AUDITING 2 ASSIGNMENT 1 cho QUESTION 1 MARKS You are a member of the team on the audit of Tapp Tapp (Pty) Ltd, a company which supplies plumbing requisites (baths, basins, pipes, joints, etc) to plumbing contractors. You have been assigned to the audit of the revenue and receipts cycle and are in the process of evaluating the accounting system and related internal controls in the cycle. Information pertaining to certain aspects of the cycle appears below. 1. The company sells only on credit. This reduces the risks arising from having cash on the premises. 2. All sales are made from Tapp Tapp (Pty) Ltd's premises which consist of a showroom, warehouse and administrative offices under one roof. 3. Plumbing contractors must visit the company's premises to make purchases as Tapp Tapp (Pty) Ltd does not deliver. This suits the contractors as it means they can make their purchases early in the day (the company's business hours are 7am to 5pm) and collect the goods at the same time. 4. Customers (contractors) are served by any one of six technically trained salesmen who sit behind a long counter in the sales area. Each salesman has his own computer terminal 4.1 When a contractor arrives at the counter, one of the salesmen will enquire as to the contractor's name and having accessed the "create sales invoice" module, will enter the given name, e.g. Watertite Plumbers CC into the computer. This brings up the customer details on screen which is formatted as a sales invoice. The salesman will then confirm the details e.g. account number, address etc, with the customer by reading the details off the screen to the customer. 5. The contractor's order is then taken as follows: 5.1 To determine inventory availability and price, the salesman accesses the inventory masterfile. 5.2 If the item is available (which is usual) and the customer is satisfied with the price, the salesman proceeds with taking the order. 5.3 To complete the invoice, the salesman enters the inventory Item code and quantity of each item required in the relevant fields. This automatically completes the other fields on the invoice e.g. description of goods, selling price, VAT, total selling price. The invoice is automatically sequenced by the computer software. Page 10 of 23 5. The computer then prints out a four-part invoice. The top copy remains in the department and is filed. The second copy is sent to the accounting department where it is tied The remaining two copies are handed to the customer who takes them to the despatan department" which is a secure area attached to the warehouse. Both copies of the invoice handed to any one of the five despatch clerks: who picks the items required from Warehouse. Once the items have been picked, the despatch clerk, using an ink stamp, stan both copies of the invoice "FILLED" and hands one copy of the invoice to the customer with goods. The customer then loads the goods onto his vehicle and leaves Tapp Topp premises. The remaining copy of the invoice is filed in the despatch departa 6.If a contractor does not have an account, the salesman will select the "open new module of the accounts receivable software and following the screen prompts, wil encer contractor's name, trading name, registration number of applicable), address and banken salesman will request the contractor's identity document and enter the identity nur the computer. Once this has been completed the contractor is automatically account number and added to the debtors' masterfile. He can then make whatev he ed, the contractor is automatically allocated an asterfile. He can then make whatever purchases requires TO: YOU ARE REQUIRED pleteness in the context a. Explain the internal control objectives of validity, accuracy and completeness in the of sales in the revenue and receipts cycle. (3) b. Explain the following assertions pertaining to the accounts receivable balance in the year and Tinancial statements of Tapp Tapp (Pty) Ltd: existence, accuracy, valuation and allocano completeness and classification. C. Identify the two assertions pertaining to the audit of accounts receivable which, under normal circumstances, are likely to attract a greater risk of material misstatement. Give brief reasons d. Identify and explain the weaknesses in internal control in the aspects of Tapp Tapp Ltd's revenue and receipts cycle which are described in points 1-6 above. Do not concern yourself with backorders. (18) QUESTION 2 (40 MARKS You are a newly appointed internal auditor at Calpak (Pty) Ltd. The company is a manufacturer of backpacks and bags for sporting equipment. The company employs approximately 120 hourly paid semi-skilled workers, equally spread over the three sections, cutting stitching and finishing. Each section has a section supervisor who reports to the factory foreman. The wage payroll system is currently completely manual but management now wish to computerize the system. At the first phase of this exercise you have been asked to evaluate the system so that the company will have a better understanding of what weaknesses the computerized system must address. Your initial enquiries have