Audit and Assurance Page 4 of 4

Q.9 You are audit senior at Advanced Limited (AL) which is engaged in the business of
assembling and marketing of consumer electronics. The process followed by AL for
procurement is as follows:

(i) Store Department generates a numerically sequenced purchase requisition (PR), when
the quantity falls below re-order level. PR shows the name of goods and quantity
required and is signed by the store officer. The approved PR is forwarded to the
Purchase Department for procurement.
(ii) Purchase Department has a list of suppliers which was prepared in 2015 by including
all the suppliers who had supplied goods to AL during the previous five years. Later,
some suppliers were added to the list on the recommendation of the store manager.
(iii) When a PR is received, the five most experienced suppliers are contacted and purchase
order (PO) is issued to the most experienced supplier provided he agrees to supply the
goods on the same price which was paid by AL on the latest purchase. The PO is
issued in the form of an email by the purchase manager. A copy of the email is also
sent to the store manager and the finance manager. In case of large or unusual
purchases, PR and PO are also authorised by the store manager prior to sending the
email.
(iv) On receiving the goods, the store officer agrees the goods dispatch note (GDN) of the
supplier with the PO to ensure that description of goods is the same as were ordered by
AL. An acknowledged copy of GDN is given to the supplier and another copy is sent
to the accounts department.
(v) Store Department prepares sequentially numbered Goods Received Note (GRN),
which is signed by the store officer after counting the goods received. Entry in the
stores ledger is made on the basis of GRN.
(vi) On receiving the invoice, purchase is recorded by the accounts department after
comparing the quantity received as per the GDN with PO and the invoice.

Required:
Identify the weaknesses in the internal control system of AL and their possible effects and
give your recommendations to AL. (15)

(THE END)
 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

Sale of shares by director:

The directors' intention to sell their shareholding in GL provides them an incentive
to manipulate the annual profits so that they can achieve the maximum possible
gain from the sale of shares.

Non-implementation of last year’s external auditor’s recommendations:

auditor on timely basis shows the management’s attitude towards the improvement
Management failure to place controls against weaknesses identified by the external

of internal controls and consequently it increases the risk of fraud.

(b) Course of action:

In response to assessed risk of material misstatement due to fraud, the auditor shall:
 emphasize to the Audit team the need to maintain an attitude of professional
skepticism.
 assign more experienced staff or increased supervision of staff.

the entity’s related controls, relevant to such risks.
to the extent not already done, the auditor shall obtain an understanding of

 evaluate whether the selection and application of accounting policies by the

entity, particularly those related to subjective measurements and complex

management’s effort to manage earnings.

transactions, may be indicative of fraudulent financial reporting resulting from

 incorporate an element of unpredictability in determining the nature, timing

and extent of audit procedures.
 design and perform further audit procedures whose nature, timing and extent
are responsive to the assessed risk of material misstatements.

Ans.9 S.No. Control weakness Possible effect Recommendation

(i) The list prepared by the There might be suppliers There should be a formal
purchase department has on the list who are not process of approving the
not been approved by competent enough to list and also for placing
anyone other than the make the supply. the suppliers on the
purchase department. approved list.
(ii) List has not been The list of the suppliers
updated since 2015. should be updated on a
regular basis.
(iii) Lack of proper criteria Purchases may be made The criteria for addition
for selecting suppliers as from unreliable suppliers. of new supplier should
presently suppliers are be comprehensive which
added to the list without should cover both
considering their financial and technical
financial soundness, capabilities of the
experience, etc. suppliers.
(iv) Purchase requisitions are This could lead to All purchase requisitions
processed merely on the inappropriate purchases, should be authorized by
initials of the stores i.e. in terms of type of the store manager as well
officer. /There is no goods or their quantity. as the user department.
formal process of
reviewing the purchase
requisition received from
store department.

