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. Rowan Jones, the factory manager is responsible for initiating orders for raw materials by using the production and warehouse management functions within the EMS. EMS system holds information of inventory item name, item code, quantities and costs. When an order for the customised products range is placed, Rowan assesses and calculates what the raw materials needed to manufacture the order. He checks EMS for the availability of raw material because some materials they may already have. If the raw materials are insufficient, Rowan generates a purchase order using the EMS. The EMS automatically assigns a reference number to the purchase order. For the ready-made range of products, Rowan usually re-orders when there is one month of products left in the warehouse. Given that Carl wants to maintain sufficient level of inventory to minimise backorders, Rowan normally generates a purchase order for three months' production needs.

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.