revealed the following: 1. Wages are paid every two weeks. The wage period runs from a Thursday morning to a Wednesday afternoon, two weeks later. The work day commences at 7.30am and employee Page 11 of 23 daily shift. work eight hour arrival at their section, employees report to their section supervisor who records presence by ticking the appropriate column on the daily time sheet. (See 7 bow 3. Work periods are controlled by a factory siren (hooter). Employees commence work they hear the siren at 7.30am and end the days shift at 4.30pm, again when the siren sound The siren is also used to control tea and lunch * Workers are not required to sign themselves out at the end of the day, but if they contine to work after 4.30pm, they must notify their section supervisor. On reporting for work lowowing day they must inform their section supervisor of the number of hours overtime they worked the previous afternoon/evening. The section supervisor records this on the daily time sheet against employee's 5. Three administration clerks from the accounting department are responsible for our e responsible for certain payroll functions. An administration clerk is allocated to ach of the three sections i. e. cutting stitching finishing. the and 6. Each administration clerk maintains a ledger of all wage earners in the section for which ion for which he is responsible. The factory foreman is responsible for hirine and dismissing staff as well as receiving notices of resignation). When a change must be made to the employee ledger, the foreman sends a completed, pre-printed sequenced Employee Engagement / Dismissal Resignation Form" to the section administration clerk. This contains full details of the employee, e.g. date of engagement/dismissal erade and pay scale. The clerk updates his ledger, and files the instruction from the foreman. 7. On Wednesday morning the administration clerks prepare the daily time sheets for their section for the following wage period. Daily time sheets are preprinted and sequenced (each section has its own unique sequence). The sheets consist of a column for each day of the working week in which the section supervisor can tick off each employee's (daily) attendance and enter any overtime worked. 8. Before 7am on Thursday morning the administration clerks take the daily time sheets (for the following wage period)to the supervisor of the section for which they are responsible, and collect the completed wage period's time sheets. The supervisor and administration clerk sign the completed wage period's time sheets to acknowledge the transfer. 9. The administration clerks then prepare the wage period (see point 1) payroll for their section. They calculate the normal hours worked (each "tick" represents 8 hours) and the overtime hours for each employee from the daily time sheets. The employees hourly pay rate is obtained from the employee ledger and overtime is calculated at the rate of one and a half times the normal wage. Using the relevant schedules and tables, the administration clerks calculate PAYE, UIF and medical aid deductions and calculate the Page 12 of 23 net wage payable for their section. The payroll is preprinted, well designed and pages are numerically sequenced in a bound book. 10. Once the payrolls for the three sections have been prepared, they are sent to the factory accountant who reperform the calculations on the payrolls, makes any corrections, and signs the payroll to acknowledge is control procedures. He then prepares and signs cheques for the net wages and all deductions to be paid over e.e- PAYE. The cheques are sent to the financial accountant for a second signature and the payrolls are returned to the respective administration clerks. The factory accountant also prepares a coinage schedule 11. On receipt of the payrolls the administration clerks prepare a pre printed paypacke for each employee in their section by writing the details of the employee and the period's wages onto the paypacket. 12. On the Friday morning a wage payout Calpak Iptv Lid's security section takes the cheque and the coinage schedule to the bank. The cash is placed in three numbered bank bags (per instructions from Calpak (Pty) Ltd, sealed, and delivered to the administration clerks by security. The three administration clerks make up the paypackets for their section according to the payroll 13. At 3pm on a payout Friday, the administration Clerks accompanied by a security guard) distribute the paypackets from the three pay points within the factory. Wage earners must present their staff identity card, sign the payroll next to their names on receiving their wages. As there are only approximately 40 wage earners per section, the payout is completed without significant delay. (Note: do not concern yourself with unclaimed wages). 