Pear International (June – 2012)

It is 1 July 20X5. You are an audit supervisor in Apple & Co and you are currently reviewing
documentation of Pear International Co’s internal control in preparation for the interim
audit. Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories
across the country and its customer base includes retailers as well as individual consumers,
to whom direct sales are made through its website. The company’s year‐end is 30
September 20X5.
Pear’s website allows individual consumers to order goods directly, and full payment is
taken in advance. The website has some inbuilt validation checks to ensure details such as
the customer’s postcode and payment card details are in the correct format. Currently, the
website is not integrated into the inventory system and inventory levels are not checked at
the time orders are placed.
Pear’s retail customers undergo credit checks prior to being accepted and credit limits are
set accordingly by a sales manager. These customers place their orders through one of the
sales team, who decides on sales discount levels. Sales invoices are raised by the accounts
department using the GDNs. Monthly customer statements are sent to retail customers by
the credit control team and the credit control team follow up on overdue debts as soon as
they become overdue.
Goods are despatched via local couriers, however, they do not always record customer
signatures as proof that the customer has received the goods. Over the past 12 months
there have been customer complaints about the delay between sales orders and receipt of
goods.
Pear has investigated these and found that, in each case, the sales order had been entered
into the sales system correctly but was not forwarded to the despatch department for
processing.
Raw materials used in the manufacturing process are purchased from a number of suppliers.
Factory supervisors check stock levels on a weekly basis and place a purchase requisition
with the centralised procurement department. The requisitions must be authorised by the
factory managers before the order is processed by the procurement department. Orders
can only be placed with suppliers from the approved supplier list. The list is updated by the
procurement team and a new supplier can only be added once the terms of the contract
have been agreed and references obtained. As a result of staff changes in the payables
ledger department, supplier statement reconciliations are no longer performed.
Additionally, changes to supplier details in the payables ledger master file can be
undertaken by payables ledger clerks as well as supervisors.
In the past six months Pear has changed part of its manufacturing process. A significant level
of new equipment has been purchased, resulting in considerable levels of plant and
equipment becoming surplus to requirements and disposed of during the year. Purchase
requisitions for all new equipment have been authorised by production supervisors.
Required:
(a) In respect of the internal controls of Pear International Co:
(i) Identify and explain FIVE DIRECT CONTROLS which the auditor may seek to place
reliance on, and
(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these
direct controls is operating effectively.
Note: Prepare your answer using two columns headed Direct control and Test of control
respectively. The total marks will be split equally between each part.
(10 marks)
(b) Identify and explain FIVE DEFICIENCIES in Pear International Co’s internal controls and
provide a recommendation to address each of these deficiencies.
Note: Prepare your answer using two columns headed Control deficiency and Control
recommendation respectively. (10 marks)