Internal control systems and Internal Audit Function

August 2025

1 Questions

Question 2a

You are the auditor in charge of Viazi Tamu Enterprises, a distributor of fresh produce to supermarkets across the country. The company has recently expanded its operations and now operates warehouses in various towns and cities in the country. The Finance Director is concerned that the entities’ internal controls have not kept pace with this expansion. During your review of internal controls, you discovered the following:

Bank reconciliation is carried out every six months.
Purchases are authorised by the head of the warehouse and purchase orders can be raised by any member of the warehouse since the procurement department is inadequately staffed.
The entity has an internal auditor domiciled in the risk department.
Warehouse staff make manual adjustments to inventory records since the inventory management system is manual. They are not required to provide any documentation.
There have been increased complaints from supermarkets about delivery discrepancies. The warehouse manager downplayed this claim citing that the discrepancies were not material.

Required:

(i) Identify FIVE weaknesses in the internal control system of Viazi Tamu Enterprises.

(ii) For each weakness identified in (a) (i) above, recommend an internal control measure that could be implemented by the company to mitigate the associated risk.

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April 2025

1 Questions

Question 1c

Analyse FOUR factors that an external auditor could consider before placing reliance on the work of an internal auditor.

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December 2024

2 Questions

Question 3a

Usafi Enterprises is an organisation that provides home cleaning services. The organisation’s policy is that 50% of the charged fee is paid in advance before the cleaning service is provided and the other 50% is paid after the service has been completed. The customers pay by cheque or mobile money. The cheques are supposed to be delivered by the customers to Usafi Enterprises office during working hours. However, some customers have been paying the cleaners by cash and at times giving cheques to cleaners to deliver to the office on their behalf.

Usafi Enterprises’ accountant has noted that the accounts receivable balance in the books has been increasing while revenue collection has been declining in the past few months. The organisation has also lost many customers due to disagreements on payment for services rendered. Usafi Enterprises has approached you as an audit firm to advise them on how they can improve their operations and manage receivables.

Required:

(i) Identify FOUR weaknesses in Usafi Enterprises’ internal control system.

(ii) Propose THREE controls that the management of Usafi Enterprises could implement to address each deficiency.

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Question 1b

Discuss FOUR differences between “internal audits” and “external audits”.

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August 2024

2 Questions

Question 3b

You are an auditor at Bima and Wali Associates. You have been approached by your client, Ann Mino, who has recently restructured her medium-sized wholesale business to make it more structured in terms of roles and responsibilities of each employee. Ann Mino has structured the roles as follows:

(i) Customer care supervisor: Responsible for both collection and record maintenance of accounts receivable.

(ii) Inventory co-ordinator: Responsible for purchasing, receiving and storing inventory.

(iii) Payroll manager: Responsible for all payroll matters including personnel records keeping timecards, preparation of payrolls and distribution of payroll cheques.

Required:

Advise Ann Mino on the implication of each of these duties on the internal control system of the business.

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Question 3a

Curate Ltd. has been experiencing challenges in its internal audit department with a high staff turnover rate. There are also glaring cases of fraud being identified by the external auditors which the internal auditors had not identified. The chief executive officer has suggested to the board of directors that they should consider outsourcing the internal audit function.

Required:

(i) Advise the board of directors of Curate Ltd. on FIVE benefits that could accrue to Curate Ltd. from outsourcing the internal audit function.

(ii) Analyse FOUR implications of outsourcing the internal audit function on the work of the external auditor.

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April 2024

1 Questions

Question 1c

Explain THREE internal control procedures that an organisation should have in place for each of the following:

(i) Unclaimed wages.

(ii) Credit sales.

(iii) Inventory in transit.

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December 2023

2 Questions

Question 5d

Discuss FIVE components of an organisation’s internal control system.

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Question 1c

Biggy Furnitures Ltd. is a high-end office furniture and equipment company. The company has grown tremendously in its customer base in recent years and apart from selling furniture and equipment, it now has a maintenance and leasing department. The company has an elaborate internal audit function to enhance the internal control system. Biggy Furnitures Ltd. has appointed you as the external auditor and requested you to cooperate with the company internal auditor to keep the total audit costs down. The company would like you to rely on the work of the internal auditor.

The internal auditor provides the following services to the company:

An audit of the operations of internal controls in the company’s major functions (operations, customer support and information services).
A review of the structure of internal controls in each major function every four years.
An annual review of the effectiveness of measures put in place by the management to minimise the major risks facing the company.

In the year being audited, the company has had a major internal restructuring in its information services function. The internal auditor was closely involved in the preparation of the plan for restructuring and in the related post implementation review.

