F8: Internal controls (part 2) - YouTube

Longer type questions and answers, I know this will be a little bit difficult to

see on the screen so I'm going to drill down on the next slide. Let's start by

looking at part A, this is question 2 from June '15. Let's look at the two individual

parts. First of all part A, identify and briefly explain the five components

of an entity's internal control. I mean, isn't that just a dream question? Because as

long as you've got the knowledge as long as you remember the pneumonic crime or

however you remember your knowledge you can answer it. But the pneumonic crime

will give you two and a half marks. To pass you've got to go on and explain. I think

that pneumonic will give you five beautiful subheadings for your answer to

allow you to then build a written answer which will score the full mark. So here's

an example of control environment

written with a title underlined this is the culture attitude and awareness of

management and those charged with governance regarding internal control

within an organization.

Remember you've only got 1.8 minutes per mark, 1 and a half minutes

really once you build in some thinking, reading and planning time. I think that's

enough time to write that answer but you've got to be careful if you start

writing too much you will run out of time. Certainly a sentence, two or three lines

for any one individual mark would be a nice rule of thumb. If you start writing

more you're probably writing too much and possibly waffling. I did another

one, Information System, this is the one which people tend to struggle with

but it's the business processes related to financial reporting. It includes the

accounting which is used to record, process, and report business transactions

and events. So they have wrote a little bit more maybe then control environment

but over the course of the five, elements over the course of the time

allowed to answer the question

I think I can write briefly enough to cover everything to get the

full five marks. My target there, 4 and a half out of 5. What did the examiner say

however about candidates in that question? I really advise you to go back and

read the examiners commentary

she gives you so much good information gives me information but you this would

be invaluable for you to understand where you can improve relative to other

students. So on that part A the examiner said, "candidate's performance was mixed with

many not even attempting it". I find that incredible but obviously they didn't

have the knowledge. Many candidates were only able to identify the components and

either did not provide an explanation or it was incorrect.

Again knowledge, it's all very well having it but you need to be able to

apply it. In addition a significant significant minority of candidates

didn't understand the question requirement so instead of providing

components they started to talk about control procedures which was wrong. Now I

can understand why someone did that; they know the components they can't explain

them so they jot down something just to try and get the other half mark, I can

understand that. You wouldn't be negatively marked but obviously don't

waste time if you don't know the right answer. The second part of that, "describe

a test of control which the auditor of Bonsai Trading would perform to assess

whether or not each of the non-current asset controls listed above is operating

effectively". 'Describe'. You can't just say it too briefly, you can't just identify, you've

got to say a little bit more. Now to get the most out of this session what I'd like

you to do is just pause the video now, read through the scenario, read

through those five elements, okay? Spend 4 or 5 minutes, try and write out maybe an answer

for the top two and then I'll debrief them when you come back. So just pause your

video now and I'll see you in a couple of minutes.

Okay, hopefully you've paused it, hopefully you've had time to read through the scenario. I

won't deal with a little preamble at the top let's get straight into it. So these

are the issues; Bonsai has a capital expenditure committee and all purchase

orders for capital items are required to be authorized by this committee. So how,

how are you gonna test, as the auditor of Bonsai, how are you going to test that this

capital expenditure committee actually does, actually does, authorize all, all

capital items?

well the best answer I can come up with is to think about the committee, a

committee will hold meetings and those meetings will be minuted, so maybe the

best answer you could construct using remember in my mind about those two

words, 'inspection', 'observation', 'inspection', 'observation'. Maybe I could for the

control expenditure committee for a sample of capital purchases 'inspect'.

'Inspect' the minutes of the committee meeting to ensure they have been authorised.

I've written it in a question, I've got a lovely subheading just to give the exact

sorry the marker of your paper the understanding of exactly what you're

covering and have written enough in my opinion to get the full mark; I've

'described' it. Let's take the next one. The next one, "on receipt each asset is

assigned a unique serial number and this is recorded on the asset and in the

non-current asset register". Well I've given you two examples of an answer;

Top one, "inspect the non-current asset register", 'inspect', "to confirm that all

recorded serial numbers are unique". I think that would get the mark. I'm testing a

control that's listed in the scenario but I'd be a bit worried. Have I

written enough? Have I described it enough? Maybe I would probably do the one below,

you'd only do one of the other you don't need to give two for each control just

one test per control, there's five controls there for you to look at. The bottom one there

I feel is much better; "select a sample of non-current assets and physically

verify they have an asset tag attached. Trace and agree the asset tag

numbers back to the non-current asset register". I've got an inspection in there

or a physical verification and I'm tracing and agreeing back to the register

itself.

