Internal Systems and Controls

Question 1

What is SOAPSPAM?

Answer 1

Segregration
Organisational
Authorisation
Physical
Supervision
Personnel
Arithmetical & Accounting
Management

Question 2

What is the fraud triangle?

Answer 2

Rationalisation
Financial Pressure
Opportunity

Question 3

What are the 5 Frauds

Answer 3

Fraud - intentionally using decption to make unlawful gains

Theft - dishonestly takes someone else’s property

False Accounting - intentionally falsifying, altering or submitting inaccurate accounts for personal gain

Deception - deceiving another to obtain something or evade liabilities

Bribery & Corruption - offering, giving or taking an inducement that might influence actions of another

Question 4

Name 4 strengths of Downton Instruments

Answer 4

1. well established company with 20 years of growth
2. founder is still involved with a background in the industry and good knowledge and understanding
3. 2 new big customers, giving future financial stability
4. Have appointed a new MD with successful background in manufacturing

Question 5

Name 5 weaknesses of Downton Instruments

Answer 5

1. Poor staff morale in most departments especially testing & calibration (which is what the 2 new customers are relying on)
2. Profits have declined in last 2 years
3. Lack of goal congruence between the three divisions
4. Customers have noticed the divisions run separately
5. New MD has no experience in precision investment, has a manufacturing background but a large part of the business is servicing

Question 6

Name 4 Opportunites of Downton Instruments

Answer 6

1. Could expand into manufacturing
2. Take further advantage of their niche market
3. Expand geographically/overseas
4. Training of MD

Question 7

What are the 6 steps to reduce fraud risk from high to low

Answer 7

Evaluate
Recommendation
Communication
Training
Implementation
Re-evaluate

Question 8

What are the 4 types of implementation and pros/cons

Answer 8

1. Phased - implemented in sections. Least stressful but takes longer
2. Direct/Hard Changeover - old system finishes and new system starts at the same time. Quick and cheap but very risky if poorly planned
3. Parallel Systems - running new and old at same time. Considered safe but higher cost (double workload, potentially paying for both systems)
4. Pilot - new systems are piloted for a period. Any problems should be indentified and resolved without risk but does take longer.

Question 9

How would profit ratio show a weakness

Answer 9

Should stay consistent if pricing, costs are similar from previous period. A significant change would indicate issues with any of inventory, purchasing, turnover or expenses. e.g. incorrect recording of purchase transactions

Question 10

Ratios identifying weaknesses in controls

Answer 10

Profit ratio
Current & quick ratio
Inventory ratio
Receivable & payable days
Gearing
ROCE

Question 11

How would current/quick ratio show a weakness

Answer 11

Problems with credit control i.e. not collecting payment or making payments on time.

Question 12

How would inventory ratio show a weakness

Answer 12

May indicate ordering processes need to be reviewed.

Question 13

How would receivable/payable days show a weakness

Answer 13

Problems with credit control
Sales/purchases incorrectly recorded

Question 14

Name 3 threats to Downton Instruments

Answer 14

1. New legislation could be introduced
2. A new competitor could emerge or an existing competitor could expand threatening the market share
3. Two new clients rely on testing teamif morale is low could impact the quality of work and staff may leave meaning not able to meet terms of new contract.

Question 15

6 ways to prevent/detect Fraud

Answer 15

1. have strong internal controls
2. regular external audits
3. training and awareness to help create a culture of compliance
4. fraud risk assessement to identify areas at risk and implement controls
5. management review - regularly review financial statements by directors
6. whistelblower programs - encourage employees to report suspicious behaviour