Department of Auditing

AUDITING 200

YEAR TEST 2
20 JUNE 2017

SUGGESTED SOLUTION

Internal examiners

Mr K Fouché
Miss C Coetzee
Miss C Mphahlele

External examiner

Ms M Kirstein

INSTRUCTIONS

Maximum time: 2 hours (120 minutes)

Maximum marks: 80

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 PART 1
COMPONENTS OF INTERNAL CONTROL
COMPONENTS OF INTERNAL EXAMPLE
CONTROL
1 Control Environment. (1) Mr Burns creates and encourages a positive attitude
towards internal control by enforcing integrity and
ethical values to all employees. (1)
Mr Burns also ensures that they have the necessary
skills, knowledge and competence to perform their
duties properly. (1)
2 Control Activities. (1) A sales manager at one of FF’s outlets has
overstated the revenue figure reported to the head
office by initiating and recording false
transactions. (1)
3 Risk Assessment. (1) FF has a risk management process in place where
managers should identify and respond appropriately
to all risks threatening the achievement of the entity’s
business objectives (1)
4 Monitoring of controls. (1) The importance of assessing the effectiveness of the
design and operation of internal controls on an
ongoing and timely basis has also been brought to
the attention of all outlet managers by Mr Burns. (1)
5 Information system. (1) QuickFin has the ability to document each
transaction according to the path followed, from the
initiation to its ultimate inclusion in the financial
statements, much more effective in terms of controls.
(1)
mark allocation: 1 mark per aspect maximum 10
total 11
presentation (table format) maximum 1

PART 2
CONTROL ACTIVITIES & CONTROL OBJECTIVES
CONTROL CONTROL ACTIVITY CONTROL OBJECTIVE
NUMBER
I Authorisation Validity (1)
(Authorisation and approval) (1)
II Physical Controls Validity (1)
(Access control) (1)
III Information Processing Completeness (1)
(Documentation and records; Document
Design) (1)
IV Performance Review Validity / Accuracy (1)
(Independent checks and
reconciliations) (1)
V Segregation of duties (1) Validity (1)
mark allocation: 1 mark per aspect maximum 10
total 10
presentation (table format) maximum 1

2
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 PART 3

RECOMMENDATIONS FOR SETTLEMENT OF SUPPLIERS’ STATEMENTS

(BUSINESS) LETTER 

PO Box 123
Pretoria 
1111
20 June 2017
Ms Mollo
(Chief buyer)
Fabulous Flames 
PO Box 456
Molteno
9999

Dear Ms Mollo 

SETTLEMENT OF SUPPLIER STATEMENTS

In relation to your inquiry on improving existing internal controls,

find attached in Appendix A my recommendations. 

Should you have any further inquiries, please contact me on 0XX XXX XXXX.

Yours sincerely/ yours faithfully 

NOT OWN NAME 

Mark allocation:
At least 3 elements () are present and correct 1
At least 5 elements () are present and correct 2

mark allocation: 1 mark per aspect, unless indicated otherwise maximum 2

total 2

3
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 APPENDIX A

 Monthly suppliers’ statements should be reconciled with supporting

documentation such as goods received notes, invoices and payments to ensure
that such documents were subject to accuracy controls upon recording. (1)
 Individual creditor accounts in the creditor ledger should be reconciled with
supplier’s statements. (1)
 Any differences noted during all reconciliations should be investigated and
followed up by senior management. (1)
Note: This mark for ‘follow up’ can only be awarded once (max 1)
 Mr Burns and Ms Snow, responsible for authorisation of payments should be
provided with all supporting documentation other than the suppliers’ statement.
(1)
 EFT requisitions should be prepared in writing for each payment. (1)
 The details according to the supporting documents should be agreed with the
amount per EFT requisition by Mr Burns or Ms Snow. (1)
 All the payments captured by either Mr Burns or Ms Snow, should be compared
to the EFT requisition/Payment schedule after captured (before payments are
released) to ensure accuracy of data captured for payment. (1)
 Mr Burns and Ms Snow responsible for authorisation of payments should
indicate on the EFT requisition/suppliers’ statement that payments have been
completed for requisitions received by them. (1)
 EFT payments should be entered to the cash payments journal once the
transaction has been carried on. (1)
 EFT payments should be reconciled with actual payments and such
reconciliations should be subject to review or followed up upon. (completeness
test) (1)
 The payments captured by the accounting clerk onto the QuickFin accounting
system, should be reviewed and compared to the payment schedules in the file
by the senior accountant, to ensure accurately captured on the system.
(accuracy test) (1)
 The creditor’s ledger and general ledger should be updated with EFT payments
made. (1)
 Suppliers should be informed of the payments by means of remittance advices.
(1)

