COLLEGE OF BUSINESS AND ECONOMICS

SCHOOL OF ACCOUNTING
Department of Commercial Accounting

AUDITING AND INTERNAL CONTROL

AIC22B2

FINAL ASSESSMENT OPPORTUNITY

16 November 2017

Time: 3 hours Marks: 100

Assessors: B KUZWAYO & K MODISAGAE

Moderator: J MAMAILE (Internal)

INSTRUCTIONS:
 Please hand in the question paper with the answer sheet.
 This paper consists of 6 pages (including the cover page).
 Answer all questions.
 Start each question on a new page.
 Silent, non-programmable calculators may be used.
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -2-

QUESTION 1 [GREEN BOOK] THEORY QUESTION A

[30 MARKS – 54 MINUTES]

Internal Control is necessary for organisations to reach their goals and objectives and to be able
to address the various risks that arise.

REQUIRED:
1.1 Describe the ‘control environment’ and ‘risk assessment’ as components of internal
control. (10)
1.2.1 Describe the four characteristics of the Revenue and Receipts Cycle. (4)
1.2.2 Describe the purpose of the following functions in the Revenue and Receipts Cycle:
a. Ordering,
b. Warehouse & Despatch and
c. Credit Management. (6)
1.3 List the risks in the Receiving of Goods and the Recording of Purchase functions in the
Acquisitions and Payments Cycle. (10)

QUESTION 2 [ORANGE BOOK] THEORY QUESTION B

[20 MARKS – 36 MINUTES]

The Payroll and Inventory Cycles are central to an organisation because employees are an
invaluable asset to any organisation and inventory is at the heart of the organisation.

REQUIRED:
2.1.1 Discuss the differences between salaries and wages. (5)
2.1.2 List five (5) ways in which fraud can be performed in the Payroll Cycle. (5)
2.2.1 List five (5) actions that take place during a year-end inventory count. (5)
2.2.2 List five (5) risks in the Warehouse function in the Inventory Cycle. (5)

QUESTION 3 [YELLOW BOOK] INTEGRATION QUESTION

[10 MARKS – 18 MINUTES]

Integrated thinking requires that the financial accounting and the management accounting
aspects of the events that occur in the various cycles must always be taken into account. This
ensures that the accountant considers each matter and each even holistically and considers
appropriate action for each scenario.

REQUIRED:
Provide the accounting journal entries (including narrations) for the events below:

3.1 A debt of R10 000 owed by a customer has gone bad. (1)
3.2 There are suspicions that a customer that owes R6 000 may be in financial difficulty.
The company estimates that only R5 000 may be recovered from the customer. (1)
3.3 A company paid R1m gross salaries for the month and withheld employees tax of
R350 000 from it. The tax collected has not yet been paid over to SARS. (1)
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -3-

3.4 A company has collected pension fund contributions from employees. The amount
collected for this month was R120 000 and is now being paid over to the pension fund
administrator. (1)
3.5 A company purchases cleaning materials to the value of R13 000 for cash. Ignore Vat.
(1)

Define the following concepts:

3.6 Net reliasable value. (1)

3.7 Manufacturing overheads. (1)
3.8 Stock re-order level. (1)
3.9 Job costing. (1)
3.10 Variable costs. (1)

QUESTION 4 [YELLOW BOOK] APPLICATION QUESTION

[10 MARKS – 18 MINUTES]

Major League DJs (Pty) Ltd is a private company that specialises in hosting entertainment
events mainly in Gauteng. This year’s spring event is the traditional Major League Gardens
music concert that will take place in September at the Soccer City FNB Stadium. The event has
an exciting line-up of artists that will be performing. The main artist for this year is Dafita, a
leading artist from Nigeria. Many supporters are eager to hear him perform his hit song
“Paparazzi Follow You”.

The company has two executive directors and a team of 8 employees that handles various tasks
for the events. One director focusses mainly on sourcing sponsors for the event and the other
director mainly focusses on securing local and international artists to come perform at their
events.

The 8 employees focus on the following tasks: (i) venue booking, professional covering of the
field where applicable, and hiring of mobile toilets (ii) stage, sound and lights, (iii) flights,
accommodation and VIP transport for the artists (iv) media and publicity for the events (v)
ticket sales for events and sourcing of arm-bands for events (vi) security for events and
accreditation for artists, VIPs, journalists, etc., (vii) sourcing service providers for food and
drinks at the events (viii) a general admin person who performs various tasks as requested by
the two directors and the seven team members. All 8 team members where carefully selected,
they have many years of experience in the entertainment industry and a specialists in the tasks
they are responsible for.

