XYZ company manufactures custom made bed and its year end is 30 June. The

company purchases its raw materials from a wide range of suppliers. Below is a

description of XYZ's purchasing system.

When production supervisors require raw materials, they complete a requisition

form and this is submitted to the purchase ordering department. Requisition

forms do not require authorisation and no reference is made to the current

inventory levels of the materials being requested. Staff in the purchase ordering

department uses the requisitions to raise sequentially numbered purchase orders

based on the approved suppliers list, which was last updated 24 months ago. The

purchasing director authorises the orders prior to these being sent to the

suppliers.

When the goods are received, the warehouse department verifies the quantity to the

suppliers despatch note and checks that the quality of the goods received are

satisfactory. They complete a sequentially numbered goods received note and send

a copy of the goods received note to the finance department.

Purchase invoices are sent directly to the purchase ledger clerk, who stores them

in a manual file until the end of each week. He then inputs them into the purchase

ledger using batch controls and gives each invoice a unique number based on

the supplier code. The invoices are reviewed and authorised for payment by the

finance director, but the actual payment is only made 60 days after the invoice is

input into the system.

Required:

In respect of the purchasing system of XYZ Company:

a. Identify and explain FIVE deficiencies (5 marks)

b. Recommend a control to address each of these deficiencies (5 marks)

Part II

Consider the following independent and material situations. Assume that you are the

audit partner on the engagement:

1. Your client reported a note receivable consisting of principal and accrued interest

receivable. The maker of the note filed a bankruptcy petition, but the client

refused to reduce the recorded value of the note to its net realisable value. The

net realizable value was 22 per cent of the amount reported.

2. An audit client has been making losses over the past few years. After interpreting

key financial ratios, your audit team has substantial doubt about a client's ability

to continue as a going concern for a reasonable period of time. The client has

adequately disclosed its financial difficulties in a note to its financial report, which

do not include any adjustments that might result from the outcome of this

uncertainty. You concluded that there would be no circumstances to force the

company to declare bankruptcy.

3. There was a fire that broke out a month before the year-end date. The fire has

destroyed most of the accounting records and underlying receipts and invoices.

Management has reconstructed the accounting records using its bank statements

and other means, but they are uncertain if all material matters have been taken

into account and they would like to wait until after a couple of months when

subsequent receipts may assist them to compile further outstanding items. You

have serious doubts as to the accuracy of the compiled figures and have been

unable to verify any of the material balances.

Required:

Nominate what type of audit report are you going to issue in each of the above