QUESTION 3

One of the responsibilities of management is to ensure the organisation has an effective system of internal control.

Required

(a) What do you understand by internal controls?

(b) State and explain five different types of internal control on which the auditor may wish to place reliance.

(c) Internal controls are not solution for all the ailments of an organization. State four limitations of internal controls.

(d) The following procedures for handling of cash remittances from customers are in effect at DEF Limited.

Incoming mail is opened in the mailroom, and all letters which include remittances are forwarded to the cashier. The cashier restrictively endorses all cheques and prepares an adding machine tape of them. The cashier prepares a remittance advice when the customer does not return the DEF remittance advice sent to the customers with monthly statements, unless the customer's cheque was accompanied by a customer-prepared document which could be used as a remittance advice. The cashier prepares an adding-machine tape of remittance advices and agrees the total to the tape of cheques received. The cashier uses one adding-machine tape for the bank deposit-slip she prepares and delivers with the cheque to the bank by messenger. The cashier delivers the remittance advices together with the second adding-machine tape to the debtors-ledger section where they serve as a source for posting to the accounts of individual debtors. The cashier prepares a memorandum listing of the receipts for the day which she delivers to the general-ledger section. The debtors-ledger section advises the general-ledger section of the total daily credits posted to the individual accounts of debtors in order that this total can be posted to the credit of the control account for debtors in the general ledger. This total can also be agreed with the total supplied by the cashier.

i. Describe any weaknesses in internal control surrounding cash receipts, and suggest two recommendations which you could make to the client, either one of which would eliminate these weaknesses.

ii. What are the possible effects of these weaknesses in internal control?