Part B: Assessing control risks

Cook's Furniture uses a cloud-based enterprise management system (EMS). It has different functions such as procurement, finance, HR, sales, production, warehouse etc. Different employees are given access to the area they are responsible for. Carl is given access to all area of the system. The access is controlled by personal login and passwords.

Cook's Furniture Purchase and Cash Disbursement Cycle

Cook's Furniture sources raw materials domestically as much as possible, but it also has multiple suppliers in different locations globally. Customised products range is made to order and the lead time for manufacturing process is 10-12 weeks when an order is placed. Other products (e.g. office chairs, ottomans) are made based on anticipated level of sales. As part of interim audit, Jane Owen the audit senior on this engagement has completed a 'walk-through' of the procedures for the inventory purchases and cash disbursement cycle. The following is a summary of the procedures she documented on the audit file:

1. Rowan Jones, the factory manager is responsible for initiating orders for raw materials by using the production and warehouse management functions within the EMS. EMS system holds information of inventory item name, item code, quantities and costs. When an order for the customised products range is placed, Rowan assesses and calculates what the raw materials needed to manufacture the order. He checks EMS for the availability of raw material because some materials they may already have. If the raw materials are insufficient, Rowan generates a purchase order using the EMS. The EMS automatically assigns a reference number to the purchase order. For the ready-made range of products, Rowan usually re-orders when there is one month of products left in the warehouse. Given that Carl wants to maintain sufficient level of inventory to minimise backorders, Rowan normally generates a purchase order for three months' production needs.
2. The purchase orders completed by Rowan are sent to Thomas Chapman (the account payable clerk) via emails generated by the EMS at end of each working day. Thomas contacts any of the approved suppliers by phone or email regarding the availabilities of the materials they wanted. After he confirms with a supplier, he forwards the purchase order to the supplier and updates EMS to show the order is sent. No record is kept of the phone conversation with a supplier, nor does the purchase order needs to be approved before sending to a supplier.
3. If a purchase order cannot be fulfilled by any of the approved suppliers, Thomas may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier's information to Claire, the CFO for approval. Once approved, Claire adds the new supplier into the approved supplier list.
4. When goods are received in the warehouse, Tony Young, the warehouse assistant, checks the supplier's delivery note against the physical stock coming in. Once it is confirmed that the materials agree to the delivery note, Tony initials and dates the delivery note and then passes it to Craig Tukiri the warehouse manager. Craig will then login to the inventory function within the EMS system to update the received materials. Once the inventory records are updated, the system updates Rowan that the orders have been received. Craig makes a copy of the supplier's delivery note, files the original copy of the delivery note and forwards a copy of the delivery note to the accounting department.
5. When inventory is updated in the prior step, EMS accounting function automatically generates a journal entry to update the accounting records. (Note: the journal suggested by the system is Dr Raw materials inventory; Cr Creditor). The system rejects the journal if the inventory item code or the name of supplier is not recognised. When the journal is accepted, the computer will generate a journal number. Thomas then writes the journal number onto the delivery note forwarded by the warehouse. Thomas files the delivery note by supplier names.
6. Thomas the payable clerk receives all supplier invoices. On receipt of an invoice, he checks the details against the delivery note received from the warehouse. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forward the payment requisition together with the invoice and a copy of the corresponding delivery note to Claire for authorisation. Claire forwards to Carl the CEO for further authorisation any payments of over $30 000 for a single transaction.
7. Claire and/or Carl signs the payment requisition to confirm authorisation and forwards the documentation to Kumar Singh, the banking clerk, who keys each payment into the accounting system (the journal posted by the system is Dr Creditor; Cr Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the payment requisition. Kumar then files the payment requisition together with supporting documentations by the payment requisition number.
8. The banking clerk then loads the payments on the online banking facility with reference to the payment requisition number. Both Claire and Carl must approve and release the payments. The banking system automatically sends electronic transfer records to Claire who subsequently forwards them to Thomas. Thomas then checksit against supplier invoices and then sends a remittance advice to individual suppliers.

