Tag (SQ): Internal controls

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SCS – L3 – Q3- Corporate Governance

Explain the composition and functions of an Audit Committee in corporate governance.

Question

a) The role of Audit Committee in corporate governance cannot be overemphasized.

(i) What should be the composition of an Audit Committee, and who might be invited by the committee to attend their meetings?

(ii) Explain FOUR (4) functions of an Audit Committee.

(b) Corporate governance is now a very popular and important area in strategic management. However, corporate governance is poor in a number of organizations.

Answer

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Tags: Audit committee, Auditor Independence, Corporate Governance, Internal controls, Non-executive directors
Level: Level 3

Topic: Corporate governance

AA – L2 – Q69 – Audit Reports

Draft a management report addressing inventory and credit limit deficiencies at TechTrend Solutions, including implications and recommendations.

Question

TechTrend Solutions sells personal computers (PCs) to independent shops. You are the external auditor of TechTrend Solutions. Your interim audit revealed the following issues:

(1) The half-year physical inventory count revealed that some PCs supposed to be in inventory were missing and that other machines which had been returned by customers were in inventory but had not been recorded as having been returned. A few of the missing PCs have been traced to directors who borrowed them for use at home.

(2) Two customers had been allowed to exceed their credit limits and new customers in the last year had not been allocated credit limits.

Required:

Draft the section of your report to management dealing with the above deficiencies. Set out the deficiencies, their implications, and your recommendations for improvement.

Answer

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Topic: AUDIT REPORT

AA – L2 – Q67 – Internal Control Systems

List six audit procedures for Bertram Co's procurement and purchases system with reasons. List four audit procedures before attending Bertram Co's inventory count. Identify deficiencies in Bertram Co's inventory count at depot nine and explain how to address them.

Question

Bertram Co
Bertram Co assembles fridges, microwaves, washing machines and other domestic appliances from parts procured from a large number of suppliers. As part of the interim audit work two weeks prior to the company year-end, you are testing the procurement and purchases systems and attending the inventory count.

Procurement and purchases system
Parts inventory is monitored by the stores manager. When the quantity of a particular part falls below re-order level, an e-mail is sent to the procurement department detailing the part required and the quantity to order. A copy of the e-mail is filed on the store manager’s computer.
Staff in the procurement department check the e-mail, allocate the order to an authorised supplier and send the order to that supplier using Electronic Data Interchange (EDI). A copy of the EDI order is filed in the order database by the computer system. The order is identified by a unique order number.
When goods are received at Bertram, the stores clerk confirms that the inventory agrees to the delivery note and checks the order database to ensure that the inventory were in fact ordered by Bertram. (Delivery is refused where goods do not have a delivery note.)
The order in the order database is updated to confirm receipt of goods, and the perpetual inventory system updated to show the receipt of inventory. The physical goods are added to the parts store and the paper delivery note is stamped with the order number and is filed in the goods inwards department.
The supplier sends a purchase invoice to Bertram using EDI; invoices are automatically routed to the accounts department. On receipt of the invoice, the accounts clerk checks the order database, matches the invoice details with the database and updates the database to confirm receipt of invoice. The invoice is added to the purchases database, where the purchase day book (PDB) and suppliers individual account in the payables ledger are automatically updated.

Required:

(a) List SIX audit procedures that an auditor would normally carry out on the purchases system at Bertram Co, explaining the reason for each procedure.

(b) List FOUR audit procedures that an auditor will normally perform prior to attending the client’s premises on the day of the inventory count.

Pre-numbered count sheets were being issued to client’s staff carrying out the count. The count sheets showed the inventory ledger balances for checking against physical inventory.
All count staff were drawn from the inventory warehouse and were counting in teams of two.
Three counting teams were allocated to each area of the stores to count, although the teams were allowed to decide which pair of staff counted which inventory within each area. Staff were warned that they had to remember which inventory had been counted.
Information was recorded on the count sheets in pencil so amendments could be made easily as required.
Any inventory not located on the pre-numbered inventory sheets was recorded on separate inventory sheets – which were numbered by staff as they were used.
At the end of the count, all count sheets were collected and the numeric sequence of the sheets checked; the sheets were not signed.

