Stage Internal Control Examples Sample Tests of Controls

 Segregation of duties between:

o Order recording
o Order authorisation
o Despatch of goods
o Invoice preparation
o Handling of cash
receipts
o Ledger posting
Overall o Supervision o

 Test a sample of
sales orders for
evidence of
authorisation.
 Sales order should be authorised and  Review and test (e.g.
show evidence of authorisation (e.g. sales by re-performance)
manager's signature). the client's
 Sales orders are sequentially numbered procedures for
and regularly sequence checked to accounting for the
ensure completeness (i.e. pre-numbered numerical sequence
or generated in strict numerical of sales orders.
sequence).  Observe periodic
 An "open sales order" file should be review of open sales
maintained and periodically reviewed to order files.
ensure all orders are ultimately fulfilled.  Test a sample of
 Sales orders should be validated for price, sales orders for
quantity, goods availability and customer evidence of credit
Sales orders creditworthiness. approval.

Goods  Goods despatch notes (GDNs) should be  Test a sample of

despatches matched to authorised sales orders. GDN for evidence of
 GDNs are sequentially numbered and matching to sales
regularly sequence checked to confirm orders.
completeness.  Review and test the
 Proof of delivery (e.g. customer signature) client's procedures
should be obtained (e.g. on a copy of the for accounting for the
GDN). numerical sequence
 Sequentially numbered goods returned of GDNs.
notes should be used to ensure  Test a sample of
completeness of recording of sales sales invoices for
returns. evidence of proof of
delivery.
 Review and test the
client's procedures
for accounting for the
numerical sequence
of goods returned
 notes.

 Sequentially numbered sales invoices

should be used. Regular sequence
checks should be carried out to ensure
completeness.  Review and test the
 Sales invoices should be matched to client's procedures
GDNs and sales orders to confirm the for accounting for the
accuracy of product description and numerical sequence
quantity. of sales invoices.
 Arithmetic accuracy of sales invoices  Inspect a sample of
should be verified. sales invoices for
 Prices on sales invoices should be agreed evidence of
periodically against the authorised price authorised sales
list. orders and GDNs.
 Trade discounts applied should be agreed  Review a sample of
(e.g. to contracts with customers or sales invoices for
authorised price list) to ensure that the evidence of
Sales correct discount has been applied to the verification of
invoices quantity sold. arithmetic accuracy.

 Invoices should be "pre-listed" (e.g. in a  Review

sales daybook) to enable control accounts reconciliations of the
to be prepared and confirm completeness sales ledger control
and accuracy of postings to the account to the list of
customers' accounts in the sales ledger. customer balances
 A sales/trade receivables ledger control for evidence of
account should be maintained and the having been
balance reconciled monthly to a list of checked and agreed
amounts due from customers. (e.g. a signature).
 Monthly statements should be sent to  Observe preparation
customers and disputes handled and mailing of
Recording independently. monthly statements.

Cash  Where money is received by post, "mail-  Review and observe

receipts opening procedures" should include two the client's
staff members (segregation of duties). procedures for
 Cheques should be restrictively endorsed opening mail and
when received and a pre-listing of handling complaints
receipts prepared. and disputes about
 All monies received should be banked monthly statements.
intact on that business day.  Observe the
 Entries in the cash receipts book should preparation of the
be proved by regular (usually monthly) pre-listing of
reconciliations of the bank account cheques.
balance in the general ledger to the bank  Examine bank
statement. statements to verify
 Bank reconciliations should be reviewed that cash is
regularly by a responsible official deposited daily.
independent of the recording function.  Review the monthly
 bank reconciliations
for evidence of
review by a
responsible official
(e.g. a signature).

2. PURCHASES CYCLE

Stage Internal Control Examples Sample Tests of Controls

 Segregation of duties between:

o Purchasing
department
o Order department
o Bookkeeping
functions
o Inventory
handling
o Recording and
Overall payment o

 Orders should be requisitioned by  Verify authorisation of a

the user department and sample of purchase
authorised by the head of the requisitions.
department.  Test the sequence of
 Sequential numbering should be purchase requisitions and
checked for completeness. enquire into those
 A buyer should coordinate missing.
requisitions (to secure value for  Scrutinise all tenders
money). Selected tender should be received, where
authorised. applicable, in respect of a
 An economic order quantity (EOQ) sample of transactions
inventory system or checks on and verify the
physical quantities held (to prevent authorisation of selected
Requisitions "overstocking"). tender.

Purchase  Purchase orders should be raised  Verify authorisation of a

orders in an order (buyer) department sample of purchase
independent of all other orders.
departments.  Agree a sample of and
 Purchase orders must be agree purchase orders to
sequentially pre-numbered. Orders requisitions.
must be authorised and the  Scan the unfilled purchase
sequence periodically checked for order file for evidence of
completeness. review.
 Pending (unfilled) orders should be
reviewed regularly to ensure that
 purchasing requirements are met.