14. During the course of the following week, the administration clerks update the employee ledger with details of each employee's wages and deductions YOU ARE REQUIRED TO: a. Identify and explain the weaknesses in the payroll of Calpak (Pty) Ltd based on the information above. Your explanation must convey why you believe that the weaknesses you have identified are weaknesses. b. For each weakness, explain in general terms if, and how, a computerized wage system would address the weakness. (10) (30) QUESTION 3 (30 MARKS) You are the senior on the audit of Smartpart (Pty) Ltd, a company which wholesales a large range of motor vehicle accessories to garages, panel beating businesses and Page 13 of 23 Specialist accessory shops. The company sells only on credit to account holders Smartpart (Pty) Ltd has expanded quickly over the past few years and the accounting system related internal controls are proving to be inadequate. You have therefore requested various members of the audit team to document the company's systems to enable you to evaluate them. One of your best trainees, Anton Goo has presented you with the following narrative pertaining to certain functions in the revenue and receipts de Order receiving/sales Outhorisation No aspect of the order receiving function is computeryed. Orders are received by phone, or mail. Customers sometimes place an order by phone and within two or three days send a written order to confirm the phone order. When a customer phones, the call is put through to Eddie Meres, the sales order clerk. On taking the call, if he does not recognize the voice of the caller, he asks for the customer's name and confirms that the customer has an account referring to an up-to-date hardcopy of Smartpart (Pty) Ltd's customers. This list reflects the customer's account number name, address and contact details. (He also has up to date product price lists so that he is able to answer customers' price queries.) If Eddie Mercs is satisfied that the caller is an account holder, he fill out a single part (original only, no copies) preprinted, prenumbered internal sales order (ISO) by inserting the customer's number (which he obtains from the customer list) and recording the description and quantity of the goods ordered on the ISO. At this point the telephone conversation is terminated. Eddie Mercs then completes the ISO by filling in the customer's name and delivery address and signing it. if the caller does not appear on the list of customers, tie is not an account holder) Eddie Mercs fills in a preprinted "new customer form" (NCF) by obtaining (over the phone) the prospective customer's business name, postal/delivery address and contact details as well as the names of the business's bankers and two trade references, Eddie Mercs then completes the ISO in the normal manner with the exception of inserting the customer's account number. All incoming mail is received by Pearl Pillay the receptionist who, assisted by one of the clerks from accounting, enters details of all letters, customer orders etc in a mail register. She and the accounts clerk both sign the mail register. Whatever has been received is then distributed. All customer orders go to Eddie Mercs, who makes out an ISO for each order, taking the details from the customer order. Page 14 of 23 Before he goes home at 4 pm. Eddie Mercs places the day's ISO on the stores controller, Kobus Marais desk, and there are any NCF, he gives them to Precious Gumede, the senior debtors administrator. She allocates an account number to the new customer, files the NCF and updates the customer ist.) Warehouse and Despatch Again no aspect of these functions is computerized Each morning Kobus Marais splits the iso's between his two assistant storemen who pick the goods ordered from the shelves. The goods picked are placed in cardboard boxes with the ISO but the box is not Sealed. As the items are picked, the assistant storemanticks them off on the iso. the changes the quantity ordered is greater than the quantity on hand, the storeman changes quantity ordered on the ISO to the quantity actually picked. If the item ordered completely out of stock, the ISO will be changed to o for that item. The assis.com storemen sign the ISOs once they have picked the items ordered. Once the goods nav been picked, they are moved to the despatch area. Hawke Mathebula, the despatch clerk, extracts the ISO from the box and makes out a preprinted, sequenced four part Delivery Note (DN), copying all details from the ISO onto the DN. He places the top copy in the box, and addresses and seals the box. The 2nd copies, along with a delivery list, are handed to the company's delivery driver who checks the boxes to be delivered against the copies of the despatch notes and delivery list as the boxes are loaded onto the truck. Hawke Mathebula attaches the ISO to the 3" copy of the DN and sends them (in well controlled batches) to the accounting section for invoicing at a later stage. The 4 copy of the DN remains as a fast (fixed in the book) copy in Hawke Mathebula's office in despatch. YOU ARE REQUIRED TO identify and explain the weaknesses in the order receiving/sales authorization and warehouse/despatch functions as described above. Notes: 1. Your explanation should convey the reason why you believe the weaknesses identified are, in fact, weaknesses. 