I think that is a good test of control to ensure that that system, that process

that control is operating effectively. I'll leave the remaining three for you

to have a look at. The examiners answer is fantastic,

okay, it's written in a really good way and a brief way that I think as a student

you would be able to learn from very easily and also be able to replicate

that style in your answers so it is highly recommended. The examiner said on this

scenario on this question weaker candidates wasted time by writing out

the five controls.

Well why would you do that just please get in

to giving me the tests. Some candidates give substantive procedures, they weren't

asked for, she wanted tests of control. Some of the tests that were given were

vague and incomplete, for example, "agree the serial numbers on the assets". That's not really

a proper description is it? And I can understand and if I was marking that paper I

can understand why you'd get probably no marks, okay, lucky to get a half,

probably none. The examiner does just say also just bear in mind

'observation', it is a valid procedure but it's not the only one for tests of

control. I say observation and inspection there are others examiner uses the word

review in her model answer quite a bit so you can use a variety of verbs but

don't do five 'observations', your answers do get repetitive and are unlikely to

score full marks. Let's move on, the final question we're going to look at is

question 4 from June '14.

I want to just look at the requirements here, then I'lll pause and I'll let you run

through the scenario. So first of all the requirements in respect of the

purchasing system at Cherry Blossom identify and explain five deficiencies

that's five, five, not six, not seven, not eight, five, five. And recommend a control to address each

of these deficiencies. I mean she gives you the clue in the requirement, she tells

you how she wants you to answer it. She wants two columns. She wants two columns, the

first of which 'identify' and 'explain' two deficiencies and then a second column

right alongside it that recommends controls to address them. You must say

enough to get a mark. So, what I want you to do is, here's a zoom-in of the actual

scenario. Again I'd like you to pause the video just for a few minutes and I want

you to identify, identify five internal control deficiencies and then I think

you might find a couple more think about which ones you would answer and ideally

try and write out a couple and I'll do the same. So pause the video now and come

back once you've done that task. Okay I hope you paused the video, I do hope you paused the video, I'm

trusting you a little bit on this. Let's read through the scenario, let's find

these issues. "When production supervisors require raw materials they complete a

requisition form and this is submitted to the purchase ordering department". Well as soon

as I read that I thought well who authorizes that? Who authorizes the form? So I

highlighted the requisition form completion and I thought I reckon I've got a lack of

authorization there but it's not signposted yet. What I'm looking for the

best answers you can give are the clear issues highlighted by the examiner in the

scenario, so let's read on. "Requisition forms do not require authorization", ah

there you go, so it is, it's clearly signposted that is a clear deficiency

they are not authorized. We can think about why in a few minutes and we can

think about recommendations in a few minutes, let's just identify them first.

"No reference is made to the current inventory levels of the materials been

requested". Well bang there's a second one.

"No reference is made to the current inventory levels of the materials been

requested". Well if you're not looking to see what inventory you've got at the moment

and you simply order it maybe you don't need that inventory. Let's read on. "Staff in the

purchase ordering department use the requisitions to raise sequentially

numbered purchase orders based on the approved suppliers list". That sounds good

to me, if this question was asking for strengths I think that they would be

strengths, but it's not, "which was last updated 24 months ago".

Bang there's another one, "24 months ago" these suppliers and the list could be out of

date there could be cheaper suppliers, there could be suppliers which will deliver

more efficiently and quicker, there may be suppliers who would be given better

quality of goods so I can argue that that is a deficiency as well.

"The purchasing director authorizes the orders prior to these these being sent to

suppliers". Good news. "When the goods are received the warehouse department

verifies the quantity to the supplier's dispatch note and checks quality is okay".

That's fine I mean suppliers can dispatch what they want but surely we've got to

be checking back to the original order to ensure we're accepting goods that we

did indeed order. "They complete a sequentially numbered Goods Received note

and send a copy of the GRN to the Finance Department", so they send a copy of the GRN

to the Finance Department, what about the Purchase Ordering Department? If they don't

get one they may not think the order's been fulfilled and reorder. "Purchase

Invoices are sent directly to the Purchase Ledger Clark who stores them in a manual file

until the end of each week.

