Reference no: EM132836068

1. Explain the difference between entity-level controls and transaction-level controls. Is an auditor interested in both?

2. Explain the importance of segregation of incompatible duties. What sort of duties would be segregated within the sales process? Why?

3. Several approaches to internal control documentation are discussed in the chapter. Assess the advantages and disadvantages of each. How would documentation assist the auditor to identify strengths and weaknesses of an entity's system of internal controls?

4. Abbott & Partners audit firm has audited Pretty Valley Shire council for two years, performing both a statutory audit of the financial reports and a compliance audit for the government department in charge of local councils' landfill waste disposal sites. In all previous control testing, no exceptions were detected. The junior auditor on the engagement has suggested that no work on internal controls is required because last year's evidence will be sufficient.

Required

Explain why the junior auditor's suggestion is not appropriate.

5. Donna MacIntosh runs Emerald Spa, a business providing women-only hairdressing, beauty, relaxation massage and counselling services in a small tourist town. Ninety per cent of the clients using the beauty and massage services at Emerald Spa are weekend visitors to the town, but 80 per cent of the hairdressing and counselling clients are locals. The masseuse and counsellor have formal qualifications and are registered with the medical authorities, allowing clients to claim the cost of the service with their private health insurer if an appropriate receipt is provided when the client pays. Emerald Spa has just opened another branch of the business in a town 100 kilometres away and there are plans for a third branch to be opened next year. Donna has been very busy establishing each new branch and relies on staff in each office to run the day-to-day operations, including ordering supplies and banking receipts. In addition, the branch manager organises the staff and authorises their time sheets. Donna makes the payments for rent, power, salaries and large items of expenditure such as furniture purchases.

Required

(a) Give examples of transactions that would occur at Emerald Spa.

(b) Explain what could go wrong with these transactions if the system of internal controls could not meet any of the seven generally accepted objectives of internal controls.