Required:
(i) List the deficiencies in the control system for counting inventory at depot nine.
(ii) For each deficiency, explain why it is a deficiency and state how that deficiency can be overcome.

(d) (i) State the aim of a test of control and the aim of a substantive procedure.

(ii) In respect of your attendance at Bertram Co’s inventory count, state one test of control and one substantive procedure that you should perform.

Answer

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Tags: Audit Evidence, Audit Procedures, Internal controls, Procurement System, Purchases System
Level: Level 2

Topic: Audit Procedures

AA – L2 – Q66 – Internal Control Systems

Explain steps to verify accuracy of prior year's internal control questionnaires for Lara Co's revenue system. List six tests of control for Lara Co's despatch and revenue system with reasons for each.

Question

Introduction – audit firm
You are an audit senior in Heston & Co, a firm providing audit and assurance services. At the request of an audit partner, you are preparing the audit programme for the revenue and receivables systems of Lara Co.
Audit documentation is available from the previous year’s audit, including internal control questionnaires and audit programmes for the despatch and revenue system. The audit approach last year did not involve the use of computer assisted audit techniques (CAATs); the same approach will be taken this year. As far as you are aware, Lara’s system of internal control has not changed in the last year.

Client background – revenue system
Lara Co is a wholesaler of electrical goods such as kettles, televisions, rice cookers, fans etc. The company maintains one large warehouse in a major city. The customers of Lara are always owners of small retail shops, where electrical goods are sold to members of the public. Lara only sells to authorised customers; following appropriate credit checks, each customer is given a Lara identification card to confirm their status. The card must be used to obtain goods from the warehouse.

Despatch and revenue system
The despatch and revenue system operates as follows:

Customers visit Lara’s warehouse and load the goods they require into their vans after showing their Lara identification card to the despatch staff.
A pre-numbered goods despatch note (GDN) is produced and signed by the customer and a member of Lara’s despatch staff confirmingGOODStaken.
One copy of the GDN is sent to the accounts department, the second copy is retained in the despatch department.
Accounts staff enter goods despatch information onto the computerised revenue system. The GDN is signed.
The computer system produces the sales invoice, with reference to the inventory master file for product details and prices, maintains the sales day book and also the receivables ledger. The receivables control account is balanced by the computer.
Invoices are printed out and sent to each customer in the post with paper copies maintained in the accounts department. Invoices are compared to GDNs by accounts staff and signed.
Paper copies of the receivables ledger control account and list of aged receivables are also available.
Error reports are produced showing breaks in the GDN sequence.

Information on receivables
The chief accountant has informed you that receivables days have increased from 45 to 60 days over the last year.
The aged receivables report produced by the computer is shown below:

Number of receivables	Range of debt	Total debt ₵	Current ₵	1 to 2 months old ₵	More than 2 months old ₵
15	Less than ₵0	(87,253)	(87,253)
197	₵0 to ₵20,000	2,167,762	548,894	643,523	975,345
153	₵20,001 to ₵50,000	5,508,077	2,044,253	2,735,073	728,751
23	₵50,001 or more	1,495,498	750,235	672,750	72,513
388		9,084,084	3,256,129	4,051,346	1,776,609

In view of the deteriorating receivables situation, a direct confirmation of receivables will be performed this year.

Required:

(a) Explain the steps necessary to check the accuracy of the previous year’s internal control questionnaires.

(b) Using information from the scenario, list SIX tests of control that an auditor would normally carry out on the despatch and revenue system at Lara Co and explain the reason for each test.

(d) (i) Describe the procedures up to despatch of letters to individual receivables in relation to a direct confirmation of receivables.

Answer

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Tags: Audit Documentation, Control Questionnaires, Internal controls, Revenue System, Walk-Through Checks
Level: Level 2

Topic: Internal Control Systems

AAA – L3 – Q57 – Reporting

Discuss deficiencies in database maintenance and advertising deals at Glenda Publishing, their consequences, and recommendations.