2. You are not required to make recommendations to address the weaknesses. Page 15 of 23 AUDITING 2 ASSIGNMENT 1 cho QUESTION 1 MARKS You are a member of the team on the audit of Tapp Tapp (Pty) Ltd, a company which supplies plumbing requisites (baths, basins, pipes, joints, etc) to plumbing contractors. You have been assigned to the audit of the revenue and receipts cycle and are in the process of evaluating the accounting system and related internal controls in the cycle. Information pertaining to certain aspects of the cycle appears below. 1. The company sells only on credit. This reduces the risks arising from having cash on the premises. 2. All sales are made from Tapp Tapp (Pty) Ltd's premises which consist of a showroom, warehouse and administrative offices under one roof. 3. Plumbing contractors must visit the company's premises to make purchases as Tapp Tapp (Pty) Ltd does not deliver. This suits the contractors as it means they can make their purchases early in the day (the company's business hours are 7am to 5pm) and collect the goods at the same time. 4. Customers (contractors) are served by any one of six technically trained salesmen who sit behind a long counter in the sales area. Each salesman has his own computer terminal 4.1 When a contractor arrives at the counter, one of the salesmen will enquire as to the contractor's name and having accessed the "create sales invoice" module, will enter the given name, e.g. Watertite Plumbers CC into the computer. This brings up the customer details on screen which is formatted as a sales invoice. The salesman will then confirm the details e.g. account number, address etc, with the customer by reading the details off the screen to the customer. 5. The contractor's order is then taken as follows: 5.1 To determine inventory availability and price, the salesman accesses the inventory masterfile. 5.2 If the item is available (which is usual) and the customer is satisfied with the price, the salesman proceeds with taking the order. 5.3 To complete the invoice, the salesman enters the inventory Item code and quantity of each item required in the relevant fields. This automatically completes the other fields on the invoice e.g. description of goods, selling price, VAT, total selling price. The invoice is automatically sequenced by the computer software. Page 10 of 23 5. The computer then prints out a four-part invoice. The top copy remains in the department and is filed. The second copy is sent to the accounting department where it is tied The remaining two copies are handed to the customer who takes them to the despatan department" which is a secure area attached to the warehouse. Both copies of the invoice handed to any one of the five despatch clerks: who picks the items required from Warehouse. Once the items have been picked, the despatch clerk, using an ink stamp, stan both copies of the invoice "FILLED" and hands one copy of the invoice to the customer with goods. The customer then loads the goods onto his vehicle and leaves Tapp Topp premises. The remaining copy of the invoice is filed in the despatch departa 6.If a contractor does not have an account, the salesman will select the "open new module of the accounts receivable software and following the screen prompts, wil encer contractor's name, trading name, registration number of applicable), address and banken salesman will request the contractor's identity document and enter the identity nur the computer. Once this has been completed the contractor is automatically account number and added to the debtors' masterfile. He can then make whatev he ed, the contractor is automatically allocated an asterfile. He can then make whatever purchases requires TO: YOU ARE REQUIRED pleteness in the context a. Explain the internal control objectives of validity, accuracy and completeness in the of sales in the revenue and receipts cycle. (3) b. Explain the following assertions pertaining to the accounts receivable balance in the year and Tinancial statements of Tapp Tapp (Pty) Ltd: existence, accuracy, valuation and allocano completeness and classification. C. Identify the two assertions pertaining to the audit of accounts receivable which, under normal circumstances, are likely to attract a greater risk of material misstatement. Give brief reasons d. Identify and explain the weaknesses in internal control in the aspects of Tapp Tapp Ltd's revenue and receipts cycle which are described in points 1-6 above. Do not concern yourself with backorders. (18) QUESTION 2 (40 MARKS You are a newly appointed internal auditor at Calpak (Pty) Ltd. The company is a manufacturer of backpacks and bags for sporting equipment. The company employs approximately 120 hourly paid semi-skilled workers, equally spread over the three sections, cutting stitching and finishing. Each section has a section supervisor who reports to the factory foreman. The wage payroll system is currently completely manual but management now wish to computerize the system. At the first phase of this exercise you have been asked to evaluate the system so that the company will have a better understanding of what weaknesses the computerized system must address. Your initial enquiries have