8.14 What is internal control? Why is it important?

8.16 What are the responsibilities of management and the auditor in relation to internal control?

8.19 Audit risk is said to be a function of inherent risk, control risk and detection risk. Explain audit risk. Define and differentiate between each of its components.

8.23 This chapter identified several categories of control activity, using the following categorisation: (a) Information processing controls:

1. General controls

2. Application controls (input, processing, output)

(b) Segregation of duties (c) Physical controls (d) Performance reviews

The internal controls in relation to payroll for Stent Ltd includes the following.

1. Employees are paid fortnightly and must complete online timesheet; standard hours are 76 per fortnight and any hours in excess of this require a supervisor to log on and approve the hours before the timesheet will be processed.

2. The payroll system takes the hourly rate from each employee's master file and multiplies this by the hours entered to calculate gross pay.

3. Payroll staff process fortnightly pay amounts; Human Resources department controls employee master file information.

4. PAYG and superannuation calculations are performed by the payroll system based on the calculations embedded in the software.

5. Only payroll staff are only able to log on to the payroll system and this access is restricted to only those computers in the Payroll department.

Required Indicate the category of control activity and related financial statement assertion for each of the above.