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. 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.
2. 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.

Question 1 Assessing control risk in the purchase and cash disbursement cycle

a. Identify control weaknesses (if any) in the purchase and cash disbursement cycle.

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.

a. Identify control strengths (if any) in the purchase and cash disbursement cycle

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.