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 of functions, authorization, recording custody, vouching and verification applicable to SMC Hotels LLC are as follows :

1. Separation of functions : This is one of the most important aspects for any organisation as not ensuring separation of functions/segregation of duties can lead to fraud or management override of controls. If there is no separation of functions and any single person is allowed ownership of multiple functions, he could easily manipulate the accounts which leads to fraud and misfeasance. Hence it should be ensured that proper separation of functions has been carried out by any entity.

2. Authorization : Every organisation is divided into several levels and the organization is able to function because the work of one person is approved/authorized by another person which ensures quality of work. In the hotel industry like SMC Hotels LLC, authorization process should be there so that the employees do not embezel cash or make purchases for their own. Internal control processes should be present to ensure that every payment, purchase or any other activity performed by one person is authorized by their supervisor.

3. Recording custody : This function becomes particularly important in respect of tangible assets like property, plant, equipment, laptops etc. If the person responsible for maintaining physical custody of the assets is same as the person responsible for recording their purchases, this could led to fraud and embezellment. Hence it shall be ensured that these 2 functions are appropriately segregated.

4. Vouching and verification : This is the process where it all begins. This is the first process on the basis of which all other processes are continued. The information being uploaded in the voucher forms the basis on which all other entries, amounts etc. are recorded in the books of accounts. It is also particularly important for auditors to ensure that the voucher contains all the required details, whether indirect taxes like GST, VAT etc. have been appropriately calculated or not etc.