Question

57 Glenda Publishing
Described below are situations which have arisen at Glenda Publishing, a company involved in publishing activities.
(1) Database maintenance
Routine maintenance work is behind schedule resulting in a backlog of input for new subscriptions, cancellations, and changes of addresses.
(2) Advertising deals
As a result of staff shortages, some deals with advertisers are not being recorded and order confirmations are not being sent out.

Required:
For each situation, set out the deficiencies, their consequences, and your recommendations for improvement.

Answer

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Tags: Audit Deficiencies, Customer Goodwill, Internal controls, Management Report, Publishing Industry, Revenue Loss
Level: Level 3

Topic: Audit-Related Services

AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

Question

55 Richmond Computers

Richmond Computers sells personal computers (PCs) to independent shops. You are the external auditor of Richmond Computers. Your interim audit revealed the following issues:

(1) The half year physical inventory count revealed that some PCs supposed to be in inventory were missing and that other machines which had been returned by customers were in inventory but had not been recorded as having been returned. A few of the missing PCs have been traced to directors who borrowed them for use at home.

(2) Two customers had been allowed to exceed their credit limits and new customers in the last year had not been allocated credit limits.

Required

Draft the section of your report to management dealing with the above deficiencies in internal control. Set out the deficiencies, their implications and your recommendations for improvement.

Answer

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Tags: Auditor’s Report, Credit Limits, Financial Statements, Internal controls, Inventory
Level: Level 3

Topic: Reporting

AA – L2 – Q62 – Audit Evidence

Identify deficiencies in Elite Tableware Ltd's inventory count, their implications, recommendations, and audit procedures for inventory.

Question

Your firm is the external auditor of Elite Tableware Ltd, and you recently attended the year-end inventory count at the company’s warehouse. The company manufactures high quality tableware (plates, cups and saucers etc.) and it maintains an integrated computerised system that shows the inventory held at any point in time.
At the year-end inventory count, reports showing the various categories of inventories (but not the quantities) are printed off the system and the quantities of inventories actually counted are inserted annually by the counters. Later the quantities are compared with those per the computer system.
The count instructions were received by both you and the counters the day before the count was due to take place. The instructions consisted of the following five points:
(1) Counters must arrive at 8 am on the morning of the count.
(2) They will work in teams of two people.
(3) Each team will be assigned a specific area of the warehouse to count. They will receive inventory sheets listing the products to be found in their area.
(4) The inventory sheets are pre-numbered.
(5) Once the counters have finished the inventory count, the inventory sheets must be handed to the warehouse manager.

Your notes from the attendance at the count include the following observations:
Many areas in which the count took place were untidy and inventory was sometimes difficult to find because it was not in the allocated area. The same categories of inventories were sometimes found in several different areas and some inventory was incorrectly labelled.
The count was conducted in a hurry in order to close the warehouse before a public holiday and there were insufficient counters to conduct the count properly in the time available. The issue and receipt of inventory sheets (on which the quantities were recorded by counters) was not properly controlled. It was difficult to reconcile the inventory quantities recorded at the count to the computerised records and some significant differences remain outstanding.
Although no finished goods were dispatched during the inventory count, a large delivery of raw materials was received into the warehouse.
Required:
(a) For the inventory count conducted by Elite Tableware Ltd:
(i) Identify and explain FOUR (4) deficiencies in the count.
(ii) Explain the possible implication of each deficiency and
(iii) Provide a recommendation to address each deficiency.

(b) Describe the audit procedures that auditor should perform at the year end to confirm each of the following:
(i) The existence of inventory

(ii) The completeness of inventory

(iii) The valuation of inventory.

Answer

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Tags: Audit Procedures, Completeness, Deficiencies, Existence, Internal controls, Inventory Count, Valuation
Level: Level 2

Topic: Audit Evidence

AA – L2 – Q57 – Internal Audits

Explain the usefulness of internal audit work, quality factors, and audit evidence for outsourced functions at SkyHigh Airlines.