The following events generally take place when preparing for a concert and likewise took place
in preparation for this year’s Major League Gardens music concert:

-Each team member decides which service provider (for sound, lights, security company,
mobile toilet company, etc.) is best to use for the event. The venue for the concert is always
decided on by the two executive directors.
-Each team member also has their own booklet of purchase order forms. The team member,
once decided which service provider to use, will send an order form to the supplier. Team
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -4-

members always make sure that they send their order at least two weeks before the date of the
event.

-Service providers are generally paid at the latest 3 days before the event and normally deliver /
install all items at the latest at the end of the day before the concert. The 7 team members
normally email a scanned copy of the order form to the admin person. He is the only employee
that makes payments from the company’s bank account. When he received an email from a
team member she ensures that she makes EFT payment as soon as possible.

-Order forms are however not sent to artists. The director responsible will sign a contract with
the artist’s agent and then send an email that has the amount that the admin person should pay
to the artist.

-The security personnel from the security company hired arrives on the morning of the day
before the event. They need to open the venue for all service providers. They will also be
present when deliveries / installations are made. They also guard the venue over-night to make
sure that nothing is stolen from the venue. They stay at the venue a day after the concert when
suppliers come collect their delivered / installed items.

-The seven team members normally arrive at the venue early (at 08:00 sharp) on the date of the
concert to ensure that everything was delivered / installed. Gates for the concert normally open
at 11:00.

-On a three monthly basis the admin person performs a bank reconciliation to monitor all the
monies collected from ticket sales and all expenses he paid for concerts for the quarter and
salaries he pays to all staff on a monthly basis.

REQUIRED:
You are required to identify ten (10) internal control weaknesses in the events above. Also
explain why the identified items are weaknesses. (10)

QUESTION 5 CYCLE DOCUMENTS

[30 MARKS – 54 MINUTES]

Cycle documents are important because they are an effective way of communicating information
from one person to the next and to ensuring that there is always a paper trail of events that took
place.

REQUIRED:
5.1 For each of the documents listed below you are required to indicate the cycle to which the
document belongs, indicate what information is communicated in the document and from
which function / party / person does the document flow and to which function / party /
person does it flow to. Very important: Please complete the table below, tear it out
and insert into your answer book
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -5-

Student Details
Surname & Initials
Student Number

Document Name Cycle (10 marks) Information (10 marks) From ----> To (10 marks)
Example: Revenue and States how much the customer owes for the From selling company (supplier) to
Invoice Receipts goods received the customer
a) Internal sales order

b) Remittance advise

c) Credit note

d) Requisition

e) Creditor’s
statement
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -6-

Student Details
Surname & Initials
Student Number

Document Name Cycle (10 marks) Information (10 marks) From ----> To (10 marks)
f) Deduction tables
and returns

g) Unclaimed wage
register

h) Clock card

i) Production report

j) Costing schedule
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -7-

Memo: Auditing and Internal Control (AIC22B2) Main Exam ---- Nov 2017

MEMO TO QUESTION 1 (Maximum 30 marks. One mark per fact)

Any valid argument or the student can consider the following in his/her answer:

1.1 Internal Control Components (max 10 marks):

Control environment (max 5 marks):

 Control consciousness of the entity created by those at higher level
within the organisation 
 Atmosphere created by seniors within the entity to ensure that controls
work. 
 Communication and enforcement of integrity and ethical values 
 Characterised by employees that are competent, knowing limits to
their authority, committed to do things the right way 
 Controls work well where employees and management act in a
straightforward manner. 
 Commitment to competence - Employees are assisted to be possess
the necessary knowledge and skills 
 Management philosophy / Participation by those charged with
governance: senior management through their actions should
demonstrate commitment to ethical behaviour and adhere to internal
control processes. 
 Organisational structure: A clear organisational structure should exist
indicating key areas / departments and how functions should be
executed. 
 Assignment of authority and responsibility: Controls work properly
where employees know exactly the authority they have and know
when to exercise it. 
 Human resource practices: Controls work properly in an organisation
where policies and procedures are in place in recruitment, training of
employees, fair remuneration, counselling exist. 

Risk assessment (max 5 marks):

• Controls work properly where the entity knows how to assess risks that
are faced and how to address these risks. 
• The risk assessment process involves:
* identifying business risks relevant to financial reporting objectives 
* assessing the likelihood and frequency (occurrence) of risks identified

* estimating the potential impact (significance of) if the risk was to
occur 
* deciding about actions to address the risks. 
* the appointment of risk committees and risk officers 
* the engagement of external risk consultants 
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -8-

* the use of risk models 

* regular meetings at divisional, departmental and sectional level to
consider the risks at those levels 
* strategy meetings involving senior management to assess risk at an
overall level. 
• Identify and assess the following risks:
• operational risks 
• financial reporting risks 
• compliance risks 

1.2.1 Characteristics of the Revenue and Receipts Cycle (max 4 marks):

• Variation: different enterprises offer a very wide variety of goods and
services and have varied sales channels (over-the-counter, telesales,
online sales, etc) 
• Cash sales: cash sales do not carry credit risk but have a risk of theft.

