You are an audit senior with Dewald, Mustafa & Co. LLP and you are reviewing the systemsdocumentation related to Arbutus Publishing Co’s purchasing and payroll systems in preparationfor the upcoming audit. Arbutus is a book retailer, operating a network of ten stores and a digitalretail site. The company has a central warehouse, which holds the majority of the company’sInventory.

Your firm has audited Arbutus for a number of years and as such, audit documentation isavailable from the previous year’s file, including internal control flowcharts and detailed notes onboth the purchasing and payroll systems. As far as you are aware, Arbutus’ system of internalcontrol has not changed in the last year. Extracts from the existing systems notes are provided below.

The audit manager has asked you to review this and identify any control weaknesses. She wantsyou to explain the implications of any weaknesses identified so that this can be given to the clientand asked you to recommend a control that Arbutus should implement to address eachweakness you identify.

Extract related to the purchasing system
Each store manager is responsible for ordering the books for their shop. As the inventory levelsfall in a store, the store manager raises a purchase requisition form (PRF), which is sent to thecentral warehouse. If there is insufficient inventory on hand, the warehouse manager completes asupplier requisition form (SRF) which is sent to the purchasing clerk who prepares the purchaseorder (PO) and sends it to the supplier. The purchasing clerk sends any POs in excess of $5,000to the director of purchasing for authorization. A copy of each PO is retained by the purchasingclerk, and another is sent to the warehouse.
Receipts of goods from suppliers are processed by the warehouse receiving team, who agree thedelivery to the purchase order, checking quantity and quality of goods and complete asequentially numbered goods received note (GRN). The GRNs are sent to the accountingdepartment each week for processing.On receipt of the purchase invoice from a supplier, the accounting clerk matches it to the GRN.
The accounting clerk then prepares a bank transfer payment request form. The accounting clerkthen files the purchase invoice and related GRN with the related PO. These are filed by suppliername. At 4 pm each day, the accounting clerk provides the accounting manager with a folder withall of the bank transfer payment request forms that she prepared during the day. The accountingmanager signs these and returns them to the accounting clerk so that she can prepare andprocess the daily payment list which initiates the bank transfer payments. These payments areprocessed by the bank each evening.Extract related to the payroll systemArbutus has a small human resources department which is responsible for interviewing and hiringall regular employees. They are responsible for setting up new employees in the payroll systemand removing any employees who leave or are terminated. Seasonal casual staff can also be hiredby the store managers to help cover extended hours during the holiday season or to cover staffabsences related to long-term health pr parental leaves. The store managers have thesetemporary employees complete the required new employee intake forms which are forwarded tohuman resources so these employees can be added to the payroll system.

A sequentially numbered ID, which is a magnetic swipe card, is sent to the new employee’s storelocation, together with a welcome package. Employees swipe their cards on the card readerlocated in the staff room at each location at the beginning and end of their shift shifts. Each night, data from the card readers is transmitted electronically to the company’s payroll system, whichautomatically calculates each employee’s gross and net pay along with all required statutorydeductions at the end of each two-week pay period. The payroll supervisor recalculates a sampleof paycheques for each pay period to verify that they have been calculated correctly in terms ofhours worked, hourly wage, deductions, etc.All employees are paid by bank transfer. The payroll manager reviews the list of payments andagrees on it to the related payroll records prior to authorizing the bank payments. If any requiredchanges are noted, the payroll manager amends the payment and annotates the change on therelated employee’s payroll record.