Auditing

Individual Case Study (3 marks out of 20)

Pipers Brook Parts Pty Ltd manufactures specialised machinery parts for the mining industry. It particularly specialises in parts for machinery involving iron ore extraction and pelletisation.

The following information applies to Pipers Brook Parts sales system:

• Orders are received at the sales order department by telephone or email or via a sales consultant working in the field.
• Data-entry clerks key in the order via the terminals located in that department.
• Orders are subject to various computer edit checks on the terminal. Orders that satisfy all edit criteria except the credit limit test are recorded on a file for review by the credit control clerk for her approval. Orders that fail any of the other edit criteria are not accepted by the system. Rejected orders are noted by the data entry clerk and passed to the departments supervisor for investigation.
• Picking slips are printed in the dispatch office and then forwarded to the warehouse by the dispatch supervisor. A storeperson picks and assembles the orders. If goods are not in stock the storeperson alters the picking slip quantity to reflect the actual goods picked. The storeperson then initials the picking slip prior to forwarding it together with the goods to dispatch.
• Using a terminal located in dispatch, the dispatch clerk agrees the picking slip to physical goods picked, making adjustments for any stock-outs, before printing the invoice. The dispatch supervisor agrees the details of the goods invoiced to the picking slip. The supervisor then initials a copy of the invoice before forwarding it to the accounts department.
• Two copies of the invoice are sent with the goods. Once copy of the invoice serves as a delivery docket, endorsed by the customer on delivery and returned to dispatch by the delivery driver.
• At the end of each day, the accounts receivable master file is updated

Part A)

1) Three (3) key controls in Pipers Brook Parts sales system;

• Inquiry: Simply, the auditor asks appropriate management and staff about the controls in place at the service organization to determine some relevant information. This method is often used in conjunction with other, more reliable methods. For example, an auditor may inquire of management if visitors to the data center are escorted at all times if the auditor is not able to observe this activity while on site. No control objective or criteria should ever be supported by controls only tested through inquiry procedures.
• Observation: Activities and operations are tested using observation. This method is useful when there is no documentation of the operation of a control, such as observing that a security camera is in place or observing that a fire suppression system is installed.
• Examination or Inspection of Evidence: This method is used to determine whether or not manual controls are being performed. For instance, are backups scheduled to run on a regular basis? Are forms being filled out appropriately? This method often includes reviewing written documentation and records such as employee manuals, visitor logs, and system databases.
• Re-performance: Re-performance (sometimes called recalculation) is used when the three above methods combined fail to provide sufficient assurance that a control is operating effectively or this method can be used to prove by itself to demonstrate that controls are operating effectively. This method of testing (as well as a CAAT) is the strongest type of testing to show the operating effectiveness of a control. Re-performance requires the auditor to manually execute the control, such as re-performing a calculation that a system automatically calculates to confirm that the system performs the control correctly.

Required

b. For each of the three key controls identified in part a above, design one (1) appropriate test of control you would use.