• Credit sales: credit sales have credit risk (risk that customers may not
pay and have to be written-off) . Checks of credit-worthiness are
thus important for credit sales. 
• Legislation: compliance with legislation governing sales  like the
Consumer Protection Act, National Credit Act, etc. is important! 

1.2.2 Revenue and Receipts functions (max 6 marks):

Order Department
• Receiving customer orders (by phone, fax, email, etc) 
• Authorising the sale: includes the confirmation of credit-worthiness /
credit availability before sale is processed 
Warehouse / Despatch
• Processing the order: picking goods from the stores to fill the order 
• Despatch: delivering the goods to the customer, hiring a delivery
company to do so, or customer collecting the goods 
Credit Management
• Evaluating creditworthiness: determine whether credit can be granted
to customer, how much credit, how long should repayment period be

• Collection of amounts owed by debtors. 
• Credit management should also identify debtors to be handed over to
lawyers  and subsequently written off if necessary. 

1.3 Acquisitions and Payments risks (max 10 marks):

Receiving of Goods (max 5 marks):
* acceptance of
-short deliveries as full deliveries 
-damaged and broken items 
-items not ordered 
-goods not of the required type or quality 
* goods received notes not made out accurately or completely 
* no goods received note made out 
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -9-

* theft by employees or outside parties, e.g. collusion with supplier delivery

personnel 

Recording of Purchase (max 5 marks):

* the recording of incorrect amounts arising from incorrect purchase invoices

-quantity, quality and type not as ordered or received 
-prices of goods not as quoted 
-calculation errors e.g. casts, extensions, VAT 
* the raising of fictitious purchases/creditors by the introduction of invoices
which are for goods never ordered or received by the company.  (Results in
invalid flows of cash leaving the company). 
* delays, misallocation and posting errors when entering details into
accounting records resulting in reconciliation problems and failure to make use
of favourable settlement terms 
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MEMO TO QUESTION 2 (Maximum 20 marks. One mark per fact)
Any valid argument or the student can consider the following in his/her answer

2.1.1 Differences between salaries and wages (max 5 marks):

 Salary is normally a fixed monthly amount while wages determined

based on actual hours worked 
 Salary employees don’t normally clock in and out while wage employees
have to clock in and out of the workplace 
 Salary employees not normally paid for working overtime while wage
employees paid for overtime hours 
 Salary payments normally made directly into employees’ bank accounts
while still a large number of wage employers who pay wages in cash 
 Salaries paid monthly while wages paid weekly 

2.1.2 Ways in which fraud can be performed in the Payroll Cycle (max 5 marks):
• The presence of cash used for wages results in the possibility of theft 
• Ghost employees can be created in the system and payments made to
fraudulent bank accounts 
• Abuse of employee benefits  like sick leave , travel allowances, 
claiming for personal expenses as if they are business expenses, etc.
• Clocking a card for a fictitious employee 
• Employees clocking for absent fellow employees 
• Employees clocking in and leaving the premises 
• Misappropriation of unclaimed wages 

2.2.1 Actions that take place during the year-end inventory count (max 5 marks):
• Observe inventory taking procedures for compliance to instructions 
• Walk through to identify damaged and obsolete inventory 
• Conduct test counts 
• Resolve discrepancies 
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -10-

• Test sequence of inventory sheets 

• Confirm inventory that was excluded 

2.2.2 Inventory Cycle risks (max 5 marks):

Warehouse:
* Goods received from suppliers are not transferred into the warehouse
timeously or at all (stolen) 
* Inventory (in whatever form) is stolen or lost 
* Inventory deteriorates in value due to
-inadequate physical controls, e.g. gets wet 
-its nature, e.g. foodstuffs, chemicals 
* No record is created of goods or components physically moved 
* The goods or components issued are incorrect resulting in lost sales or
production delays 
* Inventory shortages (including theft) are concealed. 
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MEMO TO QUESTION 3 (Maximum 10 marks. One mark per fact)
Any valid argument or the student can consider the following in his/her answer

Accounting journal entries (instruction to marker: award half a mark for each DR and
CR that is correct):
3.1 Dr. Bad debt written off R10 000
Cr. Trade Receivables / Debtors R10 000 
Bad debt written off

3.2 Dr. Provision for bad debts R1 000

Cr. Trade Receivables / Debtors R1 000 
Provision for a doubtful receivable

3.3 Dr. Salaries R1 000 000

Cr. Bank R 650 000
Cr. SARS Payable R350 000 
Salaries paid and employees’ tax withheld

3.4 Dr. Pension fund payable R120 000

Cr. Bank R120 000 
Employees’ pension funds contributions paid over

3.5 Dr. Cleaning materials R13 000

Cr. Bank R13 000 
Cleaning materials purchased for cash

Concepts definitions:

3.6 Net realisable value: The estimated selling price of inventory in the ordinary
course of business, less the estimated costs of completion and the estimated
costs necessary to make the sale.
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -11-

3.7 Manufacturing overheads: All indirect costs (labour, materials and other costs)
incurred in the production process. 

3.8 Stock re-order level: The minimum level of stock at which new stock should
be ordered when that level is reached. 

3.9 Job costing: A costing method used when unique items are manufactured;
where each item manufactured looks different to the others and also needs
different resources for its manufacturing.