Required:

(i) Explain the extent to which you will seek to rely on the work of the internal auditor in each of the operational areas of Biggy Furnitures Ltd.

(ii) Describe FOUR circumstances in which it would not be possible for an external auditor to rely on the work of the internal auditor.

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August 2023

3 Questions

Question 3a

Sheila Limo is the audit senior of K and R Associates. She is the one responsible for the audit of Kula Ltd, a manufacturing company. Sheila has called for a meeting with her junior auditors to discuss how they will go about carrying out tests of control and substantive tests on salaries and wages of Kula Ltd.

Required:

(i) Distinguish between “tests of control” and “substantive tests”.

(ii) Summarise FOUR tests of control in relation to salaries and wages of Kula Ltd.

(iii) Propose THREE substantive tests that Sheila Limo might perform on salaries and wages of Kula Ltd.

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Question 2b

Kilimo Bora Ltd. is an agricultural company that mainly deals with the export of horticultural products. The company’s Board of Directors would like the company to be listed in the Securities Exchange. Kilimo Bora Ltd. recently established an internal audit department to assist the board of directors in enhancing good corporate governance in the company. One of the resolutions was the creation of an audit committee of the board. The Managing Director understands the principles of good corporate governance with respect to internal audit. However, the other board members lack sufficient understanding of corporate governance and International Standards Auditing (ISA).

Required:

(i) Discuss FIVE areas that the internal audit department could assist the board of directors of Kilimo Bora Ltd. in fulfilling their obligations under the principles of good corporate governance.

(ii) Explain FIVE benefits that Kilimo Bora Ltd. would yield upon constituting an audit committee of the board.

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Question 2a

Brenda Tuli is the petty cashier for Bahari Ltd. On 20 July 2023, Brenda was short of cash for her travel for the week. She took out a small amount of cash from the petty cash at work to cover her fare. She had intended to return this amount at the end of the month, as soon as she was paid. Brenda had not obtained permission from her supervisor to pick the cash and she forgot to replace the cash when she received her salary.

Required:

(i) Indicate the type of fraud that Brenda Tuli was involved in.

(ii) Explain FOUR steps that Bahari Ltd. could take in order to improve controls over petty cash.

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April 2023

1 Questions

Question 4a

An efficient wage system is important for most companies however, there is no single wage system which suits all companies. Some companies have a completely manual system, others a partially computerised system while others have a system which is completely computerised. Broadly speaking, a company with a completely manual system will use a clock and a clockcard system to record hours, prepare the payroll manually and conduct a physical wage payout. A fully computerised system may include biometric time keeping, processing of the payroll by the computer and payment of the amount owed to the employee by electronic funds transfer.

Required:
In the context of the above information:
(i) Explain the major advantage of biometric scanning technology over other methods of recording hours worked.
(ii) Discuss whether the use of biometric scanning technology to record hours worked, might eliminate the risk of fictitious employees being used to perpetrate wage fraud.
(iii) Evaluate FOUR characteristics of an organisation which could influence the management in deciding on a suitable wage system.

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December 2022

3 Questions

Question 1c

In the context of the inherent limitations in both internal control and the audit process itself, explain FIVE reasons why even a properly performed audit may not detect errors and fraud.

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Question 5a

Your firm has been appointed as the new auditors for Jazamatt Ltd., a small-scale supermarket. The company has recently unearthed fraudulent activities perpetrated by employees leading to loss of credibility with its current and potential customers. The fraud led to loss of company revenue which was brought about by a weak internal control system (ICS). The company has requested your firm to support it to improve its operations in order to avoid another fraud in future.

(i) Propose a five-step approach that you could adopt to identify deficiencies (ordinary and significant) including material weaknesses in the ICS of Jazamatt Ltd.

(ii) Explain to the management of Jazamatt Ltd. THREE responsibilities that they bear regarding evaluating risks of fraud in the company.

(iii) Highlight THREE types of revenue manipulations that the employees of Jazamatt Ltd. may have exploited in undertaking the fraud.

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Question 4c

An internal audit function is an appraisal activity established or provided as a service to the entire entity.

Required:

With reference to the above statement, explain FIVE functions that could be performed by the internal audit department.

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August 2022

2 Questions

Question 2d

Kilimo Sacco has recently automated its loan processing and disbursement activities upon purchase of an Enterprise Resource Planning (ERP) system. You have been requested to review the processing controls of the system.

Required:

Suggest four processing controls that the system should possess upon full implementation.

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Question 3b

Analyse four factors that could result in an increase in the control risk within an organisation.

