College of Business and Law Semester 1 2019 Page 3 of 9
Assignment Details
QUESTION 1
The following are independent situations:
(i) Bob is an audit assistant currently undertaking university studies. While auditing the books
of Club Casino, he comes across certain financial information that he believes will assist
him in completing one of his university assignments. He copies the information and uses it
in his assignment, carefully removing all reference to Club Casino in order to preserve the
client’s confidentiality.
| (ii) | Wendy has been the engagement partner on the Ace Limited audit for a number of years. Some time ago, Ace’s long-standing company secretary retired and Ace took six months to |
find a replacement. At Ace’s request, Wendy performed company secretarial duties for this
period of time.
| (iii) | Leo is the eldest son of the factory foreman of one of your firm’s major audit clients, Precision Machinery Limited. During vacation work, L is assigned to the audit of Precision Machinery. Leo’s work comprised testing the internal controls of the cash payments system. Chan & Associates are auditors of Classic Reproductions Pty. Limited, a large furniture |
| (iv) |
wholesaler currently experiencing financial difficulties. Classic Reproductions is a
significant client of Chan & Associates and have not paid their audit fee for the past three
years. The audit partner recently threatened to resign from the audit if the outstanding fees
were not paid. To prevent this occurring, Classic Reproductions offered to supply Chan &
Associates with new office furniture. The partner accepted this offer in full consideration of
the outstanding fees, even though the furniture was only worth 50% of the balance. As a
thankyou present, Classic Reproductions gave the partner a 25% shareholding in an
unrelated listed company. At present these shares are worth $1,000. Chan & Associates do
not act as auditors of this company.
Required:
a) Define actual and perceived independence, and explain the importance of each.
b) For each of the above independent situations list any professional standards and regulatory
requirements breached and discuss possible alternative courses of action the auditor should have
taken in order to properly discharge their professional responsibilities.
[4 + 8 = 12 marks]
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QUESTION 2
The audit partner has just advised you that he has been approached to accept the appointment of auditor
to Games Limited. Games Limited is a manufacturer of gaming machines and has been named in a
recent anti-corruption enquiry as having offered incentives to state government members to support a
proposed bill which would allow an increased number of gaming machines in licensed premises. No
charges have yet been laid against Games Limited or any of its employees. The audit partner explains to
you that Games Limited’s auditors were re-appointed for the current financial year at the Annual
General Meeting held two months ago. However, Games Limited’s managing director is unhappy with
the existing auditing firm as the audit partner assigned to Games Limited has been changed.
Required:
The audit partner is unsure whether he should accept the appointment and has asked you to outline any
ethical, legal and other factors to be considered in his decision about whether to accept the appointment
for the current year, and to indicate the steps that need to be taken prior to the appointment.
[10 marks]
QUESTION 3
Everyday Supplies Pty Ltd is a single-store retailer that sells a variety of tools, garden supplies, lumber,
small appliances, and electrical fixtures to the public, although about half of Everyday Supplies’ sales
are to construction contractors on account.
Retail customers pay for merchandise by cash or credit card at cash registers when merchandise is
purchased. A contractor may purchase merchandise on account, if approved by the credit manager
based only on the manager’s familiarity with the contractor’s reputation. After credit is approved, the
sales associate files a prenumbered charge form with the accounts receivable supervisor to set up the
receivable.
The accounts receivable supervisor independently verifies the pricing and other details on the charge
form by reference to a management-authorised price list, corrects any errors, prepares the invoice, and
supervises a part-time employee who mails the invoice to the contractor. The accounts receivable
supervisor electronically posts the details of the invoice in the accounts receivable subsidiary ledger;
simultaneously, the transaction’s details are transmitted to the bookkeeper. The accounts receivable
supervisor also prepares a monthly computer-generated accounts receivable subsidiary ledger without a
reconciliation with the accounts receivable control account, and a monthly report of overdue accounts.
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The cash receipts functions are performed by the cashier, who also supervises the cash register clerks.
The cashier opens the mail, compares each cheque with the enclosed remittance advice, stamps each
cheque “for deposit only”, and lists cheques for deposit. The cashier then gives the remittance advices
to the bookkeeper for recording. The cashier deposits the cheques daily, separate from the daily deposit
of cash register receipts. The cashier retains the verified deposit slips to assist in reconciling the
monthly bank statements, but forwards to the bookkeeper a copy of the daily cash register summary.
The cashier does not have access to the journals or ledgers.
The bookkeeper receives the details of transactions from the accounts receivable supervisor and the
cashier for journalising and positing to the general ledger. After recording the remittance advices
received from the cashier, the bookkeeper electronically transmits the remittance information to the
accounts receivable supervisor for subsidiary ledger updating. The bookkeeper sends monthly
statements to contractors with unpaid balances upon receipt of the monthly report of overdue balances
from the accounts receivable supervisor. The bookkeeper authorises the accounts receivable supervisor
to write off accounts as uncollectible when six months have passed since the initial overdue notice was
sent. At this time, the credit manager is notified by the bookkeeper not to grant additional credit to that
contractor.