Question

SkyHigh Airlines is an airline. The company owns some of its fleet of aircraft. Other aircraft are leased from third parties. SkyHigh Airlines has an internal audit function that has recently expanded. Your firm is the external auditor to SkyHigh Airlines. Your firm has been asked to investigate the extent to which it may be able to rely on the work of internal Angelfire International

Required:

(a) Explain why the work of internal auditors, in the three areas noted above, is likely to be useful to you as the external auditor. (9 marks)

(b) Explain how the quality of the internal audit function is likely to influence the extent of your reliance on internal audit work. (5 marks)

(c) Describe the audit evidence you will seek relating to internal controls over the outsourced functions (in-flight catering and payroll). (6 marks)

Answer

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Tags: Audit Evidence, Audit Procedures, External Audit, Financial Statement Assertions, Internal Audit, Internal controls, Outsourcing
Level: Level 2

Topic: Internal Audits

AAA – L3 – Q43 – Internal audit and outsourcing

Explain risks, controls, further work, and financial statement impact for YUM Supermarkets' issues.

Question

YUM Supermarkets (YUM) has 200 stores throughout Ghana, with around a further 20 stores across Africa. YUM have been trying to compete with the large out of town supermarkets for the last five years but have recently taken the decision to move into the smaller stores in towns. Their aim is to be specialist in the type of value for money ‘quality’ products that cannot normally be obtained in local shops. YUM has also moved into sales via the internet. They receive orders through the internet and arrange for the closest local store to distribute the shopping to the customer.
You have been assigned to the audit of YUM this year. You have obtained the following information:
(1) The internet sales service has proved very successful with a 100% increase in revenue on last year. However, there have been complaints about the quality of deliveries and that customers are failing to receive all items ordered.
(2) There have been interruptions to the internet sales service caused by the higher than expected levels of revenue. There have also been concerns over the confidentiality and security of information accessed via the internet.
(3) Problems have arisen with two of the new sites selected by YUM for expansion.
In respect of Site A, there has been substantial local opposition accompanied by environmental concerns over potential contamination of the site.
In respect of Site B, planning permission has not yet been obtained and has been deferred due to an alternative application in the locality by a major competitor. This looks likely to delay planning decisions for a significant period of time.
(4) YUM acquired Ripe Supermarkets last year as part of their business strategy. Initially, the decision was taken to continue to operate Ripe separately and integrate the stores on a phased basis over a two year period. This would involve rebranding Ripe, investing and upgrading stores and ensuring the same quality of staff as YUM. Ripe managers were retained to continue managing stores and to ensure continuity. As the integration has commenced, a number of problems have now become apparent with Ripe operations. These include the following:

Ripe employees have not been receiving the legal minimum wage.
No records have been maintained of the number of hours worked by employees, although anecdotal evidence has been received that in some areas they have been regularly working 60 hour weeks.
There are three ongoing complaints for unfair dismissal.
Staff retention has been a major difficulty.
Investigations are underway by the authorities over allegations of false labelling of sales items.
An investigation is underway over the sale of meat products in one store that appear to have resulted in a local outbreak of food poisoning. The most likely cause for this outbreak is the poor refrigeration and maintenance of the products and sales beyond ‘sell by’ dates. Some local press comment has already arisen.
Required
Explain the risks facing YUM Supermarkets in respect of the above, the controls you would expect to operate in the scenario, the further work you would undertake and the potential impact on the financial statements and the audit.

Answer

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Tags: Acquisition issues, Audit risks, Financial Statement Impact, Internal controls, Internet sales
Level: Level 3

Topic: Internal Audit and Outsourcing

AA – L2 – Q47 – Audit Evidence

Identify strengths and weaknesses of year-end inventory count instructions at a manufacturer.

Question

The following is a set of instructions for the year end physical inventory count at a manufacturer. Production is to continue on the day of the year end count.
Counting is to be carried out by staff from the warehouse and the accounts department. Counters are to report at 8am on 30 June to the warehouse manager.
The warehouse manager will issue sequentially numbered inventory sheets which will include pre-printed descriptions of the inventory lines and the quantities supplied by the inventory controller.
The count area is to be divided into sections and each will be allocated a section by the warehouse manager. Items are to be marked once counted.
The production manager will estimate the materials required for use in production on the day and ensure that they are taken out of the warehouse and moved to the production department.
Goods to be despatched on the day are to be taken out of the warehouse before counting commences and labelled accordingly. Any items not despatched at the end of the day will be included in inventory. The number of the last despatch note will be recorded by the warehouse manager.
Any emergency requisitions of raw materials are to be reported to the warehouse manager.
Damaged inventory is to be noted as such on the inventory sheets.
Any discrepancies between physical and book inventory will be referred to the warehouse manager.
All inventory sheets are to be signed by the counter and returned to the warehouse manager at the end of the count. The warehouse manager will check the numerical sequence of the inventory sheets.

