Question Two (2)[70 Marks]

Orange & Field Inc. (Orange Field) is a local audit firm based in WINDHOEK. Orange Field's client portfolio mainly consists of medium-size private companies. Orange Field recently accepted the appointment as the external auditors of Max Sound Systems Ltd for the financial year ended 30 April 2019.

MAX is listed on the NAMIBIA Stock Exchange (NSX). The company is situated in WINDHOEK but does business throughout NAMIBIA. Their main income-generating activities are the import, distribution and leasing of commercial sound and audio equipment.

MAX has had a profitable financial history. However, its sales have been under pressure from cheaper, low quality equipment being sold by its competitors. This is concerning for management as their bonuses for the year are based on the financial results after the annual audit has been completed.

A big source of MAX's annual income is from big artists who lease their audio equipment for the purposes of events and performances all over the country. They have a good business relationship with many of the big-name artists in the country, including Sally and Otewa.

You are the senior trainee and AIC (Auditor-In-Charge, an internal name that Orange Field uses to identify the Lead Trainee) on the audit engagement of MAX. A file with several working papers and supporting documentation has been presented to you for further consideration.

Reference Description

A1.1 System description: Masterfile amendments and back-up system

B2.2 System description: Payroll and personnel cycle

INFORMATION ON FILE

Client: Max Sound Systems Ltd Year end: 30 April 2019

Prepared by: Trainee

Date: 10 May 2019A1.1 Reviewed by:

Date:

System description: Masterfile amendments and back-up system

Through inquiry of Bobby Thompson (CFO), the following system description was obtained:

1. Masterfile amendmentsSales of audio equipment are only made on credit to approved customers. A new prospective customer is only required to fill in an application form. Based on the details reflected on the application form, the new customer is added on the customer masterfile.

The details of the new customer are captured on a Masterfile Amendment Form (MAF) template that Roy Patterson (sales clerk) prints from Microsoft Word. All Masterfile amendments are made by Roy Patterson.

Roy logs into his computer terminal using a specific username and password. This specific username and password will give the user the ability to add/remove/change information on the masterfile.

This username and password is changed by Jane Brown (IT administrator) on a monthly basis and is sent to Roy and Bobby Thompson. When adding a new customer, Roy clicks on the "Create new customer" button on the system. Roy is required to key in the following information: name, surname (only if it is a natural person), ID-number (or business registration number), email address and contact number.

By opening this screen, the system automatically generates a unique customer number. Roy checks the information captured to ensure that all fields have been completed.

Note to audit manager: Roy admitted that he sometimes types in the wrong information by either entering too many / too few characters or sometimes enters alphabet letters in the contact number field.

After the new customer is added, Roy sends an email to Bobby Thompson informing him that the new customer has been created on the system. Bobby will send the client an email confirming that their application has been successful and provide them with the account number.

The system keeps a log of all the amendments made on the masterfile. The logs can be viewed on the information system when necessary.

2. Back-up system:

After hearing about water damage to the computers in the administrative office due to heavy rains and a leaking roof, Jane Brown (IT administrator) admitted to Bobby Thompson that MAX has no backup system in place to ensure the continuity of its operations.

To address this, Bobby Thompson wants to implement a backup strategy for MAX, but is unsure of what principles should be incorporated in his strategy.

During the audit of the payroll and personnel cycle MAX, the following information was gathered by your audit senior through discussion with management:

Client:

MAX Sound Systems LtdYear end: 30 April 2019

Prepared by: TraineeDate: 12 May 2019

B2.2 Reviewed by: Date:

System description: Payroll and personnel cycle

MAX currently has a workforce of 878 employees of which, 21 are salaried managers, 48 are administrative salaried employees and 809 are permanently employed wage workers.

Mr.Robs is the accountant in charge of the salaries and wages division of MAX. All permanent employees (salaried and wage workers) are paid by means of electronic funds transfers (EFTs).

MAX uses a reputable computerized payroll system, PayEarly-Solutions. When new employees are appointed, they are requested to sign a contract, setting out their conditions of employment, as well as their monthly salary amount (for salaried employees), or their hourly wage rate and number of weekly hours (for wage workers). Newly appointed employees are also required to fill in a form that contains their full names, banking details and tax numbers.

As soon as a new employee is uploaded onto the system, an employee number is automatically generated for the employee. The salaried employees of MAX do not work overtime and are simply paid according to the amounts in their contracts. For each wage worker, a magnetic clock card is issued, which is wiped through a magnetic reader on entry and exit every day.

A security guard observes that each employee swipes their own card only once upon entry to and exit from the premises. The clock card reader is linked to the PayEarly Solutions system and accurately records the name, employee number and hours worked for each wage worker. Salaries are paid on the last working day of each month, while wages are paid on a weekly basis.

Ms. Charm, the payroll clerk of MAX, is responsible for the computerized generation of pay slips on the PayEarly-Solutions system. A computerized pay slip appears on her screen for each separate employee. The fields on each pay slip are pre-populated by the computer by pulling the employee's personal information, amount payable and employee number into the pay slip.

For the wage workers, each working day consists of nine normal hours of work, paid at the normal hourly rate. Wage workers are allowed to work up to three hours of overtime per day, limited to a maximum of 10 hours of overtime per week, as per the Basic Conditions of Employment Act.

Overtime is paid at 1.5 times the normal rate. The hours recorded on the clock system is used by the computer to calculate the normal and overtime pay for each wage worker.

Other variables, such as the pay-as-you-earn (PAYE) deductions, Skills Development Levy (SDL) contributions and Unemployment Insurance Fund (UIF) contributions, are automatically calculated by using the latest relevant tables loaded onto the PayThem- Solutions system.

Ms. Charm provisionally approves each pay slip. As soon as she clicks the "approved" button on the screen, this pay slip gets lined up in the payroll, which is then ready for the final approval by Mr. Robs. After the final approval by Mr. Robs, the pay slips are printed.

Required:

A) Based on the information provided in working paper A1.1, identify weaknesses in the Masterfile amendment process and backup procedures for MAX Ltd. For each weakness identified, provide a recommendation(s) on how to improve the system.

The format of your answer should be as follows: Weakness Recommendation 1. ............... 1. .................

B) Advise Bobby Thompson on five (5) key backup strategy principles that should be taken into account when designing a backup strategy.(10 marks)

C) Based on the information provided in working paper B2.2, describe the application controls that you would expect to be in place related to the use and working of the Pay Them-Solutions system.(20 marks)

D) Express simply, what is the difference between the application control and general controls with relevant examples for both terms?(10 marks)