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 Audit and Assurance
Suggested Answers
Certificate in Accounting and Finance – Spring 2018

(v) Purchase orders are not Liabilities for goods PO should be

pre-numbered as they arereceived may not be pre-numbered or be
issued in the form of recorded or may be issued in sequential order
email. recorded more than once controlled by a computer
if there is no sequential system.
numbering.
(vi) Quotations are not Purchases may be made Prior to ordering of
obtained from the at a higher price or goods the shortlisted
supplier before placing discounts may not be suppliers should be asked
the orders. availed. to submit the quotations,
which should be
reviewed by the purchase
committee.
(vii) High value or other than This leads to lack of A purchase committee
routine purchases are segregation of duties comprising of senior
only authorized by the which may result in officials should be
purchase manager and inefficiencies. formed to oversee
store manager. purchases above a certain
amount.
(viii) There is no system of Sub-standard goods may Proper inspection should
quality inspection. be received. be carried out before
accepting the goods.

supplier’s invoice should

(ix) Although GRN has been There is a possibility of Before payment,
prepared by the store incorrect payment to the
department, payment has supplier. be reconciled with GRN
been made on the basis and PO.
of GDN instead of
GRN.
(x) Inventory and payable Cut off errors may arise Inventory/payables
are recorded upon receipt i.e. where goods are should be recorded on
of invoice only. received but invoice is the basis of GRN.
received after year end.

(THE END)

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 Examiners’ Comments on Audit and Assurance – Spring 2018

(e) The performance in this part was good as most of the candidates were able to
identify at least three controls. Poor performing candidates were those who tried
to fulfill the requirement of four controls but did not care to ensure that they
identify relevant controls only.
(f) The performance remained average. Some students gave pertinent answers but
many other seemed confuse and tried to mention procedures related to subsequent
receipts, subsequent warranty claims, subsequent sale prices to assess NRV, etc.
which were totally irrelevant.

Question 7

In this question the candidates were required to identify 3 control weaknesses and suggest
2 mitigating controls for each weakness in a scenario where changes in system had
caused the invoicing system to malfunction and close down for 4 days. The overall
performance remained below average as only 21% of the candidates secured passing
marks. A large number of candidates identified issuance of invoices manually as a control
weakness which was incorrect as it was just a contingency measure rather than a routine
practice.

Question 8

This question on fraud risk factors was poorly responded as only 15% of the candidates
secured passing marks. In part (a) where fraud risk factors were to be identified, most of
the candidates just copied the text from the question without elaborating as to why that
particular fact is a fraud risk factor.

In part (b), students were required to list down the actions which the auditor should take
in respect of the identified fraud risk factors. The performance in this part was better,
though comprehensive answers were rarely given.

Question 9

In this question six steps followed by an organisation during its procurement process
were mentioned and the candidates were required to identify the weaknesses in internal
controls, their possible effects and give recommendations.

The performance in this question was much below expectation as only 22% of the
candidates secured passing marks. Answers were not up to the mark in many cases so the
scores were not very good in this question.

Answers were generally flooded with repeated points whereas other important ones were
missed. Lack of proper criteria for selecting suppliers and pre-numbering of purchase
orders remained un-noticed by most of the students. Some students wrote about issuing
invoices rather than receiving invoices. Some students merely repeated the words written
in the question as the weaknesses without explaining why these were considered as a
weakness.

(THE END)

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 Audit and Assurance
Summary of Marking Key
Certificate in Accounting and Finance – Spring 2018

Mark(s)
A.6 (a) 0.5 mark for each benefit of splitting the work between interim and final audit 2.0

(b) 01 mark for each risk of material misstatement in case of significant related
party transactions 3.0

(c) 01 mark for each step that may be taken in case the reliability of management
representation is inconsistent with other audit evidence 4.0

(d) 01 mark for each circumstance in which other matter paragraph may be
included in the audit report 4.0

(e) 0.75 mark for each control over data transmission 3.0

(f) 01 mark for each procedure for identification of subsequent events 4.0

A.7 ! 01 mark for each control weakness 3.0

! 01 mark for each mitigating control 6.0

A.8 (a) 01 mark for identification of each fraud risk factor 4.0

(b) 01 mark for description of each action that an auditor should take on
identifying a fraud risk factor 5.0

A.9 ! 01 mark for each control weakness 8.0

! 0.5 mark for each possible effect 3.5
! 0.5 mark for each recommendation 3.5

(THE END)

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