Required:
Describe five internal control weaknesses in Everyday Supplies’ internal control for the cash receipts
and billing functions. Explain why each is a weakness.
[10 marks]
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QUESTION 4
Retro Pty Ltd is a major manufacturer of industrial machinery. Detailed below is a description of its
purchasing and payments system.
(i) When the stores department requires items to be purchased, they issue a three-part prenumbered purchase requisition that needs to be approved by the store’s manager. Copy 1 is sent
to the purchasing department, Copy 2 is sent to the accounts payable department and Copy 3 is
filed in the stores department.
(ii) On receipt of an approved purchase requisition, the purchasing department issues a five-part
pre-numbered purchase order. Copy 1 is sent to the supplier, Copies 2 and 3 are forwarded to
the receiving department, Copy 4 is forwarded to the accounts payable department and Copy 5
is filed in the purchasing department.
(iii) When goods are received, the receiving department logs in the shipment by stamping “order
received” on its two copies of the purchase order, which then forms its receiving record. One
copy of the receiving record is filed in the receiving department and the other is forwarded to the
accounts payable department.
| (iv) | The accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment. |
(v) The accounts payable department prepares a pre-numbered disbursement voucher and forwards
it along with the supplier’s invoice, purchase requisition, purchase order and receiving record to
the financial accountant.
(vi) The financial accountant prepares a cheque for each supplier, signs the cheque and records it in
the cash disbursements journal. The cheque is immediately mailed to the supplier. Supporting
documentation is returned to accounts payable for filing.
(vii) At the end of the month, the assistant accountant undertakes a sequence check of all accountable
forms. The financial accountant receives the monthly bank statement, prepares a bank
reconciliation and investigates any reconciling items.
Required:
Identify seven (7) internal control weaknesses in Retro’s internal control concerning the purchases and
payments functions. Explain why each is a weakness.
[14 marks]
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QUESTION 5
You are the audit senior on the MyPet Pty Limited audit. MyPet is a distributor of pet care products
including shampoos, lotions and a small range of toys.
MyPet uses an on-line computer system. No goods are manufactured in-house; rather, MyPet maintains
a stock of raw materials and sub-contracts the manufacture of its products to third parties.
Approximately 50 suppliers and sub-contractors are used and all have proven to be reliable. You have
made the following notes about the inventory system:
Procedures for raw materials
• Separate systems, staff and warehouses are maintained for both raw materials and finished
goods.
• Purchase orders are automatically generated by the computer when stocks of any raw material
fall below 70% of the prior month’s usage. The purchase orders contain the following details:
date;
supplier name and address;
raw material needed.
• Three copies of the purchase order are produced and distributed as follows:
Copy 1—to warehouse to enable follow up of late orders.
Copy 2—filed by accounts clerk in date order.
Copy 3—sent to supplier.
• When raw material stocks are received, the bar codes attached to the delivery boxes by the
supplier are scanned into the system. A two-part Goods Received Note (GRN) is then produced:
Copy 1—matched to warehouse copy of purchase order by stores staff.
Copy 2—filed by accounts clerk.
The scanning process is aborted if the codes do not match those on the masterfile.
Procedures for finished goods
• Production orders are automatically generated when finished goods fall below 60% of the prior
month’s sales. The production orders contain the following details:
date;
sub-contractor’s name;
raw materials required;
finished goods needed.
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• Two copies of the production order are produced:
Copy 1—to raw materials store for use as a picking slip, then it is packed with goods and sent to
the supplier.
Copy 2—filed by production controller in date order.
• When the finished goods stocks are received, the bar codes attached to the delivery boxes by the
supplier are scanned into the system. A two-part GRN is then produced:
Copy 1—matched to production controller’s copy of production order.
Copy 2—filed by accounts clerk.
The scanning process is aborted if the codes to not match those on the masterfile.
General notes
• The computer automatically selects the supplier of both raw materials and finished goods based
on:
the latest price (as per their most recent invoice).
their delivery times (based on the number of days between the date the purchase/
production order is raised and the date the goods are scanned by the warehouse).
• Password access is as follows:
| Stores staff (raw materials): | Purchase order printing for raw materials only. GRN printing for raw materials. |
| Stores staff (finished goods): GRN printing for finished goods. | |
| Production controller: Accounts clerk: | Production order printing, masterfile amendments. Masterfile amendments. |
Masterfile amendments
• The stock masterfile contains details of:
existing stock items including codes and warehouse location;
approved suppliers and sub-contractors.
• Orders will only be generated to suppliers and sub-contractors recorded on the masterfile.
• Masterfile changes are made by the production controller for both raw materials and finished
goods inventory. A masterfile amendment form is completed by the production controller as a
record of the changes made.
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Required:
| (a) | Identify six (6) weaknesses in the internal controls described. Discuss the implications of each of the weaknesses you have identified. |
(b) Assume your IT audit division is to perform testing of controls for the inventory systems
described. Identify two tests that you would recommend they perform.
[12 + 2 = 14 marks]
*** End of Assignment***