Question

A. You are carrying out the audit of the purchases system of Nutty Sdn. Bhd. These are your observation about the purchasing processes at this company:

1) A desktop computer is used to maintain the accounting records including those of the purchases system. Standard accounting software is used, which was purchased from an independent supplier. For the purchasing system, a purchase ledger is maintained to which invoices, credits, adjustments, cash and discount are posted. When purchase invoices and credits are input into the computer, the value of the invoice or credit is posted to the purchase ledger, and the expense and sales tax are posted to the general ledger.

2) When materials are required for production, the production manager sends a handwritten note to the purchasing manager. For orders of other items, the department manager or Managing Director sends handwritten notes to the purchasing manager. The purchasing manager finds a suitable supplier and raises a purchase order. The purchase order is signed by the Managing Director.

3) Materials for production are received by the receiving department, which issues goods received note (GRN), and send a copy to the bookkeeper.

4) The bookkeeper receives the purchase invoice and matches it with the good received note and purchase order. The Managing Director authorises the invoice for posting to the purchase ledger.

5) The bookkeeper posts it to the purchase ledger. At the end of each month, the bookkeeper prepares a list of accounts payable to be paid. This is approved by the Managing Director.

6) The bookkeeper prepares the cheques and remittances and posts the cheques to the purchase ledger and cash book.

7) The Managing Director signs the cheques, and the bookkeeper sends the cheques and remittances to the suppliers.

 

Required:

I) Identify the four (4) internal control deficiencies in the acquisition cycles (both the purchasing and trade payables’ functions), and state the specific implications when these controls are not emphasized.

II) For each of the internal control deficiencies in (i) above, suggest one (1) substantive test of transaction or test of details.

III) Describe one (1) substantive analytical procedure that you can carry out on the items above.

 

B. In performing tests of balances on inventory balances for Excellent Breed Bhd, the auditor recognized that some internal control deficiencies and errors have occurred. All inventory items are not counted or tagged. In addition, goods which are already obsolete and damaged are still included in the inventory listings. There are also incidences of the non-existence of inventories listed as stored in the warehouse. The auditor suspects that the possibility of both unintentional and intentional errors is equally likely. In terms of valuation, the company fails to follow the MFRS2 requirements of using the lower of cost or net realizable value method. Besides, there are two transactions which are goods held on consignment that have been included as inventory during the current financial year.

 

Required:

I) Identify five (5) audit procedures that have enabled the auditor to detect each of the internal control deficiencies and errors above.

II) For each audit procedure in (I) above, indicate the management assertions to which it relates.

III) Auditors also perform the substantive analytical procedures to support assertions on inventories, state two types of substantive analytical procedures that should be carried out and why?

Answer 1

QUESTION A

 

I.

II.

III.

Compare purchases and payables balances between current year and previous years to determine any fluctuations in amount. If there are significant fluctuations between the two amounts, it could indicate misstatements due to errors or fraud that are caused by the lack of approval and segregation of duties in the purchasing cycle.

 

QUESTION B

 

I. and II.

III.

1) Compare gross margin percentage with that of previous years.

There are non-existence inventories listed as stored in the warehouse which may cause overstatement of ending inventory.

 

2) Compare inventory turnover with the previous years

The inclusion of obsolete and damaged inventory may cause overstatement of inventory.

Refer answer details