Case:

You are currently reviewing and understanding the purchasing process of your audit client (Best Goods Inc. - a super store) as part of the external audit assignment. Following are some of the important points taken by one of the senior audit team members regarding their purchasing system:

Purchasing

Purchasing department has only three employees: one manager and two junior staff members. Whenever any of the junior/senior staff members in the store feel that certain goods are needed or out of stock, they inform their respective departmental supervisors, who then call the purchasing department to order the goods at their earliest possible. The purchasing department then order the goods as requested by the supervisors without asking any further questions or carrying out any checks if the purchasing requests are valid. Best Goods Inc has its own list of suppliers with the prices agreed with each supplier. This list of suppliers with the agreed price

information is saved in the central computer. Price lists saved in the system are not updated for a while. Purchase orders can only be issued to these suppliers in the list. The junior staff members in the purchasing department can delete or add any new suppliers in the list at any time as everyone has the access to the database of suppliers. Purchase orders are prepared manually by the purchasing manager on the letterhead of the Best Goods Inc and handed over to the junior staff members to scan and email to the suppliers. Some of the suppliers acknowledge the orders received by email. Certain suppliers offer the facility to check the orders status online but junior staff in the purchasing department never got a chance to follow up the orders because of their very busy routine.

Warehouse

There is one permanent storekeeper and five temporary laborers to move in/out the stock items in the store. The storekeeper can get temporary laborers from a local staffing agency whenever needed. All goods from suppliers are delivered directly at the storeroom. Storekeeper match/check the goods with the suppliers delivery note in the presence of the delivery driver, and then he signs the delivery note to confirm that the goods were checked and received. Right after goods are added to the inventory records by the storekeeper, delivery documents are sent to the accounting/finance department. The storekeeper informs all the relevant departments about goods received at the end of each day. Each department then pick up their goods (if any) on the following day after checking the quality of goods. Any goods which are not claimed/picked up within two business days are stored in the storeroom until claimed. Certain goods are never picked up and are there in the storeroom for months and disposed of eventually by the storekeeper.

Invoicing

Accounts/Finance department has one manager and one newly hired junior accountant/petty cashier. All invoices from the suppliers are directed to the accounts department. The accounts department staff check/match the invoices with the delivery notes/documents (sent by the storeroom). Then these invoices are recorded in the general journal and general ledger by the junior accountant.

Payments:

Accounts/Finance department pay all the invoices approved by any member of the purchasing department. Some petty invoices from certain suppliers are paid in cash as well. The petty cash balance at the end of the last month was $60,000 which was just $14,000 a month earlier. Managers of various departments used to get petty cash from the cashier for personal use as well.

Required:

(a) Identify and explain five deficiencies in the internal controls, recommend improvements for the deficiencies identified, and describe one test of control for each of your recommendations.

Note: Present your answer in a table with three columns headed as: Deficiency, Recommendations and Test of Controls

(b) Describe FIVE substantive procedures you would perform to obtain sufficient appropriate evidence in relation to the year -end trade payables balance in Best Goods Inc.s statement of financial position.

(c) Assume, you have recently enrolled an audit trainee in your audit firm, and she has some confusion about financial statement assertions relevant to an Income statement, and Statement of financial position. Explain financial statement assertions, by using simple examples to help her understand, as this is very important part of her professional training and audit assignments.