Audit Simulation: Internal Controls
Welcome, Junior Auditor. Your first assignment is to evaluate the internal control environment at "SimuCorp," a mid-sized manufacturing company. Your goal is to understand their processes and identify key controls related to financial reporting.
Phase 1: Identifying Control Types
Controls can be either Preventive (to stop errors from happening) or Detective (to find errors after they happen). Classify the following control from SimuCorp's sales process:
Control Description:
"The system requires a manager's digital signature to approve any sales discount greater than 15% before the order can be processed."
Phase 2: Manual vs. Automated Controls
SimuCorp uses an ERP system. Controls can be manual, automated, or a mix. Consider this control:
Control Description:
"At the end of each month, the system automatically generates an exception report of all shipped orders that have not been invoiced. The billing clerk must review this report and follow up on each item."
Which statement best describes this control?
Phase 3: Performing a Walk-through
You are now performing a walk-through of the "procure-to-pay" process with a staff accountant. Your goal is to confirm your understanding of their controls. Which of the following is the most effective question to ask?
Phase 4: Inherent Limitations
During your audit, you discover that the CFO can post journal entries directly to the general ledger, bypassing the standard review and approval process. This is rarely done, but the capability exists.
This situation highlights which inherent limitation of internal control?
Assignment Complete!
Excellent work, Auditor. You have successfully identified different types of controls, understood the importance of walk-throughs, and recognized an inherent limitation in SimuCorp's control environment.
Your findings are crucial for assessing the risk of material misstatement and designing further audit procedures. This concludes the simulation.
This simulation is based on standard audit principles for understanding the control environment.
