You are one of two partners at Diligence Chartered Accountants, a small, specialist audit firm based in the Central West of NSW with clients in the aged care, retail, tourism, agri-business, local government, community banking, and education sectors. It's a snowy Thursday evening in early July 2021 and you're meeting with your audit teamKel Richards (Manager), Sally Neilson (Senior), Kristin Jensen (Graduate), and Josh McDowell (Undergraduate) to review the working papers and follow up on some issues from the recently completed interim audit on Inland Dominion Enterprises (IDE) Pty Limited before beginning the final audit in mid-August.

Kristin and Josh only began audit work this year, Sally and Kel are very experienced and have been with Diligence for 8 years. IDE is a conglomerate, privately owned by twin brothers Barry and Neville Joffe. With a background in farming, the Joffe brothers have operated Mayfield Agricultural for more than twenty years before establishing IDE in 2016 to enable them to secure controlling stakes in sheet metal fabricator Small Town Steel and tourism operator Hockeys Resorts over the last 5 years.

Question 3. Small Town Steelcomponents of internal control

In October 2020 Small Town Steel installed an off-the-shelf costing system to support the cost-sensitive nature of its product designs. The new system replaced a system that had been developed in-house as the old system could no longer keep up with the complex and detailed manufacturing costing processes to provide tender costings. The old system also had difficulty with the companys broader reporting requirements.

Small Town Steels IT department, together with consultants from the software company, implemented the new manufacturing costing system. There were no customised changes, but the key operational staff and their internal auditor were significantly engaged in the selection, testing, training, and implementation stages. The manufacturing costing system uses all the manufacturing unit inputs to calculate and produce a database of all product costs and recommended sales prices. It also integrates with the general ledger each time there are product inventory movements such as purchases, sales, wastage, and damaged stock losses.

Required

Josh McDowell, your Undergraduate, has been assigned to assess Small Town Steels IT controls with particular emphasis on the recent implementation of the new IT manufacturing costing system. Brief Josh with regards to:

1. identifying and evaluating two (2) components of internal control.
2. comparing the approaches the internal auditor and we, as external auditor, would take to assessing these components in relation to the new manufacturing costing system.