revealed the following: 1. Wages are paid every two weeks. The wage period runs from a Thursday morning to a Wednesday afternoon, two weeks later. The work day commences at 7.30am and employee Page 11 of 23 daily shift. work eight hour arrival at their section, employees report to their section supervisor who records presence by ticking the appropriate column on the daily time sheet. (See 7 bow 3. Work periods are controlled by a factory siren (hooter). Employees commence work they hear the siren at 7.30am and end the days shift at 4.30pm, again when the siren sound The siren is also used to control tea and lunch * Workers are not required to sign themselves out at the end of the day, but if they contine to work after 4.30pm, they must notify their section supervisor. On reporting for work lowowing day they must inform their section supervisor of the number of hours overtime they worked the previous afternoon/evening. The section supervisor records this on the daily time sheet against employee's 5. Three administration clerks from the accounting department are responsible for our e responsible for certain payroll functions. An administration clerk is allocated to ach of the three sections i. e. cutting stitching finishing. the and 6. Each administration clerk maintains a ledger of all wage earners in the section for which ion for which he is responsible. The factory foreman is responsible for hirine and dismissing staff as well as receiving notices of resignation). When a change must be made to the employee ledger, the foreman sends a completed, pre-printed sequenced Employee Engagement / Dismissal Resignation Form" to the section administration clerk. This contains full details of the employee, e.g. date of engagement/dismissal erade and pay scale. The clerk updates his ledger, and files the instruction from the foreman. 7. On Wednesday morning the administration clerks prepare the daily time sheets for their section for the following wage period. Daily time sheets are preprinted and sequenced (each section has its own unique sequence). The sheets consist of a column for each day of the working week in which the section supervisor can tick off each employee's (daily) attendance and enter any overtime worked. 8. Before 7am on Thursday morning the administration clerks take the daily time sheets (for the following wage period)to the supervisor of the section for which they are responsible, and collect the completed wage period's time sheets. The supervisor and administration clerk sign the completed wage period's time sheets to acknowledge the transfer. 9. The administration clerks then prepare the wage period (see point 1) payroll for their section. They calculate the normal hours worked (each "tick" represents 8 hours) and the overtime hours for each employee from the daily time sheets. The employees hourly pay rate is obtained from the employee ledger and overtime is calculated at the rate of one and a half times the normal wage. Using the relevant schedules and tables, the administration clerks calculate PAYE, UIF and medical aid deductions and calculate the Page 12 of 23 net wage payable for their section. The payroll is preprinted, well designed and pages are numerically sequenced in a bound book. 10. Once the payrolls for the three sections have been prepared, they are sent to the factory accountant who reperform the calculations on the payrolls, makes any corrections, and signs the payroll to acknowledge is control procedures. He then prepares and signs cheques for the net wages and all deductions to be paid over e.e- PAYE. The cheques are sent to the financial accountant for a second signature and the payrolls are returned to the respective administration clerks. The factory accountant also prepares a coinage schedule 11. On receipt of the payrolls the administration clerks prepare a pre printed paypacke for each employee in their section by writing the details of the employee and the period's wages onto the paypacket. 12. On the Friday morning a wage payout Calpak Iptv Lid's security section takes the cheque and the coinage schedule to the bank. The cash is placed in three numbered bank bags (per instructions from Calpak (Pty) Ltd, sealed, and delivered to the administration clerks by security. The three administration clerks make up the paypackets for their section according to the payroll 13. At 3pm on a payout Friday, the administration Clerks accompanied by a security guard) distribute the paypackets from the three pay points within the factory. Wage earners must present their staff identity card, sign the payroll next to their names on receiving their wages. As there are only approximately 40 wage earners per section, the payout is completed without significant delay. (Note: do not concern yourself with unclaimed wages). 