Required
Identify the strengths and the weaknesses of the above instructions, explaining clearly their significance.

Answer

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Tags: Audit Procedures, Cut-off, Internal controls, Inventory Count, Physical Inventory
Level: Level 2

Topic: Audit Evidence

Tag (SQ): Internal controls

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SCS – L3 – Q3- Corporate Governance

Explain the composition and functions of an Audit Committee in corporate governance.

AA – L2 – Q69 – Audit Reports

Draft a management report addressing inventory and credit limit deficiencies at TechTrend Solutions, including implications and recommendations.

AA – L2 – Q67 – Internal Control Systems

List six audit procedures for Bertram Co's procurement and purchases system with reasons. List four audit procedures before attending Bertram Co's inventory count. Identify deficiencies in Bertram Co's inventory count at depot nine and explain how to address them.

AA – L2 – Q66 – Internal Control Systems

Explain steps to verify accuracy of prior year's internal control questionnaires for Lara Co's revenue system. List six tests of control for Lara Co's despatch and revenue system with reasons for each.

AAA – L3 – Q57 – Reporting

Discuss deficiencies in database maintenance and advertising deals at Glenda Publishing, their consequences, and recommendations.

AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

AA – L2 – Q62 – Audit Evidence

Identify deficiencies in Elite Tableware Ltd's inventory count, their implications, recommendations, and audit procedures for inventory.

AA – L2 – Q57 – Internal Audits

Explain the usefulness of internal audit work, quality factors, and audit evidence for outsourced functions at SkyHigh Airlines.

AAA – L3 – Q43 – Internal audit and outsourcing

Explain risks, controls, further work, and financial statement impact for YUM Supermarkets' issues.

AA – L2 – Q47 – Audit Evidence

Identify strengths and weaknesses of year-end inventory count instructions at a manufacturer.

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SCS – L3 – Q3- Corporate Governance

Explain the composition and functions of an Audit Committee in corporate governance.

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AA – L2 – Q69 – Audit Reports

Draft a management report addressing inventory and credit limit deficiencies at TechTrend Solutions, including implications and recommendations.

You're reporting an error for "AA – L2 – Q69 – Audit Reports"

AA – L2 – Q67 – Internal Control Systems

List six audit procedures for Bertram Co's procurement and purchases system with reasons. List four audit procedures before attending Bertram Co's inventory count. Identify deficiencies in Bertram Co's inventory count at depot nine and explain how to address them.

You're reporting an error for "AA – L2 – Q67 – Internal Control Systems"

AA – L2 – Q66 – Internal Control Systems

Explain steps to verify accuracy of prior year's internal control questionnaires for Lara Co's revenue system. List six tests of control for Lara Co's despatch and revenue system with reasons for each.

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AAA – L3 – Q57 – Reporting

Discuss deficiencies in database maintenance and advertising deals at Glenda Publishing, their consequences, and recommendations.

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AAA – L3 – Q55 – Reporting

Draft a management report addressing internal control deficiencies in inventory and credit management at Richmond Computers.

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AA – L2 – Q62 – Audit Evidence

Identify deficiencies in Elite Tableware Ltd's inventory count, their implications, recommendations, and audit procedures for inventory.

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AA – L2 – Q57 – Internal Audits

Explain the usefulness of internal audit work, quality factors, and audit evidence for outsourced functions at SkyHigh Airlines.

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AAA – L3 – Q43 – Internal audit and outsourcing

Explain risks, controls, further work, and financial statement impact for YUM Supermarkets' issues.

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AA – L2 – Q47 – Audit Evidence

Identify strengths and weaknesses of year-end inventory count instructions at a manufacturer.

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