Question 2 (25 Marks) In terms of ISA 315 (Revised), an important component of a company's internal control is its risk assessment process. This may be a highly structured documented process as might be found in a large, listed company or a less formal process as might be found in a small to medium sized private company. Either way, a risk assessment process is of little value if the risks identified are not addressed. Many of the risks faced by a wide variety of companies are very similar and are addressed by the introduction of basic internal control activities. Business risks are assessed not only as regards the business as a whole e.g., the risk of foreign competition, but also at operational level within the various business cycles.

Taban (Pty) Ltd, a medium sized retailer of decorations and light fittings has implemented the following control activities (amongst others) to address risks which they face in the various business cycles.

The purchase application software will not produce a purchase order unless the order is made out to a supplier listed on the approved supplier Masterfile. (3 Marks)

To gain access to the warehouse, warehouse employees must place their thumb on a biometric reader. If the thumbprint is authorized, the turnstile is activated. (2 Marks)

To effect monthly payments to creditors by electronic funds transfer, both the financial accountant and the financial director must enter their unique passwords before the payment will be transferred.(3 Marks)

Comprehensive enquiries relating to a proposed (new) customer's creditworthiness are carried out by the credit manager. (3 Marks)

Inventory cycle counts are conducted on different sections of the warehouse at the end of every month. ......................................................................................................................... (3 Marks)

Adjustments to the inventory Masterfile arising from differences in quantities identified by the cycle count must be entered on properly designed, pre-printed sequenced Masterfile amendment forms, by the warehouse controller. Signed by the warehouse controller and signed by the financial accountant after scrutiny of the supporting documentation. (4 Marks)

At the end of each working week, a clerk in the accounting department sequence tests the dispatch notes and matches each dispatch note to a sales invoice. (3 Marks)

When a credit note is made out for a customer, it must be made out by the accounting department, cross-referenced to the original sales invoice and presented to the financial accountant with the signed goods returned note, original sales invoice and any customer documentation. (4 Marks)

YOU ARE REQUIRED to discuss the risk(s) which each of the internal controls implemented by management and listed, is intended to address. (30 Marks)