Question 3 Assessing control risk in the purchase and cash disbursement cycle

a. Identify five control weaknesses in the purchase system.

b. Explain how each control weakness may affect the financial statements (i.e. which accounts and assertions are at risk)

c. identify the audit procedures to test the account(s) and assertion(s) that are at risk.

Question 4

a. Identify six control strengths in the inventory system

b. explain why each control is a strength (i.e. which accounts and assertions does it strengthen).

c. For each control strength, identify audit procedures to test the effectiveness of control.

Question 4: Substantive Procedures and Audit Documentation

After the end of the financial year, Jane Owen performed transaction tests of the inventory purchases and cash disbursement. She summarised the audit procedures she performed in the following workpaper (reference N-2). To ensure audit quality, BDC has a review policy which helps to ensure that each audit document provides a clear and complete indication of the procedures that were performed and that adequate evidence has been collected. For this audit, you must review and approve all audit workpapers. If you find any unclarity or issues in a workpaper, the workpaper is returned to the appropriate staff auditor for necessary and appropriate revision.

REQUIRED: Review the audit work papers below. Prepare Jane a list of the concerns that are present in her work papers. For each point raised, give explanations why the documentation is not appropriate.

Client Cook's Furniture Ltd Financial year 30-Jun-20 Workpaper Inventory purchases and cash disbursements transactions Reference N-2 Prepared by Jane Owen Reviewed by Audit Manager Payment requisition Date Payee number Amount $ Audit procedures 4/07/2019 NAE Steel 961 $ 12,610.47 V O t 25/07/2019 NAE Steel 1480 $ 391.05 V O C U 5/08/2019 NAE Steel 2322 $ 4,210.40 V O F t u A 13/09/2019 NAE Steel 2568 $ 6,069.10 V O L B 20/10/2019 NAE Steel 3113 $ 841.70 V t U 13/11/2019 NAE Steel 3692 $ 7,018.45 V O U 18/12/2019 NAE Steel 4230 $ 2,295.40 V 0 t 11 A 6/01/2020 BM Hardware 4493 $ 667.45 V 0 T 5/02/2020 BM Hardware 5020 $ 318.41 V 0 t 26/03/2020 BM Hardware 5554 $ 15,440.91 V 0 T 18/04/2020 BM Hardware 6009 $ 8,611.70 O t 16/06/2020 BM Hardware 6681 $ 2,098.78 V O t UAudit Objectives: 1. To verify that all products were properly ordered and received and is for legitimate business purposes 2. To verify that expenses and assets are properly valued and classified 3. To verify that cash disbursements are for legitimate commitments and properly approved. Scope: Population all purchases from the inventory suppliers Sample selected 12 disbursements for inventory purchases from two suppliers based on the cash disbursements journal. The two suppliers are selected because Cook's furniture regularly buy from them. Audit Procedures: Traced to purchase invoice. Noted agreement with amount of payment and payment date. Each disbursement is 3% less than the invoice amount, representing the cash discount. All discounts were recalculated. Compared invoice prices with Master price list or contracted price from new suppliers. All agreed except A Examined supplier invoices for evidence that company employees verify prices, quantity and items. Marking or initials present in all cases. Verified mathematical accuracy of invoices Examined cancelled payment for amount, date, signature, endorsement and payee. Trace delivery notes to inventory journal posting and journal numbers. All journal numbers are correctly referred on delivery notes and journals are accurately posted by the warehouse manager. Examined purchase order for agreement with delivery note and invoice. Verified account code. All requisitions were properly u approved except B. Comments: Invoiced prices for two types of items on purchases dated on 5/08/19 and 18/12/19 do not agree with prices set out in the supplying contract by $200 and $360 respectively. According to Thomas Chapman, the different represents monthly purchases from NAE A steal at different prices than shown in the current price list. Pass further testing The items show on the purchase order does not agree with the delivery note for one item. Thomas indicated that replacement with a B similar item was made because of stock out. Pass further testing. Conclusions: Purchases and cash disbursement transactions are fairly stated in all material respects