Assessing control risks

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 area 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. Customised products range is made to order and the lead time for manufacturing process is 10-12 weeks when an order is placed. Other products (e.g. office chairs, ottomans) are made based on anticipated level of sales. As part of 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:

1. 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 forward the payment requisition together with the invoice and a copy of the corresponding delivery note to Claire for authorisation. Claire forwards to Carl the CEO for further authorisation any payments of over $30 000 for a single transaction.
2. Claire and/or Carl signs the payment requisition to confirm authorisation 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 documentations by the payment requisition number.
3. 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 five control weaknesses 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 six 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).

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