ISA 400 Risk Assessments and Internal Control deals with internal control
objectives and internal controls. ISA 500
Audit Evidence deals with audit objectives and audit procedures. 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, 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, describe the:
(i) Internal control objectives that should be in place; (4
marks)
(ii) Internal control environment and internal control procedures that
should be in place to achieve the internal control objectives.
(6 marks)
(b) For the payroll charges and payroll balances (including cash) in the
financial statements:
(i) Describe the external auditor audit objectives; (4
marks)
(ii) List the tests of control and substantive procedures that will be applied in
order to achieve the audit objectives identified in (b) (i) above.
(6 marks)