UNIT 1: Investment and Finance Cycle and EFT payment controls

Functions of cycle

Weaknesses: Is a weak internal control environment which will create risk to the company & Recommendations: can be made to fix the weak internal control environment so that the company will face less risks

Investment cycle: Control objectives

General internal controls

Substantive testing

Organisations want to achieve a perfect internal control environment tominimise risks, and thus have objectives they want to achieve. They implementinternal controls to achieve these objectives

Objective

Internal control

The Objective to be achieved by the control that you implement. E.g: Occurrence, Completeness, Authorisation, etc

How the objective will be achieved. (Internal Control that you will implement).

Accuracy: All fixed assets are recorded at the correct amount and totals are arithmetically
correct

Recording: All transactions w.r.t. fixed assets and depreciation are correctly recorded

Completeness: All valid fixed assets are recorded and nothing is left out.

Classification: All transactions w.r.t. fixed assets are correctly classified according to its nature.

Authorisation: All purchases and sales are authorised according to company’s policy

Cut off: All purchases and sales of fixed assets are recorded in the period to which it relates.

Occurrence/Validity: All recorded assets are valid (really exist) and are supported by proper
documentation.

General Controls: Assets are properly safeguarded against theft and physical elements.

The following falls within the business cycle:

Characteristics

Fraud in this cycle

This cycle mainly deals with:

Use of funds

Investments

Raising of funds

Material transactions

Few transactions

Legal requirements (E.g.: Companies Act)

Repayment of interests

Signing a contract with the bank in case of obtaining a loan

Repayment of the installments

Implementing proper controls to ensure that all purchases are authorized.

Omitting long term liabilities (loans) from the financial statements.

Understating the value of long term liabilities (loans)

Overstating assets by including fictitious assets or assets which the company does not own.

Overstating assets by understating depreciation allowances or impairment.

Assertions

Rights and obligations

Valuation

Presentation and disclosure

Completeness

Existence

Disposal of fixed assets

Repairs and improvements

Additions of fixed assets

(1) Inspect the underlying documents of title deeds/contracts/lease agreements for terms and conditions (2) Review minutes of directors/shareholders meetings for approval of fixed asset acquisitions.

Amortisation of intangible assets

Impairment

Depreciation

Accounting estimates

Revaluation of assets

Scrutinise minutes/contracts/lease agreements/invoices to identify any material purchase transactions and follow through to entry in fixed asset register

Select a sample of assets on hand and trace to relevant entries in the fixed asset register

Inspect the financial statements to ensure that amounts are classified and disclosed correctly in terms of IFRS

Authorisation

2 components

Investment Activities

Finance Activities

Types of transactions

Disposal of assets

Purchase/development of assets

Capitalisation of assets

Depreciation on assets

Purchase of assets

Revaluation of assets

Maintenance of assets

Authorisation

Statutory approval from the shareholders

Existence of Capex committee that will prepare and present all requests and
proposals to the BOD

Top management and BOD should authorise any acquisitions/disposals

Different levels of authorisation in the organisation

Inherent Risks

Nature and complexity of the assets acquired leading to errors in accounting,
such as property – stage of completion

Valuation of intangible assets for example goodwill & brands

Management bias and incentive to misstate capital expenditure to achieve
budget and obtain performance bonuses

Determining useful lives of assets or fair market values

Risk of management override of controls through unauthorised acquisitions

Risk of fraud and theft of assets

Errors in the recording of assets

Documents and Records

Minutes of BOD (authorisation for purchases and sales)

Invoices (purchases, sales)

Fixed asset requisition with quote/negotiated prices

Fixed assets register

Capital budget

General ledger accounts

Activities

DISPOSAL of fixed assets

REPAIRS, MAINTENANCE and IMPROVEMENTS

Fixed asset ADDITIONS: AUTHORISATION

Establish whether the control environment supports the control procedures

Rotation of duties

Personnel take leave regularly

Management control

Segregation of duties

Internal audit

Sufficient stationery control

Supervision and review

Internal controls

How the objective will be achieved. (Internal Control that you will implement).

How to test implementation of the control.
• Inspect, Observe, Enquire, Re-calculate, Investigate, Verify.

The Objective to be achieved by the control that you implement. E.g: Occurrence, Completeness, Authorisation, etc

Sources

Equity

Borrowings/loans

Type of transactions

Owner’s Equity

Borrowings

Dividends

Share buy-backs

Share issue

Loans/repayments (e.g.: Bank)

Interest on borrowings

Authorisation

Statutory requirements

requirements for issuing shares and obtaining funding

issuing of shares/loan transactions – Companies Act
has various requirements when it comes to loans

Risks

There should always be comprehensive disclosure requirements in terms of IFRS
for equity and borrowings

For global markets there are laws/regulations in the foreign markets to ensure
proper control

Because it is a highly regulated environment and there are strict controls by
directors over financing activities, the risk is usually low.

Documents

Debenture trust deed

Prospectus & articles of association

Minutes of shareholders/directors

Share certificate & share register

Mortgage bond

Bank statements

EFT payments

There should be proper access controls over the terminal that is used to make the payment

The terminal should shut down after 3 unsuccessful access attempts of logging in

Access to EFT payments should be limited to one computer

To effect the payment 2 passwords of 2 different senior employees should be entered

Multilevel passwords should be used, from two senior employees. These password must be simultaneously entered.

After the payments are made there should be an:

The reconciliation should be reviewed by senior independent official

The reconciliation should be done by a person who is independent of the EFT transactions that were made

The reconciliation should be done by a person who is Independent of the person that writes up the cashbook

All EFT transfers should be limited to a specific day, for example, Payroll should run 25th of each month

Completeness tests should be performed. E.g. If you had to pay 10 employees you have to ensure that 10 salaries were paid

The payment should reflect on the bank statement;

A bank reconciliation should be performed.

Audit trail;