Internal Control

SECTION A - CASE 3: GLOBAL WATER INITIATIVE SCENARIO: Global Water Initiative (GWI) is an international NGO providing clean water solutions in developing nations. You are advising the board on corporate governance and internal audit. GWI currently does not have an internal audit department. The board consists of the CEO, the CFO, and two non-executive directors (NEDs), one of whom is the CEO's brother. GWI receives significant grant funding, which requires strict compliance with donor conditions. Recently, a whistleblower alleged that procurement contracts in a regional office were awarded to a company owned by the regional director. QUESTION: Based on best practice corporate governance principles, which TWO of the following represent deficiencies in GWI's current board structure?

SECTION A - CASE 3: GLOBAL WATER INITIATIVE SCENARIO: Global Water Initiative (GWI) is an international NGO providing clean water solutions in developing nations. You are advising the board on corporate governance and internal audit. GWI currently does not have an internal audit department. The board consists of the CEO, the CFO, and two non-executive directors (NEDs), one of whom is the CEO's brother. GWI receives significant grant funding, which requires strict compliance with donor conditions. Recently, a whistleblower alleged that procurement contracts in a regional office were awarded to a company owned by the regional director. QUESTION: Which of the following factors from the scenario provides the strongest justification for GWI to establish an internal audit department?

SECTION A - CASE 3: GLOBAL WATER INITIATIVE SCENARIO: Global Water Initiative (GWI) is an international NGO providing clean water solutions in developing nations. You are advising the board on corporate governance and internal audit. GWI currently does not have an internal audit department. The board consists of the CEO, the CFO, and two non-executive directors (NEDs), one of whom is the CEO's brother. GWI receives significant grant funding, which requires strict compliance with donor conditions. Recently, a whistleblower alleged that procurement contracts in a regional office were awarded to a company owned by the regional director. QUESTION: If GWI decides to outsource its new internal audit function to an external firm of accountants, which of the following is a primary advantage of this approach?

SECTION A - CASE 3: GLOBAL WATER INITIATIVE SCENARIO: Global Water Initiative (GWI) is an international NGO providing clean water solutions in developing nations. You are advising the board on corporate governance and internal audit. GWI currently does not have an internal audit department. The board consists of the CEO, the CFO, and two non-executive directors (NEDs), one of whom is the CEO's brother. GWI receives significant grant funding, which requires strict compliance with donor conditions. Recently, a whistleblower alleged that procurement contracts in a regional office were awarded to a company owned by the regional director. QUESTION: To improve governance, GWI is advised to establish an Audit Committee. Which of the following best describes the role of the Audit Committee in relation to internal controls?

SECTION B - QUESTION 17 SCENARIO: EcoGrid Power You are an audit senior at Volt & Co, currently evaluating the internal controls of EcoGrid Power, a regional electricity distributor, for the year ended 31 December 20X5. You are focusing on the procurement and payroll cycles. Your system notes reveal the following: 1. To speed up emergency repairs, purchase orders for materials under $50,000 do not require any formal authorization and can be placed directly by maintenance staff. 2. Goods received notes (GRNs) are generated manually by warehouse staff and are not sequentially numbered. 3. Overtime for repair crews is frequently required due to storm damage. Overtime hours are approved verbally by line managers without any written documentation or system sign-off. 4. When employees resign or are terminated, HR notifies the payroll department via a monthly summary email. Terminated employees often remain on the payroll system until the end of the quarter when a reconciliation is performed. 5. To ensure continuous operations during shift changes, the main password for the procurement ERP module is shared among all staff in the purchasing department. REQUIREMENTS: Identify FIVE internal control deficiencies from the scenario. For each deficiency: (a) Explain the implication of the deficiency. (b) Provide a practical recommendation to address the deficiency. Note: Present your answer in a three-column format: 'Deficiency', 'Implication', and 'Recommendation'.