3.10 Variable costs: Costs that vary in direct proportion to the volume of activity.
These costs stay constant per unit but increase in total with the increase in the
number of units manufactured

MEMO TO QUESTION 4 (Maximum 10 marks. One mark per fact)

Any valid argument or the student can consider the following in his/her answer

Internal control weaknesses (max 10 marks):

-Each team member has the freedom to choose their preferred supplier. There is no
official list of approved suppliers . This is a weakness because team members can
choose their friends as supplier or other companies that are not competent. 
-Each team member has their own order form and can place orders as they wish. This
is a weakness that can lead to team members making personal orders with company
order forms. 
-There is no central purchasing function and there is no senior purchasing person
approving order forms before they are sent to suppliers . This is a weakness that can
lead to team members paying too much for goods, ordering unnecessary items, making
personal orders, etc. 
-There is only one person (as opposed to the norm of at least two company signatories)
who makes payments from the company’s bank account . This can lead to the admin
person stealing money from the company’s bank account. 
-The admin person makes payments from bank account and also performs recons of
the bank account . There is no one reviewing his bank recons . There is no
segregation of duties and this is a huge opportunity for fraud. 
-Bank recons are performed quarterly and not monthly as should be the case . Any
errors or unauthorised transactions in the bank statement will not be detected
timeously. 
-No representative of the company is present to accept deliveries / installations from
suppliers and to sign the relevant delivery notes. No inspections are made on items
delivered / installed . This is a weakness because damaged items can be delivered or
suppliers can claim that they delivered certain items which they did not deliver. 
- No representative of the company is present when suppliers collect their items after
the concert. No one checks that suppliers only collect what they delivered and
suppliers do not sign any documentation to acknowledge receipt of items they
delivered / installed . This is a weakness because suppliers can collect items
delivered by other suppliers or can later deny collecting items they delivered. 
-The admin person makes payments based on order forms instead of invoices. No
checks are made at a later date to ensure that all items paid for were actually received
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -12-

. This is a weakness that is likely going to lead to instances where payments are
made for items that will never be delivered. 
-The admin person makes payments based on email instructions, does not inspect
contracts with artists or in any way verify that he is paying into correct bank accounts
. This is a weakness that can lead to overpayment of artists or payments into
fraudulent bank accounts. 
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AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -13-

MEMO TO QUESTION 5 (Maximum 30 marks. One mark per fact)

Any valid argument or the student can consider the following in his/her answer

Document Name Cycle ( max10 Information ( max10 marks) From ----> To ( max10 marks)
marks)
Example: Revenue and How much does the customer owe for From selling company (supplier) to
Invoice Receipts goods received the customer
a) Internal sales order Revenue and Good ordered by the customer and for which From Order department to Credit
Receipts  credit approval must be given  management department 
b) Remittance advise Revenue and Which invoices are covered by payment made From debtor to supplier (creditor) 
Receipts  / 
Acquisition and
Payments 
c) Credit note Revenue and The amount by which a balance owed by a From supplier (creditor) to debtor 
Receipts  / debtor is reduced and the reason for the
Acquisition and reduction. 
Payments 
d) Requisition Acquisition and What goods / services must be ordered / From a user (staff member) to
Payments  purchased  purchasing department 
e) Creditor’s Acquisition and Summary of transactions for the month with From supplier (creditor) to debtor 
statement Payments  the supplier 
f) Deduction tables Payroll  How much must be deducted from employees From 3rd parties to employer
and returns and how much employee deductions are paid company and vice-versa 
to 3rd parties (SARS, medical aid companies,
etc.) 
g) Unclaimed wage Payroll  Identities of employees who did not collect Internal report in payroll function 
AUDITING AND INTERNAL CONTROL (AIC22B2) Exam NOVEMBER 2017 -14-

register their pay-packets and amounts therein 

h) Clock card Payroll  The time an employee signed into work and From employee to HR department 
out of work 
i) Production report Inventory  The results of production (units of output Internal report in production
achieved, wastages incurred, stage of department OR from production
completion, etc.)  department to management

j) Costing schedule Inventory  A “budget” where all the costs that are Internal report in production
expected in the production of an item are department 
identified and quantified 