Professional Documents
Culture Documents
your firm. You are an audit supervisor of Spinalonga & Co and are currently preparing
for the forthcoming interim and final audit for the year ending 31 October 20X6. You are
required to document and assess the sales system, recommend control improvements
to deal with a specific fraud issue as well as undertake substantive testing of revenue.
The company markets itself on being able to despatch all orders within three working
days. Once the order is taken, the sales person emails the finance department and
warehouse despatch team with the customer ID and the sales order details and from
this a pick list is generated. Sequentially numbered goods despatched notes are
completed and filed in the warehouse.
Sequentially numbered invoices are generated using the pick lists for quantities and the
customer master data file for prices. Standard credit terms for customers are 30 days
and on a monthly basis sales invoices which are over 90 days outstanding are notified
to the relevant sales person to chase payment directly with the customer.
Payroll fraud
The finance director, Montse Mirabelle, has informed you that a significant fraud took
place during the year in the payroll department. A number of fictitious employees were
set up on the payroll and wages were paid into one bank account. This bank account
belonged to two supervisors, who were married, and were employed by Heraklion Co.
One had sole responsibility for setting up new joiners in the payroll system and the other
processed and authorised bank transfer requests for wages and supplier payments.
These employees no longer work for the company and Montse has asked the audit firm
for recommendations on how to improve controls in this area to prevent this type of
fraud occurring again. Heraklion Co operates a Human Resources department.
(b) Identify and explain SEVEN deficiencies in the sales system of Heraklion Co and
provide a recommendation to address each of these deficiencies.
Deficiencies Recommendation
They record any discount granted in the Sales staff shouldn’t have access to
customer master data file. customer master data file but instead only the
> Sales staff that have access to likes of sales representatives or account
customer master data file can make managers.
unallowed changes, benefitting
themselves
c) In relation to the payroll fraud, identify and explain THREE controls Heraklion Co
should implement to reduce the risk of this type of fraud occurring again and, for each
control, describe how it would mitigate the risk. (6 marks)
Question 2: You are an audit senior of Scarlet & Co and are in the process of reviewing
the systems testing completed on the payroll cycle of Bronze Industries Co (Bronze), as
well as preparing the audit programmes for the final audit.
Factory staff are each issued a sequentially numbered clock card which details their
employee number and name. Employees swipe their cards at the beginning and end of
the eight-hour shift and this process is not supervised. During the shift employees are
entitled to a 30-minute paid break and employees do not need to clock out to access the
dining area. Clock card data links into the payroll system, which automatically calculates
gross and net pay along with any statutory deductions. The payroll supervisor for each
payment run checks on a sample basis some of these calculations to ensure the system
is operating effectively.
Bronze has a human resources department which is responsible for setting up new
permanent employees and leavers. Appointments of temporary staff are made by
factory production supervisors. Occasionally overtime is required of factory staff, usually
to fill gaps caused by staff holidays. Overtime reports which detail the amount of
overtime worked are sent out quarterly by the payroll department to production
supervisors for their review.
To encourage staff to attend work on time for all shifts Bronze pays a discretionary
bonus every six months to factory staff; the production supervisors determine the
amounts to be paid. This is communicated in writing by the production supervisors to
the payroll department and the bonus is input by a clerk into the system.
For employees paid by bank transfer, the payroll manager reviews the list of the
payments and agrees to the payroll records prior to authorising the bank payment. If
any changes are required, the payroll manager amends the records.
For employees paid in cash, the pay packets are prepared in the payroll department
and a clerk distributes them to employees; as she knows most of these individuals she
does not require proof of identity.
Required:
(b) Identify and explain SIX internal control DEFICIENCIES in Bronze Industries
Co’s payroll system and provide a RECOMMENDATION to address each of these
deficiencies. (12 marks)
Question 3: You are an audit supervisor of Halley & Co and you are reviewing the
documentation describing Comet Publishing Co’s purchases and payables system in
preparation for the interim and final audit for the year ending 30 September 20X7. The company
is a retailer of books and has ten stores and a central warehouse, which holds the majority of
the company’s inventory.
Your firm has audited Comet Publishing Co for a number of years and as such, audit
documentation is available from the previous year’s file, including internal control flowcharts and
detailed purchases and payables system notes. As far as you are aware, Comet Publishing
Co’s system of internal control has not changed in the last year. The audit manager is keen for
the team to utilise existing systems documentation in order to ensure audit efficiency. An extract
from the existing systems notes is provided below.
On receipt of the purchase invoice from the supplier, an accounts clerk matches it to the GRN.
The invoice is then sent to the purchase ordering clerk, Oliver, who processes it for payment.
The finance director is given the total amount of the payments list, which she authorises and
then processes the bank payments. Due to staff shortages in the accounts department, supplier
statement reconciliations are no longer performed.
(iii) Describe a TEST OF CONTROL the auditor should perform to assess if each of these
controls, if implemented, is operating effectively to reduce the identified deficiency.
Note: Prepare your answer using three columns headed Control deficiency, Control
recommendation, and Test of control respectively. The total marks will be split equally
between each part. (15 marks)