Part I

XYZ companymanufactures custom made bed and its year end is 30 June. The company purchases its raw materials from a wide range of suppliers. Below is a description ofXYZ's purchasing system.

When production supervisors require raw materials, they complete a requisition form and this is submitted to the purchase ordering department.Requisition forms do not require authorisation and no reference is made to the current inventory levels of the materials being requested. Staff in the purchase ordering department uses the requisitions to raise sequentially numbered purchase orders based on the approved suppliers list, which was last updated 24 months ago. The purchasing director authorises the orders prior to these being sent to the suppliers.

When the goods are received, the warehouse department verifies the quantity to the suppliers despatch note and checks that the quality of the goods received are satisfactory. They complete a sequentially numbered goods received note and send a copy of thegoods received noteto the finance department.

Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file until the end of each week. He then inputs them into the purchase ledger using batch controls and gives each invoice a unique number based on the supplier code. The invoicesare reviewed and authorised forpayment by the finance director, but the actual payment is only made 60 days after the invoice isinput into the system.

Required:

In respect of the purchasing systemof XYZ Company:

a.Identify and explain FIVE deficiencies(5marks)

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b.Recommend a control to address each of these deficiencies(5marks)

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Part II

Consider the following independent and material situations. Assume that you are the audit partner on the engagement:

1.Your client reported a note receivable consisting of principal and accrued interest receivable. The maker of the note filed a bankruptcy petition, but the client refused to reduce the recorded value of the note to its net realisable value. The net realizable value was 22 per cent of the amount reported.

2.An audit client has been making losses over the past few years. After interpreting key financial ratios, your audit team has substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The client has adequately disclosed its financial difficulties in a note to its financial report, which do not include any adjustments that might result from the outcome of this uncertainty. You concluded that there would be no circumstances to force the company to declare bankruptcy.

3.There was a fire that broke out a month before the year-end date. The fire hasdestroyed most of the accounting records and underlying receipts and invoices.Management has reconstructed the accounting records using its bank statements andother means, but they are uncertain if all material matters have been taken into accountand they would like to wait until after a couple of months when subsequent receiptsmay assist them to compile further outstanding items. You have serious doubts as tothe accuracy of the compiled figures and have been unable to verify any of the materialbalances.

Required:

Nominate what type ofaudit report are you going to issuein each of the above independent situation.Explain your answer.(3 + 3 + 3 =9marks)

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