support
Management Responsibility
- To establish proper internal controls
- Follow the requirement of the law
- Prevent and detect fraud or other irregularities

- Considering the changes in nature and extent of risks

- Scope of management in monitoring the risks
Tip
- Pointing out any significant failure in the controls Board of Directors
has the prime
responsibility to
ensure that proper
and effective
controls are in
place.
 Responsibilities

Assess the Effectiveness of

Risk Governance
Controls
Management Processes

01 01 01 The Internal Audit

 Differences b/w
Internal & External
Audit
Internal Auditing External Auditing

Role Advising management on internal controls Provide an opinion on financial statements

Legal Not legally required Legal requirement for large companies
Basis
Scope Determined by management (all areas of Determined by the auditor
organisation - financial as well as
operations)
Approach Assessing risks, evaluating internal Test underlying transactions that form the basis for
controls, test operations, make financial statements
recommendations

To advise and make recommendations To form an opinion

Responsibi
lity
Internal Audit -
Limitations
By the end of this section, your audience
should be able to visualize:

➔ Unavoidable independence
problem

➔ Requires staff and resources

➔ Ethical dilemma for reporting

identified fraud
External Audit - Advantages & Disadvantages

Advantages Disadvantages

- Dispute resolution as third party - Fee

- Facilitation in changes in ownership - Time and work hindrance

- Creditworthiness

- Advice to management
Internal Controls & Audit

External Audit Internal Audit

➔ Better internal controls ➔ To review the internal
reduce external systems
auditors testing
➔ Decisions and
➔ Substantive testing: to suggestions are based
check accuracy of on existing controls
statements
Fraud
Fraudulent Behaviour &
their prevention in business
Meaning of Fraud
An intentional act of deception to
gain illegal advantage.
Error: unintentional mistakes

Irregularity: something deviating from

rule or standard

Misstatement: something stated

incorrectly. May arise from error,
irregularity or fraud
 Examples of Frauds
By Management By Employees By Third Parties

❑ Financial statement
fraud
❑ Misappropriation of
• Sales ledger fraud
• False billing fraud
assets • Purchase ledger fraud
• Bank account fraud
• Skimming schemes
❑ False insurance • Advance fee fraud
• Payroll fraud
• Ponzi schemes
claims
❑ Using company assets
for personal use
 Indicating
Pre-Requisites
of Fraud Factors
❑ Management domination by one
● Dishonesty person
❑ Poor staff morale
● Opportunity ❑ Personnel who do not take a
leave
● Motivation ❑ Lavish lifestyle of employee(s)
❑ Inadequate segregation of duties
❑ Lack of appropriate control
systems
❑ Unusual transactions
❑ Disproportionate payments
 Creative Accounting / Cooking The Books /
Earnings Management
Window dressing involves misrepresentation of information, such as the entering into of transactions
before the year end that are often reversed out after the year end, the substance of which was
primarily to improve the appearance of the company’s financial statements.

Delaying an expense has an effect on the profit as it is shown less than actual and thus will have an
effect of lower tax paid than should be. Accelerating the expense will show increased profits than
actual.

Manipulation of revenue recognition; If a company is engaged on a long-term contract, they are

supposed to recognise the revenues from the contract on a reasonable basis as the contract is
fulfilled. It would be fraudulent to recognise all the revenue in the first year of the contract and none in
subsequent years.

A balance sheet is supposed to include all the assets and liabilities of the organisation. Off-balance
sheet accounting is the deliberate exclusion of certain assets and liabilities from the published
balance sheet, meaning that shareholders are mislead about the organisation’s financial obligations.
Exchange of ‘dirty’ money and assets
for ‘clean’ money that has no clear link
to the criminal activity.

- Money Laundering
 Money Laundering
Placement Layering Integration

❑ Placing ‘dirty’ money Transfer of money / asset

into legitimate between different Final stage – the money
now appears to come
business (e.g. locations to conceal the from a legitimate source
purchase of shares or original source
gold)
Money Laundering Legislation
Laundering
Money laundering is the illegal process of making large amounts of
money generated by a criminal activity, such as drug trafficking or
terrorist funding, appear to have come from a legitimate source. The
money from the criminal activity is considered dirty, and the process
"launders" it to make it look clean.
Failure to Report
Failing to disclose proof or suspicion of money
laundering – max 5 years prison & fine

Tipping Off
Disclosing information to influence investigation –
max 5 years and unlimited fine
 Control Procedures

- Identification of large or unusual transactions

- Scrutiny of unusual patterns of transactions
- Steps to identify customers
- Role of Money Laundering Reporting Officer (MLRO)
- Customer due diligence
Implications of Fraud to the Company

Loss of Shareholder confidence

Loss of assets

financial Difficulties

Collapse of the company

Fines, investigations by the authorities
Chapter End