Question

In: Accounting

(Security-For-All Bhd (MFA) is a company specializing in installing and maintaining security systems for businesses and...

(Security-For-All Bhd (MFA) is a company specializing in installing and maintaining

security systems for businesses and residential customers. It has been operating for

10 years. The company buys supplies ranging from CCTV cameras, smart locks,

keypad locks, sensors, alarms, smoke detectors and other equipment from reputable

vendors in town for customers’ installations

/Purchase of supplies

-The purchasing process starts with filling up of purchase requisition forms by

the Inventory Department when the inventory level reaches the re-order point.

They then select appropriate vendors by searching them online. Next, they

phone the vendors, request one price quotation for each item and give the

vendors a verbal order

-The filled up purchase requisition forms are sent to Purchase Department. A

pre-numbered purchase order is processed by the department for each

requisition and filed together with the earlier purchase requisition form.)

-When the items have arrived, the Receiving Department takes charge and

informs the Inventory Department orally. The receiving clerk then stamps the

purchase order with the date received and noted any difference between the

quantity shown on purchase order and the quantity received. The receiving

clerk then forwards the stamped purchase order and items received back to

the Inventory Department for verification and correction. At the same time, the

receiving clerk informs the Accounts Department that the order has arrived.)

-The Accounts Department then waits for the vendors’ invoice to arrive. The

account clerk files together the vendors’ invoice and purchase order copy

received earlier from the Inventory Department. On a monthly basis, the

account clerk prepares cheque to be paid to each vendor and sent the

cheques to the Treasurer for signature. The treasurer then signs the

cheques.)

/Company’s policies and procedures

Although the company has expanded over the years with more than 100 active

vendor accounts currently in the accounts payable’s ledger, it continues to rely on a

manual system to process all purchase transactions. In addition, the company has

no specific policy on purchase returns. For many years, the defect inventories are

simply kept in store without any follow ups and actions by the storekeeper in the

Inventory Department.)

The company maintains its existing auditor for the current financial year ended 31

December 2020. The auditor is concern that the recent pandemic has resulted in

surge of inventory prices supplied by vendors due to inadequate supply and rising

demand from customers for tightened security measures.)

REQUIRED

1. Describe at least five (5) internal control deficiencies relating to purchasing of

and payments for inventory requisition of SFA Bhd and their possible

misstatements.

2. Describe three (3) substantive audit procedures for purchase and three (3)

substantive audit procedures for accounts payable accounts that must be

performed by auditors.)

3. Identify the assertion related to each of the substantive audit procedures in

(II) above.)

Solutions

Expert Solution

1.

Internal control deficiencies relating to purchasing of and payments for inventory requisition of SFA Bhd and their possible misstatements are:

  • Verbal orders to the vendors

Possible misstatements may include no recording, incomplete or incorrect recording of purchase orders etc.

  • Receiving Department takes charge and informs the Inventory Department orally.

Possible misstatements may include no recording, incomplete or incorrect recording of invenory, wrong payment for the incorrect recorded inventory etc.

  • No follow ups and actions by the storekeeper in the Inventory Department.

Possible misstatements may include wrong calculation of value of the inventory as defected inventory also recorded along with normal stock without any identification.

  • No policy on purchase returns

​​​​​​​​​​​​​​Possible misstatements may include inaccurate recording of the inventory returns which may leads to the financial loss unsatisfactory stock valuation.

  • Manual system to process purchase transactions

​​​​​​​​​​​​​​Possible misstatements may include incorrect, inaccurate or no recording of transactions and wrong payment to the vendors and ultimately financial loss to the entity.

2.  Three substantive audit procedures for purchase are:

  • Match supplier’s invoices with purchase orders to ensure that proper recording of invenory as well as payables.
  • Perform analytical procedures on purchases made during the year with purchases of the last year and investigate significant differences.
  • Cut off procedures can be carried out to check the accuracy.

Three substantive audit procedures for payment:

  • Bank statements may be used to verify the payment made to the vendors.
  • Internal documentation can be cross verified with the invoices issued by the vendor.
  • Amount payables can be verified by asking their corresponding balances in the vendor's books.

3.

Assertions are:

  • Accuracy and Valuation: Invenory are accurately and properly valued.
  • Accuracy : Transactions have been recorded at appropriate amounts with correct prices and quantities.
  • Cut off : Transactions are correctly recorded and in relevant acccounting periods.
  • Occurrence: Transactions that are recognized in the financial records as having occurred.
  • Completeness: Transactions that are recordec are complete in all aspects.
  • Accuracy and Valuation: Balances have been disclosed acccurately and at correct valuation.

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