Audit

(b) Lorenzi Home Sdn Bhd is a furniture manufacturer with ten manufacturing facilities across Peninsular Malaysia. The manufacturing process requires a significant amount of capital, and the company owns a large range of plant and equipment. On annual basis, the finance controller is in charge of preparing a detailed non-current assets budget based on a five-year budget authorised by the board of directors after consulting with the audit committee. The audit committee approves the budget, which is then saved on a computer file and used as the authority to issue purchase orders. When the item of plant and equipment delivered at the company, a pre-numbered receiving report is produced, a copy of which is submitted to the accounting department, and the non-current assets budget is updated to reflect the movement. Production workers thoroughly inspect and examine the equipment to ensure that it is in working order. The production department prepared an operating certificate, which is used by the accounting department along with the receiving report. When the purchase invoice is obtained from the vendor, operating certificate and receiving report are checked against it. A computerised non-current assets registry is revised at the same time as the invoice reaches the purchasing system. Personnel in the accounting department have granted access to the non-current assets registry. Accounting department employees compare the non-current assets registry to plant and equipment on site on a quarterly basis, using identification numbers in the register that are permanently marked onto each component in the factory. The internal audit department also performs a sample test of the purchasing system's process, from budget preparation to non-current asset register entry. Internal auditors also compare a selection of entries in the non-current assets registry with on-site equipment. Required: (a) Briefly explain FOUR (4) internal control strengths in purchasing of non-current assets system at Lorenzi Home Sdn Bhd. (8 marks) (b) Discuss potential misstatement that might occurred if each of the controls stated in (a) were absent. (4 marks) (b) Lorenzi Home Sdn Bhd is a furniture manufacturer with ten manufacturing facilities across Peninsular Malaysia. The manufacturing process requires a significant amount of capital, and the company owns a large range of plant and equipment. On annual basis, the finance controller is in charge of preparing a detailed non-current assets budget based on a five-year budget authorised by the board of directors after consulting with the audit committee. The audit committee approves the budget, which is then saved on a computer file and used as the authority to issue purchase orders. When the item of plant and equipment delivered at the company, a pre-numbered receiving report is produced, a copy of which is submitted to the accounting department, and the non-current assets budget is updated to reflect the movement. Production workers thoroughly inspect and examine the equipment to ensure that it is in working order. The production department prepared an operating certificate, which is used by the accounting department along with the receiving report. When the purchase invoice is obtained from the vendor, operating certificate and receiving report are checked against it. A computerised non-current assets registry is revised at the same time as the invoice reaches the purchasing system. Personnel in the accounting department have granted access to the non-current assets registry. Accounting department employees compare the non-current assets registry to plant and equipment on site on a quarterly basis, using identification numbers in the register that are permanently marked onto each component in the factory. The internal audit department also performs a sample test of the purchasing system's process, from budget preparation to non-current asset register entry. Internal auditors also compare a selection of entries in the non-current assets registry with on-site equipment. Required: (a) Briefly explain FOUR (4) internal control strengths in purchasing of non-current assets system at Lorenzi Home Sdn Bhd. (8 marks) (b) Discuss potential misstatement that might occurred if each of the controls stated in (a) were absent. (4 marks)