(a) ISA 315 Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment describes the five components of an entity’s internal control.
Required:
Identify and briefly explain the FIVE components of an entity’s internal control. (5 marks)
(b) Bonsai Trading Co (Bonsai) manufactures electrical equipment, and its year end is 30 September 2015. You are the audit supervisor of Poplar & Co and are developing the audit programmes for the forthcoming interim audit. The company’s internal audit department has provided you with documentation relating to the non-current assets cycle including the related controls listed below.
– Bonsai has a capital expenditure committee and all purchase orders for capital items are required to be authorised by this committee.
– On receipt, each asset is assigned a unique serial number and this is recorded on the asset and in the non-current assets register.
– When the asset arrives, a goods received note (GRN) is completed which details the nature of the expenditure (i.e. whether it is capital or revenue), and the GRN classification is reviewed and initialled by a responsible official. Copies of the GRNs relating to capital expenditure are then submitted to the finance department for updating of the non-current assets register.
– Periodically, internal audit undertakes a review of assets in the register and compares them to assets on site, using the serial number to confirm existence of the asset.
– Access to the non-current assets register is restricted through passwords to a small number of staff in the finance department.
Required:
Describe a test of control which the auditor of Bonsai Trading Co would perform. to assess whether or not each of the non-current asset controls listed above is operating effectively. (5 marks)