Question

Question 4

Identify the control weakness, if any, in each of the following individually independent cases

and explain your reasons:

(i)

Gary Wong is the internal audit (“IA”) chief of Golden Limited (“the company”). In

preparing his audit plan for 2020, he has decided to carry out a review of the

effectiveness of the internal controls that are in place in the company’s purchasing

division. The audit programme that Gary has prepared for use in this regard has been

based on the IA’s standard audit programme which has been tailored, as appropriate, in

the circumstances. To ensure that the review can be carried out in a more efficient way,

Tim has sent his draft audit programme to the purchasing division head for comments.

(ii)

Barry Ng is the chief internal auditor of Trendy Limited which is engaged in the

manufacturing and selling of health foods. Trendy Limited has been growing rapidly

over the past few years, in particular with a number of outlets opened in South East

Asia. In this connection, Barry needs to expand his internal audit team to undertake

internal control testing. He has recently recruited externally five new staff who are all,

despite lack of audit and accounting experience, experienced front-line salespersons.

(iii)

Adam Chan is the chief internal auditor of Lewis Limited. He is currently supervising

a team of ten experienced internal audit subordinated staff. Three staff members of the

accounts payable department have recently left that manpower resource is urgently

needed by this department in the short term to help handle daily transactions. The CEO

has requested Adam to send two of his people to the accounts payable department for a

few weeks.

(iv)

Denny Chan has been working for Silver Limited as a salesman for many years. He

has built an established portfolio of long-term customers such that his relationship with

them has been well maintained. Since he knows the customers well, he has been asked

to carry out the annual credit review of his customers and revise the credit limits, where

appropriate, for each of the customers.

(v)

Astar Limited is a large import and export trading company with markets worldwide.

To support its business, it has been using a number of banks, including local, US, Japan

and Europe based financial institutions. The company carries out bank reconciliations

for all bank accounts maintained on a quarterly basis and any significant discrepancies

discovered are investigated and rectified promptly

Answer 1

i) There has been no control weakness because the internal auditor Gary Wong has prepared the internal audit plan for Golden Ltd. on the basis of standard internal audit programme with a view to make sure that the review can be done effectively and efficiently.

ii) There has been control weakness in this case i.e. lack of competence because Barry has recruited new staff for assisting him in the testing of internal controls without considering the fact that they lack the requisite and appropriate audit and accounting experience necessary for discharging their duties.

iii) There has been control weakness in this case also because the accounts payable department of Lewis Ltd. has requested its chief internal auditor Adam Chan to send two of his staff members to their department due to urgent requirement of manpower that arose due to resignation of some staff members in that department. This is outside the scope of an internal auditor who is not responsible for the execution of a company's activities but whose role is to provide advice to the board and management on how to execute their responsibilities in a better way.

iv) There is control weakness in this case also i.e. lack of segregation of duties because Denny Chan has been asked to carry out an annual credit review of his customers and revise credit limits accordingly but the fact that he has been working as a salesman for many years and has built a portfolio of long-term customers, results in very high chances that he may be biased towards some customers in his credit review.

v) There has been no control weakness because all the bank reconciliations for all the accounts maintained are properly carried out on a periodic basis and in case of any material discrepancies, proper investigation is done and the corresponding errors are rectified immediately.