Auditing the Finance and

Accounting Functions
ACCT 1163
OPERATIONS AUDITING
Introduction

 The finance and accounting areas have long been the traditional domain of the internal
auditor.
 All operations have to be accounted for and so the operational areas of the organisation
involve interfaces with the accounts(e.g. in terms of operating costs, income levels, budget
and actual comparisons, and so on.)
Defining the Finance and Accounting
Universe
 functionally, based upon the discrete accounting departments that are in place (and perhaps as
recorded on the internal telephone list);
or
 in terms of the financial cycles, such as the revenue cycle, the expenditure cycle or the treasury
cycle.
We have chosen to use the functional approach to define the financial and accounting audit
universe, which gives us the following possible breakdown of the key functions, systems or
activities:
• treasury • payroll • accounts payable • accounts receivable • general ledger/management accounts
• fixed assets (and capital charges) • budgeting and monitoring • bank accounts and banking
arrangements
• sales tax (VAT) accounting • taxation • inventories • product/project accounting
• petty cash and expenses • financial information and reporting • investments.
CONTROL OBJECTIVES AND RISK AND
CONTROL ISSUES
 Control Objectives for Treasury
(a) To ensure that the organisation’s funds are appropriately managed with the aim of
providing adequate levels of working capital.
(b) To ensure that suitable and secure investments, financial instruments, etc. are utilised to the
maximurn benefit of the organisation and within the constraints of the prevailing laws and
regulations.
(c) To ensure that treasury staff are suitably experienced and qualified, and operate within the
limits of established policy and practices.
(d) To ensure that treasury activities are monitored as part of an overall view of risk
management.
(e) To prevent the processing of unauthorised and fraudulent transactions.
 Control Objectives for Payroll
(a) To ensure that only valid employees are paid and at the correct and authorised rate.
(b) To ensure that the calculations of all payments and deductions are correct and in accord with the
relevant taxation and other regulations and requirements.
(c) To ensure that all deductions are correctly disbursed.
(d) To ensure that unauthorised access to the payroll system and data is prevented.
(e) To ensure that all payroll transactions are accurately reflected in the accounting system.
(f) To ensure that regular and accurate management and statutory information is produced.
 Control Objectives for Accounts Payable
(a) To ensure that all payments are for valid and suitably approved creditor accounts for goods
and services actually received.
(b) To ensure that all payments are correct and accurately reflected in the accounting system.
(c) To ensure that the prevailing sales tax or VAT regulations are correctly complied with.
(d) To ensure that good relationships are maintained with key suppliers.
(e) To prevent the possibility of supplier or staff malpractice.
 Control Objectives for Accounts Receivable
(a) To ensure that all income generating activities are identified and accurately invoiced to
customers.
(b) To ensure that all invoices are paid and the income is correctly identified and accounted for
and reflected in the accounts.
(c) To minimise the extent of debt and provide for the prompt follow-up of overdue accounts.
(d) To maintain the integrity of the accounts receivable system and data.
 Control Objectives for General Ledger/Management Accounts
(a) To ensure that the general ledger and management accounts are accurate,
reliable, and appropriately reflect the structure and operations of the
organisation.
(b) To ensure that the accounting data is capable of meaningful and accurate
analysis in order to support management decisions and actions.
(c) To ensure that the accounting records are maintained in accordance with
the prevailing laws, regulations and professional good practice.
(d) To ensure that the accounting information can be used to generate all the
required statutory published accounting statements.
 Control Objectives for Fixed Assets (and Capital Charges)
(a) To ensure that assets are correctly and accurately reflected in the accounts.
(b) To ensure that all capital expenditure is justified and approved.
(c) To ensure that all assets are identified, recorded and regularly verified.
(d) To ensure that depreciation is appropriate and in accordance with both
company policy and the prevailing regulations.
(e) To ensure that all asset disposals and write-offs are valid, authorised and
correctly reflected in the accounts.
(f) To ensure that assets are appropriately protected and insured.
 Control Objectives for Budgeting and Monitoring
(a) To provide an accurate and reliable budgeting system as a means to ensure that agreed
financial and business objectives are achieved.
(b) To provide a realistic and accurate budgeting framework and plan which
accurately reflects the structure and operations of the organisation.
(c) To provide management with a means to monitor progress against financial targets.
(d) To ensure that variations, deviations and failures to achieve targets are
promptly identified for management action.
 Control Objectives for Bank Accounts and Banking Arrangements
(a) To ensure that banking arrangements and facilities are appropriate and adequate for the business.
