You were assigned to the audit of Zhen Clothing Pty (Ltd) (Zhen). York and Partners has been the auditors of Zhen since the inception of the company 10 years ago. Zhen manufactures clothing and the company has grown significantly over the last 10 years. They are busy planning the annual stock count for the year ended 30 June 2020. The stock count will be held on the 30th of June and there will be no inventory movement on that day. Zhen sells specific designer clothing items to their top 10 retail customers at a discount of between 5% and 10%. Zhen has requirements for this discount to be applicable, namely, that the customer must be 1 of the 10 customers and that their purchases per semester must exceed R 500 000.

1. Inventory

Zhens inventory system is directly linked to that of their six inventory suppliers via an electronic data interchange (EDI) system. Agreements that exist between the EDI partners and Zhen were compiled and signed by both parties. Dedicated communication channels between the trade partners are used to exchange relevant business information regarding inventory transactions, by means of a uniform set of inventory codes. Zhens perpetual inventory system has pre-programmed limits in place that automatically sends an electronic re-order to the Inventory Controller as soon as a particular inventory item reaches its re-order level. The re-order record indicates the inventory code of the inventory item that must be ordered. On receipt of a re-order record, the Inventory Controller gains access to the inventory system by entering a unique username and password. He electronically approves and releases the pre-numbered requisitions that are automatically generated by the system based on the inventory codes contained in the re-order record. The requisitions are then forwarded to the Inventory Manager. The Inventory Manager checks the availability and delivery dates of the inventory needed with the suppliers of the relevant inventory items. Based on the authorised requisition and after considering the preferred supplier and the number of items that he enters and reviews through visual verification, the system generates sequentially numbered purchase orders, which are sent to the relevant suppliers.

2. Ordering and receiving orders from customers

All customers must complete an application form before any orders will be accepted. Each customer is assigned a specific customer number. The customer number must be mentioned when orders are placed. Zhen has an online platform where orders can be made online or customers can phone a 24-hour toll-free number. During the 24 hours, there will be processing clerks available to assist with the orders made on the companys website. When the order is placed, the code of the clothing item together with the number of items must be mentioned. If Zhen does not have the clothing in stock, the order will be placed on a waiting list and processed as soon as the items arrive in stock. Invoices are sent out by the Accounting Department every month and must be paid within 14 days. Subsequent orders may only be placed if the previous invoice has been paid.

The following payment methods are available to customers:

debit payment against the member's bank account;

payment by cheque; or

payment by credit card

3. Inventory Section

The Inventory Master File is made up of the below details:

Inventory code

Cost price per inventory

Inventory description

Sales price per item

Last sales date

Number of items on hand

Total value of the inventory item

4. Creditor payments

Zhen currently uses cheques to pay creditors at the end of each month. Cheques are printed by a printer that is stored safely in the Managing Directors office. The Managing Director and Financial Director compare the cheques with the supporting documentation after which they sign the cheque. Afterwards, the documentation is used to record the expenses in the relevant journal entries. Cheques are then distributed to the creditors. Some of the cheques however disappeared over the past few months. Consequently, Zhens Board of Directors decided on alternative methods of payments to creditors in future. Zhen intends to use electronic fund transfer (EFT) instead of the manual payment process that is currently in use. The electronic fund transfer will place reliance on intelligent technology which will decide when payments are made. The information in the Creditors Masterfile will be integrated with the banks electronic fund transfer software in order to allow the bank's system to be updated via an internet connection. A proper feasibility study (including a cost benefit analysis) will be performed before the implementation of the EFT payment system takes place. Specialist consultants from the bank will be contracted to write the software program which will integrate the Creditors Masterfile with the banks EFT payment software according to the companys specific needs. They will also be responsible for the testing of the new EFT payment system. The consultants are the only specialists with the necessary knowledge to perform the conversion. Management are fully aware that there will be additional business risks related to the fact that the company will be connected to the banks EFT payment system. They are willing to carry these risks, but are unsure if there are other risks they should consider

5. Cyber attack

One of Zhens employees received and opened an email which subject read as follows: You have won the lottery. When the employee opened the email, it was unreadable, but by clicking on a link, activated a virus. After the virus was activated on the computer system, it entered the memory of the employees computer and encrypted all the data and network files she had access to. All data was consequently lost.

Required:

2.1 Discuss the specific application controls that should be present in the ordering system of Zhen (Pty) Ltd to ensure the validity, accuracy and completeness of customer orders that are captured, based on note 1 and 2. (22 marks)

2.2 Explain how you would use computer aided audit techniques (CAATs) with respect to the inventory balance and the stock take of Zhen (Pty) Ltd. Refer to note 1, 2 and 3. (15 marks)

2.3 Describe the additional controls that must be present within the inventory system that Zhen (Pty) Ltd uses regarding the completeness and accuracy of orders for inventory items placed at inventory suppliers. Refer to note 1, 2 and 3. (10 marks)

2.4 Describe the controls that must be in place at Zhen (Pty) Ltd to prevent future losses of data and information caused by similar cyber-attacks based on note 5. (8 marks)