Question 1

Johnson & Kid Bhd (Johnson) run a business retailing baby products. The internal control systems relating to the inventory are as follows:

(a)When the inventory runs low, the factory manager would verbally instruct the factory clerk to write copy of the material requisition form and submit it by hand to the Purchasing Department.

(b)The purchasing officer would then select the approved supplier, indicating the chosen vendor in writing on the material requisition form and a copy is given to the purchasing clerk. The purchasing clerk is responsible for the preparation of the purchase order, which are in three copies. After signing the purchase order, the purchasing clerk would send the original copy to the supplier and the second copy to the Accounts Department. The third copy is filed by the purchasing clerk.

(c)The inventory is delivered directly to the factory. The factory supervisor would sign the delivery dockets and compare them with the supplier's invoices. The factory maintains an inventory movement register which gets updated by the factory clerk on a monthly basis. The factory clerk carried out a reconciliation between the balance on the inventory movement register and the physical balance on the factory floor. The factory clerk would make adjustments in the inventory movement register should any discrepancies are discovered during the inventory count.

(d)Supplier's invoices are processed by the accounts clerk who records the purchase transactions. The company's policy regarding payments to suppliers is that cheques are processed three (3) days before the invoice due date. Mr Martin, the accounts clerk, is in-charge of writing all cheques for payment. Each cheque is signed by Mr. Chan, the accountant, after verifying that the cheque amount tallies with the total amount stated in the supplier's invoice. The invoices are then filed and the cheque sent via mail to the supplier. The cheque butts are used by Mr. Martin to update the company's Cash Payments Journal.

Required:

Required (i) Identify FIVE (5) weaknesses and explain the possible effects of these weaknesses in the internal control systems of Johnson, together with the key assertion(s) that may be misstated. (ii) For each weakness identied in part (i) above, suggest how the client's internal control systems can be improved. Present your answers for parts (i) and (ii) in the table format given below: Possible effect of weakness identified Recommendations (2 marks x 5 =10 marks) (2 marks x 5 = 10 marks) (iii) During the risk assessment phase of the audit, the control risk was assessed by the auditor as low. Discuss the impact of your interim audit results of Johnson on the audit risk. (iv) Evaluate the persuasiveness of the evidence obtained from the interim audit of Johnson (v) Discuss the importance of issuing a management letter to Johnson. Give examples. (vi) Discuss the role of the internal audit department within a reporting entity