B25S:UNDERSTANDING CONTROL SYSTEMS
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Using emojis or gifs, what would best describe your state of mind right now?
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Aim of the game
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• One of the ways a business mitigates and manages risk is
by implementing control systems.
• The basic concept of controls and the important
concepts around controls from both a management and
audit perspective.
• Understanding the purpose of the internal control system
• Distinguishing between general and application controls
• Design a control system and identify weaknesses in
control systems
• Good exam technique
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Reflect and link with risks
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Question: With the upcoming test 1 on Tuesday, what are the possible risks?
Follow up question: What are the controls you can put in place to prevent or mitigate the
abovementioned risks?
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Internal controls
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What is it?
Internal controls are systems, policies, and procedures put in place by an
organization to:
• Ensure accurate financial reporting
• Safeguard assets
• Promote operational efficiency
• Ensure compliance with laws and regulations
• Prevent fraud and errors
Key things to get out it?
1. They are implemented by management;
2. They are designed to achieve objectives/ address risk – these can be
operational, financial or legislative
3. Auditors are concerned about controls that address overall audit risk and
account balance/transaction level risk (Validity, accuracy, completeness)
4. If control systems are good OR the nature of the business is highly
automated – then the auditor could include tests of controls in their audit plan
(keep in mind for tomorrow's session )
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General vs Application controls
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General controls Application controls
are controls that are put in place to are controls implemented at a
achieve validity, accuracy and completeness of an point in time in a transaction cycle or system to
entire cycle/ system/ business unit/ business. They specifically achieve validity, accuracy or
help achieve all the assertions and are broad policies completeness (in isolation or a combination of the
that are adopted and communicated by a company. above) on a specific element (source document,
decision, person) of a transaction cycle.
General
Applications
Principles of control systems that you already know remain the
same except:
o Additional risks exist that need to be addressed
o The computer allows for additional types of controls to be
implemented, or manual controls used in the past to be
automated.
• Application of the tools to the specifics of the example is the hard
part, remembering a list of generic tools is a starting point but if not
applied then no marks will be given.
Important to notice – the control maybe the same but applied in a
different context OR to achieve a different objective....
Example: BrightBooks Ltd.
BrightBooks Ltd. is a mid-sized publishing company that uses an integrated accounting software to
manage its finances, including payroll, purchasing, and inventory. The audit team is evaluating the IT
controls to ensure data integrity and financial accuracy.
BrightBooks Ltd. uses a cloud-based accounting system called FinMaster. The system handles everything
from journal entries to payroll processing. The company has experienced issues in the past with
unauthorized access and data entry errors.
Control:
Purpose:
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Control:
Purpose:
Type:
Application Control Example
Control:
Purpose:
Type:
Summary of Differences
Feature General Control Application Control
Scope
Purpose
Example
Impact
Let's try a quizz on the same scenario:
1. Which of the following is a general control?
A. Preventing negative salary entries in payroll
B. Automatic tax calculation in payroll
C. Password complexity requirements
D. System-generated invoices
2. What is the main purpose of general controls?
A. To ensure individual transactions are accurate
B. To protect the overall IT environment
C. To calculate financial data
D. To validate user inputs
3. Application controls are typically:
A. Applied across all systems
B. Designed to secure network infrastructure
C. Specific to a software module or function
D. Used only by IT administrators
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Designing control system
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+ =
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Example:
The company follows a set procedure when receiving goods:
• The goods receiving department receives a copy of an order confirmation from
the ordering department
• The goods receiving department of the central warehouse has several goods
receiving clerks working in the warehouse
• Upon arrival of the supplier's delivery vehicle, goods are offloaded into the goods
receiving area
• Any available goods receiving clerk then obtains the delivery note (two copies)
from the supplier's truck driver and checks that the quantity of the received goods
corresponds with the supplier's delivery note.
• The goods are then transferred from the goods receiving department to the
warehouse
Required:
1. Recommend improvements (controls) to the current receiving of goods
function
2. Describe the controls that could help in achieving business operational
objectives
3. Discuss the impact of the control weaknesses
4. Is the scenario above had a particular system- would you have been able to
recommend application controls
5. Describe the control objectives
Possible solutions focusing on required 1:
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