Fabulous Films Ltd (FF) runs four private colleges that provide education and training for people in the film industry. Its two year course includes training in financing, producing and directing films and in sound and lighting technology. You are conducting the interim audit for the year ending 30 June 2014. The property, plant and equipment assets of each college are recorded in an asset register which is maintained at each college location by each college manager. The system operates as described below:

• In order to obtain new assets, a purchase requisition form is completed and approved by the manager at each college.
• The requisition is sent to Head Office, where the purchasing officer checks the requisition for approval and completes a purchase order for the new asset.
• Assets costing more than RM5,000 are approved by the financial accountant. All assets over RM20,000 require board level approval.
• The purchase order is then sent to the supplier and a copy is sent to the central store at the head office location.
• The asset is received by the central store where the receiving clerk checks that all the asset details agree with those on the goods received note (GRN) and the copy of the purchase order. The receiving clerk will then issue the asset to the college with its computer-generated sequential barcode number. This barcode is fixed to the asset and written on the goods received note (GRN) and the supplier invoice.
• The relevant college manager inputs the new asset details into the asset register using a copy of the purchase order, the original requisition and the assets barcode.
• For disposal or write-off of an asset, an asset disposal write-off form is completed by the relevant college manager, signed and sent to head office. Disposals and write-offs are approved by the financial accountant. A copy of the form is filed at head office and the approved original is returned to the college manager for action. The college manager will then update the college asset register for the subsequent disposal.
• The asset register is maintained on a bespoke computerised system and is reconciled to the general ledger by each college manager monthly.
• The computerised asset register system calculates depreciation automatically each month using the rate input by the college manager at the time the asset was added to the register.

Required:

1. The system above has been described using narrative notes. Alternatively the system could have been visually represented using a flowchart. What are the advantages and disadvantages of each method? (8 marks)

2. Identify five internal controls in the system described above. In each case identify the type of control in place. (5 marks)

3. Design tests of control to evaluate the effectiveness of each of the five controls identified. (10 marks)

4. Assuming that the results of your tests of control identify high levels of non-compliance, what is the likely impact on further audit work? (2 marks)