14. During the course of the following week, the administration clerks update the employee ledger with details of each employee's wages and deductions YOU ARE REQUIRED TO: a. Identify and explain the weaknesses in the payroll of Calpak (Pty) Ltd based on the information above. Your explanation must convey why you believe that the weaknesses you have identified are weaknesses. b. For each weakness, explain in general terms if, and how, a computerized wage system would address the weakness. (10) (30) QUESTION 3 (30 MARKS) You are the senior on the audit of Smartpart (Pty) Ltd, a company which wholesales a large range of motor vehicle accessories to garages, panel beating businesses and Page 13 of 23 Specialist accessory shops. The company sells only on credit to account holders Smartpart (Pty) Ltd has expanded quickly over the past few years and the accounting system related internal controls are proving to be inadequate. You have therefore requested various members of the audit team to document the company's systems to enable you to evaluate them. One of your best trainees, Anton Goo has presented you with the following narrative pertaining to certain functions in the revenue and receipts de Order receiving/sales Outhorisation No aspect of the order receiving function is computeryed. Orders are received by phone, or mail. Customers sometimes place an order by phone and within two or three days send a written order to confirm the phone order. When a customer phones, the call is put through to Eddie Meres, the sales order clerk. On taking the call, if he does not recognize the voice of the caller, he asks for the customer's name and confirms that the customer has an account referring to an up-to-date hardcopy of Smartpart (Pty) Ltd's customers. This list reflects the customer's account number name, address and contact details. (He also has up to date product price lists so that he is able to answer customers' price queries.) If Eddie Mercs is satisfied that the caller is an account holder, he fill out a single part (original only, no copies) preprinted, prenumbered internal sales order (ISO) by inserting the customer's number (which he obtains from the customer list) and recording the description and quantity of the goods ordered on the ISO. At this point the telephone conversation is terminated. Eddie Mercs then completes the ISO by filling in the customer's name and delivery address and signing it. if the caller does not appear on the list of customers, tie is not an account holder) Eddie Mercs fills in a preprinted "new customer form" (NCF) by obtaining (over the phone) the prospective customer's business name, postal/delivery address and contact details as well as the names of the business's bankers and two trade references, Eddie Mercs then completes the ISO in the normal manner with the exception of inserting the customer's account number. All incoming mail is received by Pearl Pillay the receptionist who, assisted by one of the clerks from accounting, enters details of all letters, customer orders etc in a mail register. She and the accounts clerk both sign the mail register. Whatever has been received is then distributed. All customer orders go to Eddie Mercs, who makes out an ISO for each order, taking the details from the customer order. Page 14 of 23 Before he goes home at 4 pm. Eddie Mercs places the day's ISO on the stores controller, Kobus Marais desk, and there are any NCF, he gives them to Precious Gumede, the senior debtors administrator. She allocates an account number to the new customer, files the NCF and updates the customer ist.) Warehouse and Despatch Again no aspect of these functions is computerized Each morning Kobus Marais splits the iso's between his two assistant storemen who pick the goods ordered from the shelves. The goods picked are placed in cardboard boxes with the ISO but the box is not Sealed. As the items are picked, the assistant storemanticks them off on the iso. the changes the quantity ordered is greater than the quantity on hand, the storeman changes quantity ordered on the ISO to the quantity actually picked. If the item ordered completely out of stock, the ISO will be changed to o for that item. The assis.com storemen sign the ISOs once they have picked the items ordered. Once the goods nav been picked, they are moved to the despatch area. Hawke Mathebula, the despatch clerk, extracts the ISO from the box and makes out a preprinted, sequenced four part Delivery Note (DN), copying all details from the ISO onto the DN. He places the top copy in the box, and addresses and seals the box. The 2nd copies, along with a delivery list, are handed to the company's delivery driver who checks the boxes to be delivered against the copies of the despatch notes and delivery list as the boxes are loaded onto the truck. Hawke Mathebula attaches the ISO to the 3" copy of the DN and sends them (in well controlled batches) to the accounting section for invoicing at a later stage. The 4 copy of the DN remains as a fast (fixed in the book) copy in Hawke Mathebula's office in despatch. YOU ARE REQUIRED TO identify and explain the weaknesses in the order receiving/sales authorization and warehouse/despatch functions as described above. Notes: 1. Your explanation should convey the reason why you believe the weaknesses identified are, in fact, weaknesses. 2. You are not required to make recommendations to address the weaknesses. Page 15 of 23