SECTION B - CONSTRUCTED RESPONSE MediChain Pharmaceuticals is a cross-border medical supplier. You are evaluating the internal controls for the year ended 31 May 20X6. During your review of the procurement and payroll systems, you note the following: 1. Purchase orders for medical supplies are raised by warehouse clerks when inventory looks low. They do not require authorization before being sent to suppliers. 2. New suppliers are added to the purchase ledger master file by the accounts payable clerk without any secondary review. 3. Goods received notes (GRNs) are filed sequentially in the warehouse, but copies are not sent to the finance department. 4. Factory employees clock in and out using paper timesheets, which are often filled out at the end of the week from memory. 5. The payroll manager processes the payroll, authorizes the bank transfer, and adds new employees to the payroll system. Requirements: (a) Identify and explain FIVE deficiencies in MediChain's procurement and payroll systems, and provide a recommendation to address each deficiency. (15 marks) (b) Describe FIVE tests of control the auditor should perform to assess the operating effectiveness of the payroll system. (5 marks)

SECTION B - CONSTRUCTED RESPONSE Company: GlobalCare Foundation Year-end: 31 December 2025 You are the audit senior for GlobalCare Foundation, a large Non-Governmental Organization (NGO) providing disaster relief. During your review of the internal controls over the cash cycle and procurement, you note the following: 1. The NGO receives significant cash donations via street collectors. Collectors are given unnumbered collection buckets. At the end of the day, collectors count the cash themselves and hand it to the regional manager, who records the total in a spreadsheet. 2. To speed up disaster response, regional managers are authorized to procure relief supplies up to $50,000 without requiring a second signature or purchase order. 3. The central finance team only reconciles the regional bank accounts on a quarterly basis due to staff shortages. 4. Grant income received from governments is mixed into the general operational bank account, making it difficult to track if funds were spent according to specific grant conditions. Required: Identify and explain FOUR internal control deficiencies from the scenario. For each deficiency, explain the implication and provide a recommendation to address it. (20 marks)

SECTION B - QUESTION 2 (20 MARKS) GlobalFreight Logistics is a multinational shipping company. You are the audit senior evaluating the internal controls for the year ended 30 June 20X6. During your walkthrough of the payroll and revenue systems, you documented the following: 1. Payroll: GlobalFreight employs hundreds of dock workers who are paid hourly. Workers fill out paper timesheets at the end of each week. These are handed to the shift supervisor, who signs them and leaves them in a tray for the payroll clerk. The payroll clerk manually enters the hours into the payroll system. There is no secondary check of the data entry. 2. Overtime: Due to shipping delays, overtime is frequent. Workers can claim overtime by simply writing the extra hours on their timesheet. The shift supervisor signs the timesheet but does not cross-reference the overtime claimed to the actual ship docking schedules. 3. Starters and Leavers: When a worker leaves, the HR department emails the payroll clerk to remove them from the system. However, during busy periods, HR sometimes forgets to send the email for several weeks. 4. Revenue Invoicing: GlobalFreight has complex international tariffs. Sales clerks manually calculate the shipping cost for each client based on a printed tariff book from 20X4. The invoice is then typed into Word and mailed to the client. 5. Credit Control: New clients are granted a standard $50,000 credit limit by the sales clerk to speed up the onboarding process. The credit control department only reviews the client's creditworthiness if they exceed this $50,000 limit. Requirements: Identify and explain FIVE internal control deficiencies from the scenario. For each deficiency, provide a recommendation to address it, and describe a test of control the auditor should perform to assess if the recommendation is operating effectively. (20 marks)

CASE SCENARIO: AgriGrow Tech Ltd AgriGrow Tech Ltd is an agricultural technology startup developing drone-based crop monitoring systems. You are planning the audit for the year ended 30 September 20X6. AgriGrow has capitalized significant Research & Development (R&D) costs this year related to a new AI-driven drone model. They also received a substantial government grant conditional on creating jobs in rural areas. Due to rapid growth, AgriGrow recently established an internal audit department, which has spent the last three months reviewing the company's payroll controls. QUESTION: Which of the following best describes a key difference between the internal audit department and the external auditor?

CASE SCENARIO: AgriGrow Tech Ltd AgriGrow Tech Ltd is an agricultural technology startup developing drone-based crop monitoring systems. You are planning the audit for the year ended 30 September 20X6. AgriGrow has capitalized significant Research & Development (R&D) costs this year related to a new AI-driven drone model. They also received a substantial government grant conditional on creating jobs in rural areas. Due to rapid growth, AgriGrow recently established an internal audit department, which has spent the last three months reviewing the company's payroll controls. QUESTION: You are considering relying on the work performed by AgriGrow's internal audit department regarding payroll controls. According to ISA 610 (Using the Work of Internal Auditors), which of the following must you evaluate FIRST before deciding to use their work?