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April 2022

2 Questions

Question 3a

You have been appointed to lead your engagement team in auditing a new client. During the planning of the audit, the team emphasised on the need to understand the internal control system maintained by the client.

Required:
(i) Describe four components of the internal control system that would be of interest to your team.

(ii) Identify two limitations of internal control systems.

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Question 5c

The financial accountant of Afiah Ltd. has provided you with the following breakdown of movements on the company's non-current assets for the year ended 31 December 2021:

Cost
Balance as at 1 January 2021
Additions
Revaluation
Disposals
Balance as at 31 December 2021
Accumulated depreciation
Balance as at 1 January 2021
Charge for the year
Disposals
Balance as at 31 December 2021
Net book value as at 31 December 2021

Land
Sh."000"
320,000

48,000

368,000

368,000

Equipment
Sh."000"
240,000
32,000

(12,000)
260,000

144,000
54,400
(10,000)
188,400
71,600

Total
Sh."000
560,000
32,000
48,000
(12,000)
628,000

144,000
54,400
(10,000)
188,400
439,600

Additional information:
1. The company does not depreciate its land and you, the company's auditor, agree that this is appropriate.

2. Depreciation on equipment is charged at the rate of 20% per annum with full year's depreciation charged in the year of acquisition and none in the year of disposal.

3. This is the company's first time revaluing the land. The revaluation was carried out by a reputable firm of auctioneers and valuers, known to you.

4. The company maintains a non-current asset register.

Required:
(i) Describe four internal controls that could be present regarding the non-current asset register before you could place reliance on it as a source of audit evidence.

(ii) Assess four audit work procedures that could be carried out on the depreciation charge and on the accumulated depreciation balance.

(iii) Explain four tests that could be carried out to audit both the additions and the disposals of the equipment

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January 2022

1 Questions

Question 1a

ABC Ltd. manufactures mineral water and has factories across the East African region. The company's customer base comprises individuals and retailers who make direct purchases through its website. You are the audit supervisor reviewing the documentation of the company's internal controls and you come across the following matters:

1. ABC Ltd.'s website allows customers to make orders directly and also pay in advance. The website is not integrated with the stock system. Goods are dispatched to the customers via courier service although the courier company does not file returns with ABC Ltd. to confirm delivery.

2. Over the last 9 months, customers have been complaining about delayed deliveries. Investigations have revealed that sales orders are entered correctly, but not dispatched to the delivery department for action.

3. Customers undergo credit checks prior to being given credit and the limits are set by the sales ledger clerks. Customers also place orders through the sales team who decide on the discount to be granted.

4. There have been various complaints raised on the accuracy of supplier statements given that the accountant who used to handle this docket left the organisation.

Required:
With reference to the internal control system of ABC Ltd.:

(i) Explain five deficiencies in the system.

(ii) Describe five tests of control required to assess if the controls are working effectively.

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Pilot December 2021

2 Questions

Question 3

You have been assigned to assist your audit senior in auditing a new client, Happy Land Limited. During the course of you reviewing and understanding the company’s internal control system, you discovered the following information:

1. The company has an internal audit department.

2. Bank reconciliation is undertaken by the internal audit department.

3. Purchase invoices are being approved for payment at branches and a list of approved invoices sent to head office for payment. The invoices, supporting documentation and suppliers statements are retained at the branches.

4. Excess cash is now invested by the finance director in short term securities.

5. A physical inventory has not been carried out for non-current assets and reconciled with the non-current assets register.

6. While visiting a production plant, it was noted that access to the inventory store room was unrestricted. It was discovered that the staff responsible for making test counts and agreeing to inventory on hand with the perpetual records, resigned and a replacement had not yet appointed.

Required:

(a) Explain five control deficiencies in Happy Land Limited.

(b) Recommend a control to address each of these deficiencies.

(c) Describe a test of control the auditor should perform to assess if each of these controls, if implemented, is operating effectively to reduce the identified deficiency.

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Question 1c

State four general controls that should exist to prevent unauthorised access to a company’s computer system from the remote terminals.

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December 2021

1 Questions

Question 4

Relax Hotels and Cottages Ltd. is your new client operating in the hospitality industry.
The company management has indicated to you in the opening meeting that the internal control environment is critical to their business profitability especially during the recent economic downturn. You are required to understand the company's internal control environment before commencing the audit task.

Required:
In relation to International Standards on Auditing (ISA) 315 "Identifying and Assessing the Risks of Material Misstatement through understanding the Entity and its Environment":

(a) Explain the term "control environment".

(b) Discuss six elements of control environment that would be relevant in understanding Relax Hotels and Cottages Ltd.

(c) Examine six factors that would lead to change in the inherent risk of Relax Hotels and Cottages Ltd.

