Question

You are the audit senior on the Wendig Limited (Wendig) engagement and have commenced planning for the 2019 audit. You have been able to obtain the following information concerning the various segments of the business:

1. Inventory Balances and Purchase Transactions Although fairly voluminous, purchase transactions at Wendig are not complex. Inventories are tightly controlled so that overstocking and obsolescence are normally not a problem. Inventory, although not as liquid as cash, is subject to theft. At Wendig, finished packaged products are shipped immediately to customers, although large quantities of purchased merchandise are maintained on hand. The personnel handling purchases and inventory transactions are, in general, competent. Access to warehouse is unrestricted.

2. Trade Receivables and Credit Sales System These transactions are not particularly complex at Wendig, nor (except for the allowance for doubtful debts account) is there any degree of estimation involved. The persons processing revenue and trade receivables transactions are thoroughly familiar with the procedures and are generally competent. Sales transactions processing does, however, entail the completion of many transactions. Competition from overseas is becoming an issue, and because of the poor general economic conditions some customers have requested extensions of time to pay.

3. Property, Plant and Equipment (PPE) There are generally few fixed asset transactions. The transactions are often not complex but an element of risk can be introduced when management has to make decisions concerning whether to capitalise or expense items. PPE, being less liquid than other assets, is generally not subject to theft. In recent years a number of PPE items have been manufactured in-house. You have noticed, as a result of your analytical procedures, that repairs and maintenance expense has dropped considerably in the last two years. Asset registers are maintained on a timely basis, and staff are generally competent.

4. Trade Payables Transactions and Balances Although not complex, the volume of trade payables transactions is high. There is a risk with trade payables balances that personnel may fail to record them in the books, as the company has applied to the bank for an increase in its overdraft and wants to impress the bank with a strong current ratio. At Wendig a request form is first prepared for all items that are to be paid through the cash disbursements system. The previous trade payables clerk, who had been with the company for eight years, left in December 2018. A new clerk was hired but is not yet thoroughly familiar with the procedures.

Questions

1. Determine any significant risks with reference to relevant facts

2.Outline internal controls relevant to the audit.

Answer 1

S. nO.	Observations	Significant Risk	Internal Control Relevant for Audit
1	Pilferage ; Single Handed Transaction Maintained ; Access is Unrestricted	- Volumionus of Transaction - Low - Theft - Risk is High - Unrestricted Access - High	- Accessibility Control : ( Card Lock / Biometric Lock) First On Accessibility to the Warehouse Restricted to Top Management ( As a Exception ) General to Store Keeper Only and same is not given to any person even thoiugh maintaining purchase records etc. -Receipient of Mtaerial and Book Keepr of Material is Two Different person ( Two way Verification as well as Maker Checker Concept) -Purchases Goods - Real Time information updated or reported at the end of the day to the L2 Officer ( Management) -Sound Alarm / Fixed Batch with the Product - So on Removal it may beep ( as we seen in various Mall in Cloths type just a thought)
2	Extenison of Time to Pay / Clear off the Debtors. Ag. Collection Period to be reviewd	- Provison for Bad and Doubtful Debts - Medium - Provision of exchange or repair or something which leads to Sale return - Low - Flow of Capital in the Market is Very Low casue the insuffieciency of Working Capital - Medium	- Analysis of the Sale and Debtors Collection Period and reporting to the Management. Bi Weekly or Monthly Reporting Control on an Organisation al Basis. - Ananlysis of the Debtor Credit worthiness so that extension should be provided accordingly - Categorisation of Debtors as per policy set as well as credit period can be offerred. This kind of Policy in place help to meet the demend of the stakeholder as well maintain the level of Working capital within the organisation.
3	In House Manufacturing, Repairing and Maintenance Reduced Aset Register Maintained and Updated.	- Decrease in Repair Cost - Wrongly Capitalised - Medium Risk - In House Manufacturing ( Focus on Cost Reduction only) - High Risk - Increase the Capital Cost lead to Non Availiability for Working Capital - High Risk	- Expenses of Repair and Maintenace not to be capitalised shall be charged to P and L a/c. Review of Monthly Repair and Maintenaces expenses - PPE requirement and Capital Budgeting shall be prepared in the beginning of the Year - Polciy for Budgeting accordingly Allocation of Funds ( Checek the Underutilisation / Over utilisatipn of Funds )
4	Non Recording of the Transactions, Misrepresentation to Bank, Note for Payables Paid through Cash Disbursement ; New Appointment not Familiar with Policy and Procedures	- Non Recording of Transaction - High Risk - Misrepresenting to FI - High Risk ( Ststutory Obligations) - Lack of Training to New Employees - Medium Risk	- All transaction Shall pass through two hands so that non recording never fit in the organstion . - Before Submission Sall be Authenticated by the Compliance Officer / CFO - Training to Employees , Orientation/ Induction at the Beginning - New Appointment shall be work at L1 and work shall be monitored by L2 officer before L1 Familiar with the process say after two or Three MOnths.