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Summer-2013
Master of
Business Administration- MBA Semester 4
MF0013–Internal
Audit and Control-4 Credits
(Book ID:
1759)
Assignment
(60 Marks)
Note: Answer
all questions (with 300 to 400 words each) must be written within 6-8 pages.
Each Question carries 10 marks 6 X 10=60
Q1. Discuss,
in brief, the advantages and limitations of auditing.
Answer. Advantages of an audit
A. We have seen that the need for an external audit in
the case of companies arises primarily from the existence of split-up of
ownership from control. There are however, certain advantages in having
financial statements audited even where no statutory requirement exists for
such an audit in the case of a sole-trader-ship, partnership, or non-profit
organizations for example. These advantages can be summarized as follows:-
Q2. Explain
the key objectives of a good internal audit system. Write down the essentials for
effective internal auditing.
Answer. There are five possible objectives that an internal audit might have:
Ø To determine whether controls over financial and
operating data provide managers with reasonable assurance that the financial
and operating data is accurate and reliable (i.e., that information gathering
and reporting has been properly planned, organized and directed);
Ø To determine whether controls over compliance with
policies, procedures, plans, laws and regulations provide managers with
reasonable assurance that proper compliance actually occurs (i.e., that
compliance activities have been properly planned, organize
Q3. List the
required qualifications of an internal auditor. Describe the role of internal auditor
in the company’s management.
Answer. This occupation has a level of skill commensurate with
a bachelor degree or higher qualification. At least five years of relevant
experience may substitute for the formal qualification. In some instances relevant
experience and/or on-the-job training may be required in addition to the formal
qualification.
Internal
Auditor should possess the following qualities:-
Ø Accounting principles knowledge
Ø Experience
Q4. Explain
the basic principles of governing internal control.
Answer. Principles
of governing internal control:-
1. OBJECTIVES AND PURPOSE OF INTERNAL CONTROL
Internal control comprises preventive actions as well
as daily and subsequent controls needed to ensure the achievement of business
objectives. Internal control plays an active role in company management,
administration and daily operations.
Objectives of internal control are:
• Effectiveness and efficiency of operations
• Reliability of financial and operational reporting
Q5. Discuss
the specific problems of Electronic Data Processing (EDP) relating to internal
control.
Answer. In an EDP system, the following problems arise in the
implementation of internal control:
a) Separation of duties:
In a manual system, separate individuals are
responsible for initiating transactions, recording transactions, and custody of
assets. As a basic control, separation of duties prevents of detects errors and
irregularities. In a computer system, however, the traditional notion of
separation of duties does not always apply. For example, as program may
reconcile a vendor invoice against a receiving document and print a cheque for
the amount owed to a creditor. Thus, this program is performing functions that
in a manual systems would be considered incompatible.
Q6. Explain
the factors for having the effective internal control system for a bank.
Answer. An effective internal control system requires that the
material risks that could adversely affect the achievement of the bank’s goals
are being recognized and continually assessed. This assessment should cover all
risks facing the bank and the consolidated banking organization (that is,
credit risk, country and transfer risk, market risk, interest rate risk,
liquidity risk, operational risk, legal risk and reputational risk). Internal
controls may need to be revised to appropriately address any new or previously
uncontrolled risks.
Banks are in the business of
risk-taking. Consequently it is imperative that, as part of an internal control
system, these risks are being recognized and continually assessed. From an
internal control perspective, a risk assessment should identify and evaluate
the internal and external factors that could adversely affect the achievement
of the banking
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