 There should be segregation of duties in place for Ms Mollo as she is

responsible for: (1)
 purchasing of raw materials; and (1)
 preparing the monthly payment schedule for supplier statements that are
due for payment. (1)
OR ALTERNATIVE FOR THE ABOVE SEGREGATION OF DUTIES

 Another independent person (other than Ms Mollo) should be appointed for the
three months of maternity leave to receive all suppliers statements and prepare
the monthly payment schedule. (1)
Note: This mark for alternative to segregation of duties = max 1

mark allocation: 1 mark per aspect, maximum 8

total 16

4
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 PART 4 WEAKNESSES IN MANUFACTURING SYSTEM

 The perpetual inventory management system is not used for regularly

monitoring stock levels as a stock count is only performed on a monthly basis
to verify stock levels. (1)
 Fixed re-order levels are not established as it seems that raw materials are only
ordered when raw materials are out of stock. (1)
 The QuickFIn software system doesn’t require the authorisation of Mr Brown,
the store manager, before the online requisition can be generated. (1)
 A production plan is not created by the production department considering the
actual sales demand that is influenced by circumstances such as the
weather/winter. (1)
 The production schedule is not compared to the production plan by the factory
manager to ensure that the production schedule is based on the production
plan. (1)
 A raw material transfer note is not created by the raw material store to keep
record of the goods selected and transferred based on the requisitions. (1)
 No indication exists that raw material requisitions are compared with actual
transfers/raw material transfer notes ensuring that all requisitions have resulted
in transfers from the raw material store. (1)
 No segregation of duties as Mr Heat, the raw material store clerk, is responsible
for: (1)
 Issuing the raw material requisition; and (1)
 Issuing the raw materials. (1)
 There is no document in place accompanying the transferred goods to the
factory for the forklift operator (factory clerk) to verify against the quantity and
description of the transferred goods. (1)
 the factory clerk doesn’t sign any document as evidence of accepting
custody of the transferred goods. (1)
 The forklift operator (factory clerk) doesn’t inspect the quality of the raw
materials received. (1)
 Spillages are not identified and followed up by the factory manager; (1)
 by agreeing the raw material transfer notes with production reports. (1)
 The factory manager, Mr Smith doesn’t compare the quantity and description
of the finished goods with the transfer to head office note before the goods are
despatched from the factory. (1)
 A quality check of the manufactured goods are also not done by Mr Smith
before the transfer of the goods. (1)
 Mr Smith, the factory manager, did not authorise the transfer to head office note
by signing the document after he performed the above check. (1)
 The transfer to head office note is at no stage captured on the QuickFin
software system to update the transfer of the finished goods on the perpetual
inventory management system by means of a transfer journal. (1)
 The representative of Eastmove does not review the quality of the products he
collects from the Factory Worker 4 to ensure no products are damaged etc. (1)
 The costs allocated to finished goods is not calculated by a cost accountant by
also taking overhead costs in consideration. (1)
 The raw material and labour costs are not calculated with reference to the
expenses carried on in the general ledger accounts – only production records
are considered for the calculation of the value of the heaters. (1)

5
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  The calculation of the amount is not reviewed by a second employee. (1)
 Actual quantity of goods manufactured according to the production report or
perpetual inventory management system is not considered for allocation a
value to each unit; (1)
 the general ledger is also updated with 100 items, irrespective the actual
quantity of goods manufactured. (1)
 Actual costs incurred are also not agreed with budgeted costs for identifying
and investigating any variances. (1)
 The finished goods value recorded to the general ledger account is also not
checked
by a second employee. (1)
mark allocation: 1 mark per aspect maximum 19
total 27

