Background of Roses

You are an auditor of YDE Auditors.

Roses is listed on the Johannesburg Stock Exchange (JSE) and has been a long-standing client of YDE Auditors. Roses employs over 350 employees.

Roses is a manufacturer and distributor of headsets. The Head Office is situated in Johannesburg. Distribution warehouses are located in the Western Cape, Mpumalanga, and the Eastern Cape. Roses plans to open more distribution warehouses in other provinces in the coming months.

Purchase cycle

During your audit procedures of the acquisition and payment cycles, you noted the following regarding the purchase and receipts of raw materials: Once raw materials reach the minimum inventory level, the Marketing Manager in the sales department prepares a purchase requisition which he also signs. He then forwards the purchase requisition to the Purchase Clerk in the purchasing department, who orders the inventory from suppliers (local or foreign), and the purchase price is negotiated telephonically. The details and rand value of the inventory are recorded on a pre-numbered order form with three carbon copies. This is provided to the Purchasing Manager for approval.

Once the Purchasing Manager receives the order form, he compares each order with the signed purchase requisition and checks the sequence of all the order numbers, after which he signs it. The original order form is kept in the purchasing department. One copy of the order form is sent to the appropriate supplier, whilst a second copy of the order form is provided to the inventory storeroom and a third copy is provided to the accounting department.

When the raw materials are delivered to Roses, a pre-numbered good received note (GRN) is prepared by the Storeman. The Storeman records the date, nature, quantity, and condition of the raw materials received on the GRN. After the Storeman compared the GRN with the appropriate order, he signs the GRN. If the Storeman is not busy, the raw materials are taken to the store by either the Purchasing Clerks or himself.

The Inventory Clerk records the GRNs and requisitions prepared in respect of raw materials received in the inventory records. As the company does not have a computer system at its disposal, the Accounting Clerk reconciles the inventory records to the inventory account in the general ledger every month. The Accountant signs the reconciliation as having performed the reconciliation correctly.

A perpetual inventory system is used. One of the benefits of the perpetual inventory system is that the accounting department has its theoretical inventory level at its disposal on a daily basis. The accuracy thereof must still be tested by performing a physical inventory count every three months by comparing the physical count to the inventory records.

Design the test of controls of the purchase cycle as auditor.