SECTION C Case Study (Total 20 marks) Assessing Control Risks (A) Kumud Pty Ltd is a major manufacturer of industrial machinery. Detailed below is a description of its purchasing and payments system. (i) When the stores department requires items to be purchased, they issue a three-part prenumbered purchase requisition that needs to be approved by the stores manager. Copy 1 is sent to the purchasing department, Copy 2 is sent to the accounts payable department and Copy 3 is filed in the stores department. (ii) On receipt of an approved purchase requisition, the purchasing department issues a fivepart pre-numbered purchase order. Copy 1 is sent to the supplier, Copies 2 and 3 are forwarded to the receiving department, Copy 4 is forwarded to the accounts payable department and Copy 5 is filed in the purchasing department. (iii) When goods are received, the receiving department logs in the shipment by stamping order received on its two copies of the purchase order, which then forms its receiving record. One copy of the receiving record is filed in the receiving department and the other is forwarded to the accounts payable department. (iv) The accounts payable department checks that there is a purchase requisition, purchase order and receiving record for each supplier invoice and then approves it for payment. (v) The accounts payable department prepares a pre-numbered disbursement voucher and forwards it along with the suppliers invoice, purchase requisition, purchase order and receiving record to the financial accountant. (vi) The financial accountant prepares a cheque for each supplier, signs the cheque and records it in the cash disbursements journal. The cheque is immediately mailed to the supplier. Supporting documentation is returned to accounts payable for filing. (vii) At the end of the month, the assistant accountant undertakes a sequence check of all accountable forms. The financial accountant receives the monthly bank statement, prepares a bank reconciliation and investigates any reconciling items. 11 Required: (a) Identify any five (5) internal control weaknesses in Kumuds internal control concerning the purchases and payments functions. Explain why each one is a weakness. (10 marks) (b) Explain the process the auditor can use in assessing control risks. ( 3 marks) (c) What will be your assessment of internal controls relating to Kumuds purchases and payments system? (2 marks) (B) You are the audit senior on the audit of Action Games Ltd (AGL), a large retailer of computer games. Although each sale is of relatively low value, the company has a very high sales volume. You have just completed your review of AGL's internal controls over sales for your audit for the year ended 30 June 2015. Based on your review, you have concluded that AGL's internal control over sales is excellent. As a result, you have suggested an audit strategy for sales of extensive testing of the controls and, if they prove to be effective, relying solely on those controls to gain reasonable assurance that the sales information is fairly stated. However, your audit manager has asked you whether you have considered the inherent limitations of internal control in designing your audit strategy. Required: (a) Explain the audit managers concern. (3 marks) (b) What would be a more appropriate audit strategy? Justify your answer. (2 marks)