Fundamentals Level – Skills Module, Paper F8 (INT)Audit and Assurance (International)December 2010 Answers1(a)
Examples of matters the external auditor should consider in determining whether a deficiency in internal controls is significantinclude:–The likelihood of the deficiencies leading to material misstatements in the financial statements in the future.–The susceptibility to loss or fraud of the related asset or liability.–The subjectivity and complexity of determining estimated amounts.–The financial statement amounts exposed to the deficiencies.–The volume of activity that has occurred or could occur in the account balance or class of transactions exposed to thedeficiency or deficiencies.–The importance of the controls to the financial reporting process.–The cause and frequency of the exceptions detected as a result of the deficiencies in the controls.–The interaction of the deficiency with other deficiencies in internal control.Tutorial note: ISA 265
Communicating Deficiencies in Internal Control to those Charged with Governance and Management
states that a significant deficiency in internal control is a deficiency or combination of deficiencies in internal control that, inthe auditor’s professional judgement, is of sufficient importance to merit the attention of those charged with governance.
Board of DirectorsGreystone Co30 Any StreetA TownX Country8 December 2010Dear Sirs,Audit of Greystone Co for year ended 30 September 2010
Please find enclosed the report to management on significant deficiencies in internal controls identified during the audit forthe year ended 30 September 2010. The report considers deficiencies in the purchases system, implications of thosedeficiencies and provides recommendations to address those deficiencies.
(i) Deficiency(ii) Implication(iii) Recommendation
The purchasing manager decides onthe inventory levels for each storewithout discussion with store orsales managers. The purchasingmanager may not have theappropriate knowledge of the localmarket for a store.This could result in stores orderinggoods that are not likely to sell andhence require heavy discounting. Inaddition as a fashion chain, if customers perceive that the goodsare not meeting the key fashiontrends then they may cease to shopat Greystone at all.The purchasing manager shouldinitially hold a meeting with areamanagers of stores; if meeting allstore managers is not practical, heshould understand the local marketsbefore agreeing jointly goods to bepurchased.The purchase orders are onlyreviewed and authorised by apurchasing director in a whollyaggregated manner (by specifiedregions of countries).It will be difficult for the purchasingdirector to assess whether overall thecorrect buying decisions are beingmade as the detail of the orders isnot being presented and he is theonly level of authorisation.This could result in significant levelsof goods being purchased that arenot right for particular marketsectors.A purchasing senior manager shouldreview the information prepared foreach country and discuss with localpurchasing managers the specifics of their orders. These should then beauthorised and passed to thepurchasing director for final reviewand sign off.The store managers are responsiblefor re-ordering goods through thepurchasing manager.If the store managers forget or ordertoo late, then as the ordering processcan take up to four weeks, the storecould experience significant stockouts leading to loss of income.Automatic re-order levels should beset up in the inventory managementsystems. As the goods sold reach there-order levels the purchasingmanager should receive anautomatic re-order request.
FOR FREE ACCA RESOURCES VISIThttp://acuteacca.tkSEND YOUR REQUESTS ATemail@acuteacca.tkPAST PAPERS ARE UNDER COPYRIGHT©.