(b) To ensure that all banking transactions are bona fide, accurate and authorised whenever necessary.
(c) To ensure that overdraft facilities are authorised and correctly operated within the limits defined by
management and the organisation’s bankers.
(d) To ensure that fund transfers and automated methods of effecting banking transactions are valid, in
the best interests of the organisation, and authorised.
(e) To ensure that the potential for staff malpractice and fraud are minimised.
(f) To ensure that all income is banked without delay.
(g) To ensure that banking charges are effectively monitored and minimised.
 Control Objectives for Sales Tax (VAT) Accounting
(a) To ensure that all valid input and output VAT is accurately identified at the appropriate rate,
recorded and reported.
(b) To ensure that the correct net value of VAT is either reclaimed or paid over and supported
by the relevant return.
(c) To ensure that the prevailing VAT regulations are correctly observed at all times.
(d) To ensure that the business remains correctly registered for VAT and correctly displays its
registration number on all relevant documentation.
 Control Objectives for Taxation
(a) To ensure that all tax affairs are appropriately planned and managed.
(b) To ensure that clear objectives are established in relation to taxation matters with a view to
minimising tax liabilities within the confines of the prevailing legislation and regulations.
(c) To ensure that all tax liabilities are accurately determined and supported by accounting data.
(d) To ensure that all required taxation returns are correctly completed and filed on time.
(e) To ensure compliance with all relevant taxation legislation and regulations.
(f) To ensure that allowances and concessions are identified, accurately assessed and accordingly
claimed.
(g) To ensure that all tax payments are suitably authorised.
(h) To provide management with adequate and accurate information on taxation matters and
liabilities.
 Control Objectives for Inventories
(a) To ensure that the accounting system and statutory accounts accurately reflect the value of current inventory
stocks.
(b) To ensure that all stock purchases, issues and other movements are valid and correctly reflected in the
inventory accounts.
(c) To ensure that stocks are correctly priced.
(d) To ensure that inventory values are periodically verified as correct.
(e) To ensure that all adjustments to stock valuations are suitably investigated and authorised.
(f) To ensure that inventory items utilised in production and customer sales activities are correctly charged out
of the inventory accounts and accounted for in target systems.
(g) To ensure that write-offs of excess, scrap or obsolete stocks are valid and authorised.
(h) To provide adequate accurate and timely management information.
 Control Objectives for Product/Project Accounting
(a) To ensure that all projects and product developments/launches are suitably authorised as
part of the strategic direction of the organisation.
(b) To ensure that the appropriate costing method is selected.
(c) To ensure that all the relevant costs are identified and accurately recorded.
(d) To ensure “local” factors are appropriately taken into consideration, such as market share,
price sensitivity, price controls, etc.
(e) To establish budgets based on reliable data and assumptions.
(f) To ensure that actual costs and progress are adequately monitored and that variances are
identified and acted upon.
(g) To ensure that actual sales or project outturn performance is monitored and managed.
(h) To ensure that the accounting system accurately reflects all the relevant economic events
associated with each product/project.
 Control Objectives for Petty Cash and Expenses
(a) To ensure that all expenses are valid and authorised.
(b) To ensure that all expenses are correctly identified, recorded and accurately reflected in the
accounting system.
(c) To ensure that all expense payments are in accord with company policy
and any relevant external regulations (e.g. for sales tax or VAT).
 Control Objectives for Financial Information and Reporting
(a) To ensure that management (and others within the organisation) are provided with accurate and
timely financial information to support their decision making and activities.
(b) To ensure that all the relevant financial reports and returns are accurately prepared and
distributed to external bodies in accordance with the prevailing legislation, regulation and
contractual obligations.
(c) To ensure that accounting records and statements are correctly maintained and prepared in
accordance with the prevailing accounting standards and good practice.
(d) To ensure that all financial information is adequately protected from loss, misuse or
unauthorised leakage.
(e) To ensure that sensitive or confidential corporate financial information is adequately protected.
 Control Objectives for Investments
(a) To ensure that all investment decisions are adequately researched and authorised in
accordance with the established objectives.
(b) To ensure that investment commitments do not interfere with the required cash flow and
that sufficient working funds are maintained.
(c) To ensure that the timescale and liquidity implications of investments are adequately
considered and catered for.
(d) To ensure that invested funds and the income generated are correctly accounted for.
(e) To ensure that all relevant regulations, exchange controls and accountancy
standards are complied with.
(f) To ensure that investment documentation is adequately and securely stored.
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