Question

You are audit senior at Bernstein and Griffiths and have been assigned to the audit of Stockman Ltd (Stockman) for the current year. Stockman manufactures, wholesales and retails Australian outback clothing for sale both in Australia and overseas. During the planning stage of the audit, you have identified the following three key internal controls over the functioning of Stockman’s online inventory management system:

• Internal control 1 – the system will not allow a customer to place an order for an item of inventory that is currently out of stock.
• Internal control 2 – all new wholesale customers must undergo a credit approval check, which has to be signed off by Stockman’s credit manager and chief financial officer (CFO), before their credit limits are approved and a debtor account established.
• Internal control 3 – each customer is required to enter their unique customer identification number and personal identification number (PIN) before an order can be processed. This is to ensure that unauthorised inventory orders are not placed and only customers who are approved customers are able to order online.

1. For each of internal controls 1, 2 and 3 above, describe a test that you would perform to assess whether the control was functioning effectively.
2. Outline the result that you would expect to see if the internal controls was functioning effectively.

Answer 1

Answer :

For A

Internal control 1 : As a customer i will place a order for out of stock item and will check whether the system is accepting the order or not . And I will not stop by performing only one stop atleast i will place 5 to 8 orders to check the effectiveness of the system

Internal control 2 :

As a wholesaler i will place a credit order and check whether the system is checking credit worthyness or not and also concerned authority personal is approving my credit worthiness and also whether debtor account in the accounts is opened or not . I will perform all these procedure by 5 to 6 times . When all the times it shown positive results then only internal controls are operating effectively

For internal control 3 : As a customer while place the order in checking the above internal control 1 . In that only i will also check while placing the order whether the system us asking unique customer identification number and Personal identification number or not .

For B

All the above three internal controls can be checked at same time in one test . By placing new order for out of stock item, we will check wether system is accepting or not and system is checking credit worthiness and also system is asking for double PIN s or not . If we want more assurance we need to perform more number of times . In all checkings if results were positive then we can assume that internal controls are good and opreting effectively and we can give unmodified report . If is there any negative in checking we will make suggestions to management regarding flaws in the internal controls .