Question

You have recently been appointed as an audit assistant for MKZ Auditing LLC, a popular auditing firm based in Al Ain. Your line manager spoke to you two weeks ago to inform you that you have been assigned with another senior auditing staff to undertake a visit and audit a client called SMC Hotels LLC.

Your line manager has tasked you to liaise with the senior auditing staff to prepare a presentation to be delivered to the senior management on how you propose to investigate and plan the audit of SMC Hotels LLC.

Required

Briefly identify the principles of control separation of functions, authorization, recording custody, vouching and verification applicable to SMC Hotels LLC ( In your Own Words)

Answer 1

The principles of control separation is essential in any form of large business where the accounts are subject to audit and the stakeholders are separate from the entity ( formed as a Company ) such a practice will ensure that there is checkpoints implemented in various stages of the standardized processes which helps to bring down the possibility of fraudulent records or practices. Control separation is a function which is fundamentally integrated into the core activities of the business and each employee involved in the day to day functioning of that business will do their job in a way it ensures a level of confidence to the internal auditor. Separating the various stages of core activities across multiple functions or employees helps to achieve this easily. Some of the controls which can be implemented by SMC Hotels LLC based on their functional requirements are as follows.

Approval Authority Requirements to ensure proper authorization -

Requiring specific managers to authorize certain types of transactions can add a layer of responsibility to accounting records by proving that transactions have been seen, analyzed and approved by appropriate authorities. Requiring approval for large payments and expenses can prevent unscrupulous employees from making large fraudulent transactions with company funds.

Separation of Duties

Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting and auditing. The further duties are separated, the less chance any single employee has of committing fraudulent acts. Various functions of back such a front office, F&B management, Laundry care, Housekeeping and accounting should be able to verify the activities mutually to make this control effective.

Accounting System Access Controls

Furthermore, Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs can keep unauthorized users out of the system while providing a way to audit the usage of the system to identify the source of errors or discrepancies. Robust access tracking can also serve to deter attempts at fraudulent access in the first place. Confidential information such a guest profile, their phone number, address, credit card number needs to be encrypted and protected using several layers of access control with authorization residing in multiple individuals.

Standardized Financial Documentation for proper vouching and verification.

Standardizing documents used for financial transactions, such as invoices, internal materials requests, inventory receipts and travel expense reports, can help to maintain consistency in record keeping over time. Using standard document formats can make it easier to review past records when searching for the source of a discrepancy in the system. A lack of standardization can cause items to be overlooked or misinterpreted in such a review.

Physical Audits of Assets to prevent theft or loss of property.

Physical audits include hand-counting cash and any physical assets tracked in the accounting system, such as inventory, materials and tools. Physical counting can reveal well-hidden discrepancies in account balances by bypassing electronic records altogether. Counting cash in sales outlets can be done daily or even several times per day by the accountant or front desk executive. Larger projects, such as hand counting inventory, should be performed less frequently, perhaps on an annual or quarterly basis.

Periodic Reconciliations in Accounting Systems

Occasional accounting reconciliations can ensure that balances in your accounting system match up with balances in accounts held by other entities, including banks, suppliers and credit customers. For example, a bank reconciliation involves comparing cash balances and records of deposits and receipts between your accounting system and bank statements. Differences between these types of complementary accounts can reveal errors or discrepancies in your own accounts, or the errors may originate with the other entities. Various payments and receivables from the side of customers and vendors needs to be tallied periodically to ensure revenue is recorded in the correct period. This control can work in conjunction with vouching, transaction authorization and payment verification.