 Goods should be inspected on

receipt (product description,
quantity and quality) before  Test a sample of GRNs
acceptance. for evidence that goods
 Documentation accompanying were inspected when
goods received (e.g. the supplier's received.
despatch note) should be matched  Test a sample of GRNs
to a purchase order to confirm the for evidence that they
goods were ordered. (Note 1) were matched to a
 Sequentially numbered goods purchase order when
received notes (GRNs) should be received.
raised for all goods received and  Test sequence of GRNs
Goods periodically reviewed for and enquire into those
received completeness. missing.

 Invoices should be recorded

promptly (e.g. in the purchase
daybook) and sequentially
numbered on receipt.
 Invoices should be checked and  Test a sample of invoices
matched to the GRN and purchase for evidence of
order. recalculation and
 Performance of these checks matching to purchase
should be evidenced on each orders and GRNs (e.g.
Purchase invoice (e.g. by initials in a "grid look for initials on "grid
invoices stamp"). stamp").

 Examine a sample of
invoice batches for
 Batch control over input (i.e. a evidence of the use of
control total of a batch of invoices batch control totals.
is predetermined and agreed after  Review the monthly
processing) to ensure accuracy reconciliations of the
and completeness. (Note 2) purchase ledger control
 Maintaining a purchase ledger account to the trade
control account, reconciled payables listing for
monthly to a list of trade payable evidence of independent
balances and independently review.
reviewed.  Review the monthly
 Monthly reconciliation of balances reconciliations of the
in the trade payables ledger to balances in the trade
suppliers' statements (and payables ledger to
independent review thereof) to supplier statements for
ensure completeness and evidence of independent
Recording accuracy of postings of invoices. review.

Cash  The person who signs cheques or  Test sequence of checks

payments bank drafts should not be involved and enquire into those
 in the authorisation, recording or
custodial functions.
 Two signatures should be required
for larger payments.
 All cheques should be issued in
sequential order and their
sequence should be controlled.
 Unused cheque books should be
kept under lock and key.
 Spoiled or cancelled cheques missing.
should be retained.  Test a sample of cash
 No cheque or other payment order payments to supporting
should be raised without documentation (invoices,
supporting documentation, GRNs, purchase orders
including the invoice, GRN and and purchase
purchase order. requisitions). Look for
 Invoices and requisitions should be evidence of a "PAID"
stamped "PAID". stamp.
 The payments system should be  Review bank
supervised by a responsible official reconciliations for
who oversees and reviews monthly evidence of review by a
bank reconciliations. responsible official.
 3. PAYROLL CYCLE

Stage Internal Control Examples Sample Tests of Controls

 A record should be kept for each

employee containing, in writing, proof
of engagement, dismissal, changes in
pay rates, etc. Any changes in detail
should be evidenced in writing by a
responsible official.
 The payroll should be independently
scrutinised (e.g. month-on-month) to
identify any unexpected deviations.  Review a sample of
 A responsible official should employee files and
supervise the recording of payroll and verify that all
the regular discharge of payroll- engagements,
related liabilities. dismissals or status
 Segregation of duties between: changes are in writing
o Personnel and authorised by a
management responsible official.
o Payroll recording  Review payroll
o Cash payment documentation for
o Overall supervision evidence of
Overall of payroll system independent scrutiny.

 Safe custody and the restricted issue

of clock cards and security passes.  Observe the use of
 Supervision of employees as they time clocks.
clock in and clock out. (Note 1)  Examine a sample of
 All time records should be checked time records for
Clock cards and approved. approval.

Payroll  Details of new employees to be put  For a sample of new

preparation on the payroll should be authorised employees, verify the
(e.g. by the line manager or authorisation of details
department head). by the responsible
 All overtime hours should be official.
authorised before inclusion in the  For a sample of
payroll run. employees, examine
 Any sickness or holiday leave should overtime payments and
be authorised. sickness or holiday
 The payroll should be checked for leave for evidence of
accuracy of detail of names, hours authorisation by the
paid, rates of pay and calculations of responsible official.
gross pay by people independent of  Review payroll for
payroll preparation. evidence of accuracy
 A responsible official independent of check by people
 independent of payroll
preparation.
 Examine payroll for
evidence of approval
by signature of
responsible official.
 Verify that
the recording and authorisation documentation for
function should formally approve the starters and leavers is
payroll by signing it. independently
 Documentation of starters and leavers maintained and
should be independently maintained examine the
(e.g. by the HR department) and documentation for
periodically compared against the evidence of periodic
payroll. comparison to payroll.

