Interim Audit of Internal Controls and Tests of Controls

Interim Audit of Internal Controls and Tests of Controls

Question:

Internal controls and tests of controls (8 marks)
Stanford-Brown University runs residential colleges on each of its five campuses spread all
over regional New South Wales. You are conducting the interim audit for the year ended 30
June 2020. The tangible fixed assets of each college are recorded in an asset register which is maintained at each college location by each college manager.

The system operates as described below.

  1. In order to obtain new assets, a purchase requisition form is completed and approved
    by the manager at each college.
  2. The requisition is sent to the University’s Division of Finance, where the purchasing
    officer checks the requisition for approval and completes a purchase order for the new
    asset.
  3. Assets costing more than $5,000 are approved by the financial accountant. All asset
    purchases over $20,000 require the approval of the University’s Finance Director.
  4. The purchase order is then sent to the supplier and a copy is sent to the Division of
    Finance on the main Whoop Whoop campus.
  5. The asset is received by the central store where the receiving clerk checks that all the
    asset details agree with those on the receiving report and the copy of the purchase
    order. The receiving clerk then issues the asset with its computer-generated
    sequential barcode number. This barcode is fixed to the asset and written on the
    receiving report and the supplier invoice.
  6. The relevant college manager inputs the new asset details into the asset register using
    a copy of the purchase order, the original requisition and the asset’s barcode.
  7. For disposal or write-off of an asset, an asset disposal write-off form is completed by
    the relevant college manager, signed and sent to the Division of Finance. Disposals
    and write-offs are approved by the financial accountant. A copy of the form is filed at
    the Division of Finance and the approved original returned to the college manager for
    action. The college manager then updates the fixed asset register for the subsequent
    disposal.
  8. The asset register is maintained on FARS – a tailored fixed assets computer system –
    and reconciled to the general ledger by each college manager monthly.
  9. The FARS system calculates depreciation automatically each month using the rate
    input by the college manager at the time the asset was added to the register.
    Required
  10. Identify four internal control strengths on which you would rely on for your audit. (4
    marks)
  11. Design four tests of controls to evaluate the effectiveness of each control identified. (4
    marks)
    Question 3: Tests of transactions and balances (9 marks)
    Phat Snax Ltd is a manufacturing company that sells biscuits and snack foods to a large
    number of retailers nationally. You have turned your attention to the audit of inventory and
    have obtained the following information from client staff:
  12. Year-end inventory is expected to be as follows:
    $000
    Raw materials 850
    Work in progress 525
    Finished goods 1,005
    2,380
  13. The company uses standard costing to value its inventory, which consists of
    approximately 150 product lines. At year-end, a relatively equal inventory value of
    each of these lines will be held.
  14. The inventory is stored in approximately fifty warehouses nationally. The company has
    a policy of taking out short-term leases on unused warehouse space (to minimise
    rental costs), so the number of warehouses in use varies over time.
  15. Goods are manufactured centrally at the Kickatinalong factory and then shipped out
    to the warehouses.
  16. The recent launch of a new biscuit, Lamington Bix, resulted in poorer than expected
    sales. Consequently, the company has excess inventory in finished goods, amounting
    to $200,000. Their use-by date is 6 weeks after the reporting date.
  17. A new work-in-process system was successfully introduced 2 months after the
    previous year-end. Staff have commented on how this system is a great improvement.
  18. Raw materials largely comprise bulk inventories of flour, rice, and potatoes. These are
    held in large storage bins at the Kickatinalong factory.
  19. Work in process largely includes biscuit dough, which is stored in several locations
    throughout the Kickatinalong factory both in large sealed vats awaiting processing
    and in mixing bowls attached to the ten different production lines.
  20. As in previous years, all warehouses and the Kickatinalong factory will be closed at
    reporting date to allow a full stocktake. A perpetual inventory system is used.
  21. From your experience in previous years, you know that the company has a highly
    accurate budgeting system. Final figures rarely vary more than 3% from budget.
    Required
  22. Identify and discuss the key financial statement assertions for the audit of inventory at
    Phat Snax Ltd. Support your answer with reference to information in the question. (4.5
    marks)
  23. Identify the specific issues to be considered in relation to the existence and valuation
    assertions for the audit of Phat Snax Ltd’s inventory balance. Note that some specific
    issues may be relevant to both assertions. Outline the audit procedures you would
    undertake to cover these issues. (4.5 marks)
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