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September 2021

2 Questions

Question 3c

Compare the responsibilities of the internal auditor and those of the external auditor in respect to detection of fraud.

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Question 1a

Controls in an entity's information technology system may consist of a combination of automated controls and manual controls.

Required:
(i) Evaluate eight risks that automated controls pose to an entity's internal control system.

(ii) Analyse four circumstances in which manual controls may be more suitable for use in an entity.

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November 2019

2 Questions

Question 1a

Lingo Ltd. was recently incorporated. It will be operating in the retail sector. The company has five directors and is currently in the process of setting-up in order to commence business on 1 January 2020. The directors of the company are considering outsourcing the internal audit function in the interim period instead of recruiting their own staff.

Required:

Analyse six advantages to Lingo Ltd. of outsourcing the internal audit function.

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Question 5a

You have recently been appointed as the auditor of Sugo Ltd. for the financial year ended 30 June 2019.

Required:

Examine eight reasons why it is important for your audit firm to review Sugo Ltd.'s internal control system prior to undertaking verifications of transactions.

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May 2019

3 Questions

Question 5a

Describe three components of an entity's internal control system.

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Question 3c

As an audit assistant engaged in the audit of Samawati Ltd., you have been assigned the audit of non-current assets. The company has a substantial number of items of plant and machinery in its books of account.

Required:

(i) Summarise two objectives of an internal control system over the company's non-current assets.

(ii) Discuss three internal control procedures you would recommend to the company to safeguard its investments in non-current assets.

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Question 1

The Finance Director of Usonga Ltd. has informed you that some fraud took place during the year in the company's payroll department. A number of fictitious employees were set up on the payroll and wages were paid into one bank account that belonged to two supervisors who have recently resigned. One ofthe supervisors had the sole responsibility for setting up new entrants in the payroll system, while the other supervisor processed and authorised bank transfer requests for wages and supplier payments.

The finance director has requested your audit firm for recommendations on how to improve controls in this area to prevent this type of fraud recurring. Usonga Ltd. has recently established a Human Resources department.

Required:

(a) Explain three types of control that Usonga Ltd. could put in place to reduce the risk of the above fraud recurring. For each control, describe how it would mitigate the risk.

(b) Describe four procedures which you would perform to assess whether Usonga Ltd. is a going concern.

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May 2018

1 Questions

Question 4a

Explain the internal control objectives in each of the following cases relating to credit sales:

(i) Credit approval.

(ii) Receipt of sales order.

(iii) Invoicing of goods dispatched.

(iv) Entry into the debtor's ledger.

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November 2017

1 Questions

Question 2b

Citing a relevant example in each case, explain the following control procedures:

(i) Segregation of duties.

(ii) Authorisation and approval.

(iii) Physical controls.

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May 2017

2 Questions

Question 4a

Explain three factors to consider while designing an effective system of internal control.

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Question 2a

Describe five roles you would expect the internal audit staff to perform.

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November 2016

1 Questions

Question 3a

Examine five possible frauds in the area of purchases that an Internal Control System should be designed to prevent and detect.

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May 2016

1 Questions

Question 4c

Shujaa Ltd. is in the process of implementing a computer based accounting system. As their auditor, you have been requested to advise on the appropriate controls to be implemented to prevent unauthorised changes to the data files.

Required:

Suggest six controls that the management of Shujaa Ltd. should consider.

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November 2015

1 Questions

Question 4a

In the context of International Standard on Auditing (ISA) 315-Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and its Environment, describe five components of an entity's internal control system.

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Pilot September 2015

2 Questions

Question 3d

Outline how an audit committee may be of assistance in the relationship between the internal auditor and external auditor.

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Question 3a

Smiling Windows Co. (SW) is a window cleaning company. Customers windows are cleaned monthly. The window cleaner then posts a stamped addressed envelope for payment through the customer's front door. SW has a large number of receivables balances. These customers pay by cheque or cash which is received in the stamped addressed envelopes through the post. The following procedures are applied to the cash received cycle:

A junior clerk from the accounts department opens the posts and if any cheques or cash have been sent, she records the receipts in the cash received log and then places all the monies into the locked small cash box.
The content of the cash box are counted each day and every few days these sums are banked by whichever member of the finance team is available.
The cashier records the details of the cash received log into the cash received day books and also updates the sales ledger.
Usually on a monthly basis the cashier performs bank reconciliation which he then files. If he misses a month then he catches this up in the following months' reconciliation.

Required:

(i) Explain three deficiencies in the system.

(ii) Suggest controls to address each of these deficiencies.

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Internal control systems and Internal Audit Function

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