Question

You are an audit supervisor of Owen & Co and you are reviewing the documentation describing
Sonic Publishing Co.’s purchases and payables system in preparation for the interim and final
audit for the year ending 30 September 2019.
The company has twenty bookshops and a warehouse, which holds the majority of the
company’s inventory. Your firm has audited Sonic Publishing Co for a number of years and as
such, audit documentation is available from the previous year’s file, including internal control
flowcharts and detailed purchases and payables system notes.
As far as you are aware, Sonic Publishing Co system of internal control has not changed in the
last year. The audit manager is keen for the team to utilise existing systems documentation in
order to ensure audit efficiency. An extract from the existing systems notes is provided below
Extract of purchases and payables system
Procurement managers are responsible for ordering books for their shop. It is not currently
possible for procurement managers to request books from any of the other nine stores. Customers
who wish to order books, which are not in stock at the branch visited, are told to contact the
other stores directly or visit the company website. As the inventory levels fall in a store, the store
procurement raises a purchase requisition form, which is sent to the central warehouse. If there is
insufficient inventory held, a supplier requisition form is completed and sent to the purchase
order clerk, Oliver Tembo, for processing. He sends any orders above N$500 for authorisation
from the purchasing director. Receipts of goods from suppliers are processed by the warehouse
team, who agree the delivery to the purchase order, checking quantity and quality of goods and
complete a sequentially numbered goods received note (GRN). The GRNs are sent to the
accounts department every two weeks for processing. On receipt of the purchase invoice from
the supplier, an accounts clerk matches it to the GRN. The invoice is then sent to the purchase
ordering clerk, Oliver, who processes it for payment. The finance director is given the total
amount of the payments list, which she authorizes and then processes the bank payments. Due to
staff shortages in the accounts department, supplier statement reconciliations are no longer
performed.

3.1 Briefly describe the term “Substantive procedures”.

3.2 Identify and explain 5 areas in the purchase and payables system at Sonic Publishing Co.
that lack internal controls.

3.3 Describe substantive procedures the auditor should perform to obtain sufficient and
Appropriate evidence in relation to Sonic Publishing Co.’s purchases and other expenses.

Answer 1

Facts of the case: Owen and Co. having 20 Bracnhes / book shop and 01 Centralized Warehouse. Current Scernario, No change in Internal Control at orgaisation level, Following Purhase and Payable system process is:

Procurement manager provide for Ordering of books although, Non availability of particular bok as demended by the customer, guided to purchase the same by contact at website or the other store of the same organisation  where the the particular book is avaiable.

Flaws: Requisition by Procurement department without back up / confirmation data from store department.

- Returning customer without making enquiry themselves at which location same is available, Loosing of Customer, Even Store is centralised, System will show that particular book is available at which store.

Another Scenario, Purchase Requisition raised by Procurement manager sent to central warehouse, if insuffiecient quantity, same is ordered with supplier by Purchase Clerk, Order above the particular Amount is verified by Purchase Director. Delivery is made by GRN receipts which first forward to Accounts department , Purchase department matches the invoice with the help of GRN held by Clerk. For PAyment Same is forwarded further to Purchase ordering clerk, Finance Director Sign off the payment list, No reconcilation is performed by the department and Bank Debit happens.

Flwas in the Process:

1. Requisition by Procurement department without back up / confirmation data from store department.

2. Double Authorisation is missing before signing the order value more than the benchmarked amount.

3. GRN receipt directly forwarded to Accounts Deprtment, before verified by Store department.

4. Invoice Directed to Purchase department before verified by Store department.

5. Finance Director sign offs the payment list before the list signoffs by her subordinate at managerial level.

6. No Reconciliation is performed.

3.1: Substantive Procedure are the audit procedure performed to detect the material misstatement or fraud at assertion level. It is the combination of process, test etc performed to obtain evidence which conclude the assertions i.e Completeness, Accuracy, Disclosures etc. To quantify comprehensive documents should be in hand to conclude the same.

3.2: Area Which Lack Internal Control:

- Recording level : Maintaing One warehouse for 20 branches is not updated as everthing is stored at one level and further distributed accordingly as per the requisition.

- No Maker - Checker: Purchase director , Fiannce Director siply sign offs the documents without lower managerial authorise the same.

- Wrong flow of Verifiecation: GRN first to be sent to store instead of finance department, as with GRN no book entry is to be passed.

- Invoice payment: WIthout Store management authorisation, Invoice payment underwent through 3 level checks Fist store manager, Purchase manager ( Requisition checks) then Finance department.

- Before making Payment no reconcilation is done , Neither  frequency for the same is determined for reconciliations. , Lack of this lead to blockage of working capital , excess payment to vendors.

3.3 Substantive procdure required to be performed by the Auditor to obtain evidence for Purchase and expense accounts

- Stock register : Maintenance of Materail recording is correct or not.

- Purchase requisition register : Purchase requisition is mae on the basis of  department / 20 branches requisition letter and thier authorisation.

- Authoristion Matrix: Level of Authorising authority within the organsiation for particular process.

- Accounts Invoice Recipt register: Whether all invoices are recorded in the books of account,

- Reconcilation of Accounts Payable is required to be made to ensure that no excess payment is made, or advance payment is made without approval.

Above documents help auditor to check the five assertions completness of stock records, books, accuracy of data recorded, its valuations etc.

All these document will keep check right from beginning of requistion requested by the 20 Shops , no amendment in requistion without 20 shops approving authority, No extra supplies, no blockage of fund, proper maintenance of books of accounts.