Internal control is a process set up by a companys board of directors or management, designed to provide reasonable assurance regarding the achievement of objectives in three categories.

Required:

(a) Identify the three categories of internal controls and explain which category is the auditors major concern. (4 marks)

(b) Management assertions are representations by management, explicit or otherwise, that are embodied in the financial statements. For each of the following examples of errors that may happen with regard to sales transactions, determine one key management assertion that is involved. (6 marks)

i) Goods shipped, sales not recorded

ii) Sales recoded, goods not shipped

iii)Goods shipped to a bad credit risk customer

iv) Sales billed at the wrong price or wrong quantity

v) Product line A sales recorded as Product line B

vi) January sales recorded as Decembers

(c) Management sets up internal controls to avoid the above errors. For each internal control procedure/activity listed below, identify the transaction error in (b) that the control activity should have prevented or detected. (5 marks)

i) Sales invoices used are prenumbered, the sequence is checked

ii) General ledger code checked for sales product lines

iii) The date of sales entry into the sales journal is checked to the shipping document date

iv) Credit files are updated for customer payment history

v) Sales orders are approved by the sales manager for accuracy