PART 5

WEAKNESSES IN HR SYSTEM – APPOINTMENT

 Request for appointment of employees (the need or skills needed) is not

identified or motivated by the sales department but Mr Cheap (sales manager)
rather took the decision by himself to appoint a new cashier. (1)
 No approval for the appointment of an additional cashier was approved by
higher management/management committee. (1)
 No formal appointment process (advertisement/interview) was in place with the
involvement of HR Department (Mr Cheap decided to appoint a relative without
any formal process followed); (1)
 and therefore HR Department did not do any of the following regarding the
candidate: (1)
 follow up any references;
 do background check (investigate if candidate has a criminal record);
 check any qualifications of the candidate; or
 perform a competency test.
(Note to marker: Only one mark awarded if student mentioned any one of the above as an
example)

 No pre-numbered employee (Masterfile) amendment form is completed for

amendment (addition) to the HR Masterfile. (1)
 No comparison are been performed by Mr Sap (HR Manager) between the
amendment form/request and supporting documentation (employee contract,
copy of employee ID, qualifications, et cetera, to verify the information. (1)
 Mr Sap (HR Manager) does not authorise any amendment forms by signing
them (after the above comparison). (1)
 Write access on the Masterfile is not restricted only to one authorised person
with the authority to make amendments. (1)
 Amendments made by HR clerk to the HR Masterfile are not compared to any
relevant supporting documentation; (1)
 Completeness and validity of changes are not followed up on a regular basis
by the HR Manager. (1)

6
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  No amendment logs or registers exists and is therefore not reviewed by on the
HR Masterfile amendment logs or registers. (1)

mark allocation: 1 mark for control and 1 mark for explanation maximum 9
total 11

PART 6

INPUT CONTROLS

LOGICAL PROGRAMMED EXAMPLE

CONTROL
 Alphabetic/Alphanumeric/ Numeric
tests
 Field length test/Size check
 Limit /Range test.
 Sign test.
 Completeness test/ Mandatory field
test/missing field test
 This test will detect alphabetic
(1) characters being input into a numeric
field such as the ID number/cell phone
number/salary/days leave. (1)
 This test will also detect numeric
characters being input into an
alphabetic fields such as full
name/surname. (1)
(1)  This places a specific limit on the number
of characters for example, the ID number
entered must be 13 digits long or the cell
number entered must be 10 digits
long. (1)
(1)  This test will detect when a field entered
exceeds a predetermined number/limit –
the salary entered for a cashier cannot
exceed R100,000 per annum. (1)
(1)  This test requires the field entered to be
either positive or negative – the salary or
number of days leave entered can only
be a positive figure. (1)
 This test will not allow a HR clerk to
(1) submit the captured data to the MF
before the compulsory fields, for
example, name, surname, ID, address,
cell phone, salary, benefits or leave
days are completed. (1)

mark allocation: 1 mark for control and 1 mark for explanation maximum 10
total 11

7
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 PART 7

RECOMMENDATIONS: POINT OF SALE SYSTEM

 The cashiers should count the R5000 cash float at the beginning of each
shift; (1)
 The cashiers should sign the cashing-up sheet for taking responsibility of the
cash float at the beginning of each shift. (1)
 The transactions should not be manually captured but the information (price
and description) relating to the product should be retrieved by means of a fixed
barcode scanning device. (1)
 The selling price retrieved by the fixed barcode scanning device should derive
from a price list master file that synchronises with the POS system. (1)
 A senior person/chief cashier should be present when the cash register drawer
containing the cash is removed from the cash register. (1)
 The transaction value amount according to the transaction summary printout
should be documented on the cashing-up sheet by the cashier for each
shift; (1)
 and the cashier should also agree the total with the actual cash and credit
cards slips accumulated during the shift. (1)
 Mr Cheap (sales manager) should count the actual cash receipts and agree it
the completed cashing-up sheets for identifying and following up on shortages
and surpluses; (1)
 and should thereafter sign the cashing-up sheets as proof of accepting
responsibility of the transfer. (1)
 A cash summary sheet should be created by a chief cashier on duty/senior
person for all six cashing-up packages ensuring that they are accurately and
completely transferred to the office of Mr Cheap. (1)
(Note to marker: Any control addressing accuracy and completeness of transfer may be
considered)
 The cash should be safeguarded in a secure, fire proof drop safe in the office
of Mr Cheap until it is collected by CashMaxSafe. (1)
 The safe should only be accessible in the presence of both Mr
Cheap/independent senior person and CashMaxSafe. (1)

mark allocation: 1 mark per aspect, unless indicated otherwise maximum 10

total 12

8
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