THE AUDIT OF VOSPA LTD

For the year ended 31 December 20X3

Assessing General Control Risks

Read ISA (NZ) 330: The auditor's responses to assessed risks

Your inquiries and observations of Vospa Ltd's general control environment revealed the following information:

Integrity and Ethical Values

Craddock Vaugh (the company MD) and his son Conrad (the Chair of the Board) have always placed a premium on values of integrity and ethics. For years, business was conducted on a handshake, and commitments made by the company were always honoured. Company employees also value integrity and ethics. This quality is evidenced in employee who has been with the company for more than a year or two.

Management Philosophy and Operating Style

The primary focus of Vospa Ltd's strategic plan is to grow revenues and earnings. In recent years, the company has directed resources to a new product line, and the company's business strategy has focused on revenue growth. Sales grew by 30% in 20x2 and unaudited results showed 28% sales growth in 20x3. Management was willing to take calculated risks in order to support growth in market share and brand recognition. The current generous profit sharing plan for the sales executives is designed to reward them for revenue growth. The previous auditor experienced a one-time problem associated with revenue recognition.

Commitment to Competence

In order to successfully manage growth, the MD expanded his management team by appointing James Doyle (with over 13 years of industry experience) as Chief Operating Officer (COO) and Julia Anderson as Chief Financial Officer (CFO). Julia was hired because of her familiarity with benefits and risks of enterprise resource planning systems.

Julia Anderson, the CFO, has responsibility for the company's financing needs, accounting, and information systems. Many accounting and information systems issues have been delegated to her. Julia immediately initiated a project to upgrade the company's computerized accounting system. She reviews the progress on the new system installation with the IT manager on a monthly basis.

The CFO recently hired Jay Harris as the new IT director. Jay Harris is given the task of implementing a new enterprise resource management system for the company. The new system is needed to handle the company's growing information system needs. Jay Harris is also responsible for managing the current system, overseeing data control and systems security until the new system has been tested and is ready for use.

Further, the CFO recently hired Harry Alston as internal auditor for the company. Harry reports directly to Julia. The internal auditor is currently given the task of reviewing all the reconciliations for the various bank accounts. The board of directors approved the hiring of the internal auditor. Julia intends plans to discuss internal audit findings with the board of directors, in the absence of an audit committee, and on an annual basis.

Board of Directors and Audit Committee

Vospa Ltd is essentially a family owned business. Its board of directors is dominated by family members. The Board of Directors includes Craddock Vaugh, the MD; Conrad Vaugh, the current Chairman; Howard Vaugh, a family member with a business background in the retail jewellery sector; Catherine Vaugh, another family member who is trained in jewellery design, and Fred Harris, the independent director. Harris is also the Senior President of a large regional bank. The Board of Directors has not appointed an audit committee, although it recently approved the hiring of an internal auditor on the recommendation of Julia Anderson, CFO.

Organizational Structure

The current senior management team is made up of Conrad Vaugh (the Chairman of the Board), James Doyle (COO) and Julia Anderson (CFO). The IT director (Jay Harris) reports directly to Julia Anderson. Jay Harris is responsible for data control and systems security in the company's small computer environment. Within IT department, there are separate managers for computer operations and programming. Also, the internal auditor reports directly to the CFO.

Assignment of Authority and Responsibility

Authority for many business decisions rests largely with senior management. Business decisions associated with IT rest solely with the CFO and the IT Director. The CFO also has sole authority for purchasing and selling short-term share investments. Julia is currently under pressure to produce financial statements within ten days after the end of the month. Both Craddock and Conrad Vaugh consider this as essential to good business management.Once the financials are produced they are closely reviewed with managers of day to day operations to ensure that managers are held accountable for the resources they are entrusted with.

Human Resource Policies and Practices

Personnel involved in the company's core manufacturing and sales functions have significant experience with the Company. In the accounting department, you observed that there is a particular accounting staff who requires more training. The staff is a challenge for the CFO. The company has hired competent individuals from outside to meet the company's IT and internal audit needs. These roles are new. In order to keep up with growing demands, employees, particularly in the accounting and the IT departments are very overworked.

Other procedures performed to obtain an understanding of internal control revealed the following information:

1.The company has identified a small group of independent jewellery retailers in the high end market. Their sales have deteriorated to the point that it is now doubtful whether they are able to repay Vospa Ltd for their purchases. However, Vospa Ltd has decided to continuing making deliveries to these retailers, but on the basis of "cash on delivery" (COD). It is anticipated that a large provision for doubtful debts may be necessary to reduce these accounts to estimated realizable value.

2.The 'accessories' inventory consists of a collection of small miscellaneous items of insignificant unit prices, totalling $42,395.89, again making up an insignificant portion of total inventories.

1. The purchased parts stockroom is segregated from the production areas by a wire fence. While visiting the factory, you noted that the gate was left open all day and access to the stockroom (which contains many valuable and easily concealed items) was accessible to any employee. The stockroom's perpetual inventory records were formerly checked by an employee who made periodic test counts. This employee has retired and has not been replaced. As a result, period test counting has ceased. You expanded your tests in view of these situations and are satisfied that the perpetual records reasonably reflect the quantities on hand.

1. The board of directors has recently adopted a policy that allows the company to invest excess funds in short-term share investments. The CFO has sole authority for purchasing and selling the shares investments. Company shares purchased will be credited to a company account at a local brokerage house. The shares are held in the Company's name. All correspondence related to the share investments are sent directly to the CFO. She in turn, forwards brokerage advices to her assistant for recording in the accounts.

1. A complete physical inventory of Company's stock of completed and work in progress jewellery have recently been counted.

Required:

a)Identify the control environment factors that would impact the company's internal control.

b)Identify the facts related to Vospa Ltd's general internal controls.

c)For each fact identified in b), explain whether it is a control strength or weakness and how it may impact on the financial statements.

d)Explain how these strengths and weaknesses may influence the audit strategies.

e)For the accounts receivable and inventory accounts identify one assertion for which you would assess control risk at the maximum or slightly below the maximum. Explain your logic.