Storing in a manual file, risk they could go missing, until the end of

the week again may not be entered on a timely basis. "He then inputs them into the

purchase ledger using batch controls", good, "and gives each invoice a unique number

based on the supplier code". Oh I'm not sure about that, I

think I might struggle to explain it well and easily but surely I'd want

there to be some sequential numbering element there. "The invoices are reviewed

and authorized for payment by the Finance Director sounds", that sounds positive, "but the actual

payment is only made sixty days, sixty days after the invoice is input into the system".

Sixty days you may lose out,

supply goodwill, any settlement discounts on offer. So how many have I got: 1,2,3,4,5,6,7,8. Eight and I need five.

Too many people in this exam would have given eight answers and wasted time.

You've got to choose what you think are the best five, the easiest to answer and the

easiest to give a recommendation to fix. To me I would have chosen firstly the

inventory levels not been checked, secondly the no authorization of the form

or requisition form, thirdly not checking back to a purchase order number,

fourthly up on the top right there that the suppliers list wasn't updated for the

last 24 months, two years, and fifthly the sixty day issue. Don't simply start at

the top and work down. This question's actually quite nice but some if I was

the examiner and thank goodness I'm not I would probably put some really tough

points at the start and the easier ones at the end. Why? I just want to bulk down

ill-prepared candidates with poor exam technique who tried to deal with the

issues in order rather than thinkin before they start writing. I've got a

couple of examples of answers here, firstly for the inventory levels

"two columns", the examiner tells you to do it just do it please.

"No references made to current inventory levels before order placed". comprehension

Paraphrasing the words from the scenario then go on and explain this

means that now I know that not might not be the best English you could ever use,

but I usually start my explanations with those words, it just focuses me to

give an explanation of the problem. "This means that orders could be placed for goods

they're not required at this time" which will, and go that extra mile if you can, tell

me the consequence to the business, it could negatively impact cash flow.

Your recommendation needs to be practical and sensible, "before any order is confirmed

inventory levels should be checked by a purchase order clark", if you can tell

me who tell me who tell me when, "before the orders placed purchase order Clark

ensure orders cannot be fulfilled from current inventory levels". I did a second

one. My second one was around the payments to suppliers again I paraphrase

the words from scenario, "payments made only after 60 days, which means that Cherry

may miss out on any settlement discounts on offer as well as potentially losing

supplier goodwill". Thinking of my recommendation, I thought that was a little bit tougher

but really I wanted to have a review of all the supplier terms but perhaps a

high-level point to make sure I get my full mark, "a new supplier payment policy

should be introduced which will allow supplier terms to be assessed regularly

and earlier payments made where appropriate or where beneficial to the

company". And that's it. I'll leave the other elements for you and again the examiners

answer is fabulous. What did she say about this answer from June '15? She

said it was a very well however some didn't always adequately

explain the deficiency.

She said that candidates should make sure they consider the implication of the

deficiency to identify the issues that will have the most significant impact. So she

does wanted to try and think of the best five deficiencies. She said that the

scenario contain more than five and the best candidates the strongest candidates

selected the five they could describe best and control best. We got candidates who

started at the top and just went down in order.

She also said that some candidates did more than five which simply wasted time,

no additional marks on offer. You will only get credit for your best 5 answers.

She suggested some of your recommendations were unrealistic and

some were too brief. However, she said it was very pleasing that most set out

their answers in columns. Those that didn't and just gave a list of control

deficiencies and then at the end a list of separate recommendations, they tended

to repeat themselves and quite a bit of time was wasted. She wants you to write in

columns because it produces the best answers. So, what have we done today, what were

the session objectives? Well I wanted to go through the key internal control

syllabus areas and we did that I know we did it briefly I'm not here to teach you the

entire syllabus but at least you should be able to tick off those you know, those

you understand and those where you think actually I need to do some more work on

that.

Secondly, I wanted to give some confidence in your ability to pass paper F8. It's

not rocket science but it does take time and it does take some commitment and

lots of question practice, and that's what we did we did a little bit of

question practice focusing both on MCQ's and internal control longer type

questions. That's the end of the session, thank you.