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Unit 1: Investment and Finance Cycle and EFT Payment Controls - Coggle…
Unit 1: Investment and Finance Cycle and EFT Payment Controls
Substantive testing
Audit procedure that examines the financial statement and supporting documentation to see if they contain any errors. Include Existence, Completeness, rights and obligations, valuation and presentation and disclosure
Existence: select items from the fixed asset register, including new additions and physically inspect assets
Completeness: Scrutinize minutes/ contracts/lease agreements/invoices to identify any material purchase transactions and follow through to entry in fixed asset register
Rights and obligations: Inspect the underlying documents of title deeds/contracts/lease agreements for terms and conditions. review minutes of directors/shareholders meetings for approval of fixed asset acquisition.
Valuation: refers to revaluation of assets, depreciation, amortization of intangible assets, impairment and accounting estimates
Presentation and disclosure: inspect the financial statements to ensure that they classified and disclosed correctly in terms of IFRS
Financing Activities
Means by which the entity obtains its funding for the company's capital investments
Funding is obtained from:
Owner's equity
2.Borrowings
The accounts affected in the finance cycle include:
+Bank
Retained income
Share capital
+Dividends Declared
Documentation Present:
Minutes of shareholders/directors, debenture trust deed, prospectus, share certificate,loan/lease contract and a journal voucher
Characteristics:
Few transactions
The transactions within this cycle are usually " material"
3.The transactions in this cycle are frequently governed by legal and regulatory requirements
Finance and investment cycle
This cycle mainly deals with:
Raising of finances
The repayments of obligations which arise out of the finance raised ( interest)
The application of fun ds raised for the acquisition of assets
weaknesses: is a weak internal control environment which will create risks within the company
Recommendations or solutions: can be made in order to fix any weak internal controls within the working environment
The Investment Activities
Comprise of aquisition, diposal and management of tangible and intangible assets.
Main Activities:
Additions of fixed assets
Disposals of fixed assets
Repair and maintenance of assets
Accounts affected in the investment cycle include:
+Land
+PPE
+Accounts receivable
+Goodwill
Documentation present:
Capital budgets, fixed assests requisition with quote' minutes of board of directors, invoices. fixed asset register and general legar accounts ( fixed assets, depreciation,profit/loss on disposal,accumulated depreciation)
Examples of fraud in this cycle:
1.Ommiting long term liabilities (loans) from financial statements.
2.Understating the value of long term liabilities
3.Overstating assets by including fictitious assets
4.Overstating assets by understating Depreciation impairments
Internal controls, control objectives and test of control in the cycle
control objectives: refers to what the company wants to achieve with regard to every transaction
Internal controls: refers to the control activities that the company should implement to ensure they achieve the desired objectives
Test of controls: refers to the way we test whether the internal controls are working as designed
Occurrence/Validity: refers to supporting documentation provided to the bod or which was filed
Authorization: is the acceptance of a decision according to policies
Completeness: Suggests that all valid fixed assets are recorded without an error
Recording: The recording of all fixed assets at the correct amount and totals
Classification: All transaction with regard to fixed assets are correctly classified according to its nature
Cut-off: all purchases and sales are recorded in the period in the period to which it relates
General controls: Assets are properly safeguarding against theft and physical elements
EFT payments
Multilevel different passwords should be used by 2 senior employees to prevent fraud and unauthorised payments
After payments are made there should be:
an audit trail
the payment should reflect on the bank statment
a bank recon should be preformed by an independent person not approved to make EFT's