XYZ is a giftware wholesaler operating out of Australia, Perth. The company purchases several lines of giftware, such as decorative plates, dolls, and candles, from smaller suppliers, and provides one-stop shopping for gift stores and souvenir stores across the Australian market. Andrew Simmons, XYZs owner and CEO. XYZs previous auditor retired at the end of 1998. I have already reviewed the predecessors files and accepted the client on the firms behalf. XYZs controller, Charlotte, was fired in April 1999 after it was discovered that she had set up fictitious vendors and was collecting payments from XYZ personally. Charlotte had not taken any time off in several years, but Andrew Simmons convinced her to take some vacation. During the time Charlotte was away, the fraud was discovered by the assistant controller, Max. Andrew Simmons is very concerned about this incident and wants to know how such a situation could be avoided in the future. He had Max provide us with details of the purchases, payables, and payments cycle.

Purchases, Payables, and Payments Cycle Previously, at the request of the warehouse manager, Charlotte set up all-new vendors in the system. There is no formal approval process for new vendors. Since Charlottes departure, the warehouse manager has been setting up new vendors in the system. The warehouse manager is responsible for all ordering activities, and for initiating purchase orders. When I covered for Charlotte during her holiday, I received several phone calls from the warehouse manager, who asked me to create purchase orders. When I asked why he was not providing the purchase order, the warehouse manager said Charlotte had informed him, several months ago, that she would create the purchase order based on his verbal request. There is no approval of purchase orders. When shipments are received, the receiving clerk records the date, time, and vendor name in a receiving log, and notifies the accounts, payable clerk. The accounts payable clerk creates the payable from the purchase order on file. When the invoice is received from the vendor, the accounts payable clerk prepares the cheque for the invoice amount, files the invoice, and provides cheques to Charlotte for signing (or to Max, when Charlotte is absent). Once signed, Charlotte (Max, now that Charlotte has left) mails the cheques. Since Charlottes departure, Andrew Simmons and I have been doing some financial statement analysis. We noticed a new rent expense account starting in January 1999. However, neither Andrew Simmons nor I were aware of any extra space being rented, especially since we are currently in the second year of a five-year lease for head office and the warehouse. When I looked into the background of the vendor, the address was a post office box in Charlottes husbands name. We also found several vendors with post office box addresses. The items ordered were giftware, but no shipping documents could be located. We are not sure whether these items were ever received.

Types of assertions are Occurrence, Completeness, Cut-off, Existence, Accuracy Valuation and allocation, Classifications, Presentation and Rights and Obligations

Please discuss 4 control deficiencies and their implications, including the financial statement assertions impacted, and provide audit procedures to address the related assertions.