Question

Cook's Furniture uses a cloud-based enterprise management system (EMS). It has different functions such as procurement, finance, HR, sales, production, warehouse, etc. Different employees are given access to the area they are responsible for. Carl is given access to all areas of the system. The access is controlled by personal login and passwords. Cook's Furniture Purchase and Cash Disbursement Cycle Cook's Furniture sources raw materials domestically as much as possible, but it also has multiple suppliers in different locations globally. The customized product range is made to order and the lead time for the manufacturing process is 10-12 weeks when an order is placed. Other products (e.g. office chairs, ottomans) are made based on the anticipated level of sales. As part of the interim audit, Jane Owen the audit senior on this engagement has completed a 'walk-through' of the procedures for the inventory purchases and cash disbursement cycle. The following is a summary of the procedures she documented on the audit file: Thomas the payable clerk receives all supplier invoices. On receipt of an invoice, he checks the details against the delivery note received from the warehouse. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forwards the payment requisition together with the invoice and a copy of the corresponding delivery note to Claire for authorization. Claire forwards to Carl the CEO for further authorization of any payments of over $30 000 for a single transaction. Claire and/or Carl signs the payment requisition to confirm authorization and forwards the documentation to Kumar Singh, the banking clerk, who keys each payment into the accounting system (the journal posted by the system is Dr. Creditor; Cr Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the payment requisition. Kumar then files the payment requisition together with supporting documentation by the payment requisition number. The banking clerk then loads the payments on the online banking facility with reference to the payment requisition number. Both Claire and Carl must approve and release the payments. The banking system automatically sends electronic transfer records to Claire who subsequently forwards them to Thomas. Thomas then checks it against supplier invoices and then sends a remittance advice to individual suppliers. Question 1 Assessing control risk in the purchase and cash disbursement cycle a. Identify control weaknesses (if any) in the purchase and cash disbursement cycle. b. Explain how each control weakness may affect the financial statements (i.e. which accounts and assertions are at risk) c. Identify the audit procedures to test the account(s) and assertion(s) that are at risk. a. Identify control strengths (if any) in the purchase and cash disbursement cycle b. Explain why each control is a strength (i.e. which accounts and assertions does it strengthen). c. For each control strength, identify audit procedures to test the effectiveness of control.

Answer 1

From the given information on Inventory Purchases and Cash disbursement cycle

Q1. (a) There are no control weakness in purchase and cash disbursement cycle.

(b) As per the given information, when the goods are delivered Thomas collects the supplier invoices and cross verify with the delivered note from the warehouse. After that, he prepares payment requisition with delivery notes. If the goods requisition note, goods received note, stores ledger accounts has any variations that will have an influence on the  account audit and affect the financial statement of firm.  

(c) The audit procedure to test the account (s) and assertions are at risk are follows:

The audit procedure test starts from material requistion to payment for the inventory management system. Here are the assertions that are to verified if not the auditing will be at risk that influences the accounting and financial statments of the firm.

(i) Material requisition note from the department required to carryout the activity

(ii) Purchase order

(iii) Invoice

(iv) Goods received note

(v) Goods returned notes

(vi) Bin card

(vii) Journal entry, Ledgers and Trial Balance.

(vii) Inspection and Payment

If the above procedure is not followed then there will be risk in the auditing of the accounts and have influence on the balance sheet of the firm.

a. Identify control strengths (if any) in the purchase and cash disbursement cycle

1. Purchase cycle - Purchase requisition, Goods received note, Goods return notes, Invoice

2. Cash disbursement cycle - Verification of goods received with the invoice, cross verification, authorization of the invoices, entry into Journals, ledgers and then final approval for the cash disbursement.

The above are the control strengths in the purchase and cash disbursement cycle.

b. Explain why each control is a strength (i.e. which accounts and assertions does it strengthen).

The procedure itself are the strenghts in the purchase and cash disbursement cycle. It procedure includes right from the purchase requisition to the delivery of the goods to the warehouse, cross verification with the goods recieved note, if there are no discrepancies, proceeds towards the payment requisition request. Then the entries are made in journal, ledger. Upon the successful acceptance of the entered details, payment requisition will be sent for the approval to disburse the amount to the suppliers.

c. For each control strength, identify audit procedures to test the effectiveness of control.

The following are the control strength and the audit procedure that test the effectiveness of control   

Control Strength Audit procedure for effectiveness of control

Purchase requisition - Proper requistion from the department and availability of the material entries in the store account helps us in managing the inventory that results in effective control of the material and can reduce the cost on material purchasing.

Suppliers - Maintenance of the two or more suppliers who provides the material with superior quality at best rate.

Ordering - Appropriate use of inventory control techniques helps in control of inventory cost.

Delivery and Inspection Inspecting the delivered goods that are ordered and returns the goods that are not fit for usage. This verifies the exact ordered and delivered goods with the help of invoice. It also helps us to order further more if the goods recieved are not quality of conformance.

Storing - This is vital in maintaining the inventory to check on the availability and supply of goods as per the requirement.

Invoice checking

and Payment - The final procedure after the store verification and invoice cross check the stores manager will prepare the payment request and forwards for the authorization to remit the funds to the suppliers