 Where employees are paid in cash,

only the exact net payment amount
should be withdrawn from the bank.
 At least two people should prepare
wage packets before pay-out. Wage  Observe the
packets must be kept securely. preparation of wage
 Handing out of cash payments must packets.
be witnessed.  Observe payroll
 Receipt of wage packet must be distribution
evidenced (e.g. by employee's unannounced.
signature). (Note 2)  Examine a sample of
 Uncollected wages should be wage packets for
recorded, placed in safe custody by a evidence of receipt
responsible official and re-banked (e.g. employee
Cash payments after a reasonable period. signature).

 Control accounts should be

maintained for wages, salaries and  Examine a sample of
related taxes. tax liability payments
 Payments of tax liabilities (including for evidence of
social deductions) should be agreed agreement to source
Recording to the source payroll. payroll.
 4. INVENTORY CYCLE

Stage Internal Control Examples Sample Tests of Controls

 Segregation of duties between:

o Purchasing
o Receiving
o Inventory management
Overall o Despatch o

 See tests of control

related to goods
Goods  See internal controls over goods received received in the
received in the purchases cycle. purchases cycle.

 See internal controls

over goods
>Goods  See internal controls over goods despatched in the
despatched despatched in the revenue cycle. revenue cycle.

 Appropriate physical safeguards. For

example:
o Gate controls over
access to the warehouse
o Environmental controls
(e.g. controlled temperature,
fire alarms)
o Emergency equipment
(e.g. sprinkler systems)
o Security guards and  Observe and inspect
CCTV. physical safeguards.
 Periodic (at least annual) comparison of  Observe regular
goods on hand (as determined by physical inventory
physical count) with quantities shown in counts and perform
inventory records. test counts.
 Senior personnel should inspect inventory  Observe physical
for obsolete, slow-moving, damaged or inspection of
excess inventories. inventory by senior
 Raw materials, components, etc should personnel.
be transferred to production using pre-  Test sequence of
numbered materials requisitions, and materials requisitions
sequence checks should be performed and enquire into
periodically. those missing.
 Goods sold awaiting collection or delivery  Observe segregation
Inventory should be held securely designated of goods sold
(physical) areas. awaiting collection.

Inventory  GRNs and GDNs are used to update  Examine a sample of

records inventory records. GRNs and GDNs for
 GRNs and GDNs evidenced as evidence of
 processed (e.g. stamped) and filed possession.
numerically.  Review the
 Regular physical inventory counted, comparison and
compared "book" v actual quantities and reconciliation of book
investigated for discrepancies. v. actual quantities.
 5. Bank and cash cycle

Stage Internal Control Examples Sample Tests of Controls

 For a sample of cheques,

examine the supporting
 Standardised cheque requisition form documentation to verify
should be used. the use of the standard
 Cheques or bank drafts should be cheque requisition form
prepared only after all source and the independent
Request for documents have been independently approval of all source
payment approved. documents.

 Examine a sample of
 Suppliers' statements should be suppliers' statements for
reviewed and reconciled to accounts evidence of review,
Payment payable records before payment is reconciliation and
authorisation authorised. authorisation.

 See tests of control

 See internal controls related to cash related to cash payments
payments made in the purchases made in the purchases
Cash payments and payroll cycle. and payroll cycle.

 See tests of control

 See internal controls related to cash related to cash receipts
Cash receipts receipts from the revenue cycle. from the revenue cycle.

 Bank reconciliations should be

prepared regularly (at least monthly).  Inspect bank
 Bank reconciliations should be reconciliations and verify
Recording independently reviewed. an independent review.
 6. NON-CURRENT ASSETS CYLCE

Internal Control Examples Sample Tests of Control

 Confirm approval (e.g.

signed capex request
or board minutes) for a
 Annual capital expenditure ("capex") budgets and sample of material
material non-current asset acquisitions approved by the non-current asset
board of directors. acquisitions.

 For a sample of
material tangible
assets, review asset
register to confirm that
 Detailed asset register including asset description, it is up to date and
location, acquisition date, cost, includes all required
depreciation/amortisation method. information.

 Review asset register

for evidence of regular
physical inspection
(e.g. date of inspection
 Periodic inspection of assets and comparison with the and comment on
asset register. physical condition).

 Approval of useful lives and depreciation/ amortisation

methods used. 

 Regular maintenance and servicing by suitably

qualified engineers. 

 Review documentation
that shows that
 Adequate appropriate insurance (e.g. buildings against adequate appropriate
fire or flood, equipment against breakdown and insurance has been
vehicles against accidents). maintained.

 Safekeeping of documents of title (e.g. title deeds to

property kept by the bank, vehicle registration
documents kept in a locked safe). 

 Observe procedures
for recording physical
assets leaving or being
 Procedures for recording physical assets leaving or removed from
being removed from the client's premises. (Note 1) premises.