CASE STUDY 2

A proper understanding of internal controls is essential to auditors in order that they understand the business and are able to effectively plan and execute tests of controls and an appropriate level of substantive procedures.

You are the auditor of a small manufacturing company, Dinko, that pays Its staff in cash and by bank transfer and maintains its payroll on a small stand-alone computer.

Required:

(a) For the payroll department at Dinko, describe the:

(i) internal control objectives that should be in place

(ii) internal control environment and internal control procedures that should be in place to achieve the Internal control objectives

(b)For the payroll charges and payroll balances (including cash) in the financial statements of Dink:

(i) describe the external auditor audit objectives;

(ii) list the tests of control and substantive procedures that will be applied in order to achieve the audit objectives identified in (b) () above. (ACCA)