Assessment item 3 - Case B (risk, planning, controls and testing)
Due Date: 11-May-2020
Return Date: 02-Jun-2020
Length: 2,500 words
Submission method options: Alternative submission method
You are an audit manager at Oscar Edwards Vance (OEV), an accounting firm with offices throughout regional Australia in major centres such as Bathurst, Goulburn, Coffs Harbour and Armidale in NSW, Warwick in Queensland and Bendigo in Victoria. OEV is a medium-sized auditing firm by national standards and most of its clients operate within the manufacturing and service industries.
During early July 2019, you met with the audit senior of OEV, Jack Higgins, to discuss a range of findings related to various clients of OEV.
Impact of business risk at Bowlby Ltd
with a plant in Goulburn NSW. Competition from imported goods in this industry has become increasingly fierce, yet Bowlby has traditionally chosen to address these competitive pressures by differentiating its products from imported rivals by focusing on quality rather than cost. Recently, Bowlby has pursued a new manufacturing process that purports to maintain quality while reducing manufacturing time and therefore costs. Unfortunately, there has been an increased number of complaints from customers which could be attributed to a potential drop in quality.
Using analytical procedures to assess risk at Zing Ltd
Zing Ltd manufactures work boots out of its factory in Bendigo, Victoria. Jack has calculated the following ratios for you to discuss.
Industry Average Zing Ltd
2019 2018 2019 2018
Current Ratio 2.5 3 2.6 2.2
Receivables turnover 6.1 (59.83 days) 5.7 (64 days) 6 (60.83 days) 7.2 50.69 days)
Inventory turnover 4.8 (76 days) 4.3 (84.88 d) 4.2 (86.90 d) 5.1 (71.56 d)
Return on total assets 6% 5% 9% 8%
Net profit ratio 0.05 0.05 0.03 0.03
Gross margin 0.23 0.25 0.23 0.20
Assessment of internal controls around purchases and payments cycle at Evans Ltd.
Jack has completed his assessment of internal controls around purchases payments to suppliers at Evans Ltd, a small manufacturer of custom outdoor timber furniture. Jack has identified the following processes in relation to purchases and payments:
Evans has the following staff: a warehouse manager; four machinery operators (who do the actual manufacturing of the outdoor furniture); an accounts payable clerk; an accounts receivable clerk; a banking clerk; an administrative assistant; and five directors, one of whom runs the business as a whole on a day to day basis.
All operations occur at their location in Bathurst, NSW.
When stores of raw materials are visibly running low as assessed by the machinery operators, they tell the warehouse manager and he then initiates the order of goods. The process for ordering goods begins with the warehouse manager making phone calls to a range of approved suppliers to obtain quotes. Once a list of quotes has been obtained, the order will then be lodged via the phone, with confirmations of the order being received by email. The confirmation email is kept by the warehouse manager.
Once the confirmation email is received, the warehouse manager completes a purchase order in duplicate. One copy is kept at the warehouse, while the other is sent to the accounts payable clerk and is filed by date.
When the goods arrive at the warehouse, the warehouse manager checks the goods received match the delivery note which comes attached to the goods and signs the delivery note. There are two copies of the delivery note – one is kept by the delivery company, the other is kept by the warehouse manager.
The warehouse manager photocopies the delivery note and forwards the copy to the accounts payable clerk, who performs the journal entry to the creditor’s ledger for the amount on the delivery note. The delivery note is stamped/signed as ‘entered' and filed by supplier.
Tests of control for payroll at Bryer Ltd
Jack has identified a range of controls over payroll at Bryer Ltd, which operates a hotel in Armidale, NSW. There is a significant degree of variability in the staffing at Bryer, given seasonal variations around tourism. Wages and salaries are the major expense for Bryer, especially in summer when as many as 30 additional staff can be employed. Jack has indicated that he wishes to rely on the internal controls around payroll for the audit and has identified the following features of the system:
The operations manager at Bryer keeps a detailed weekly roster on a spreadsheet which has the following details:
• Employee name
• Position of employment (eg, bar/kitchen staff; cleaner, etc)
• Hourly rate
• Days rostered for the week;
• Additional amounts to be paid (meal allowances, uniform expenses, etc).
Every employee's supervisor is required to sign a physical copy of the excel sheet every day to provide evidence that the hours were worked as set out on the spreadsheet. If there are any changes or discrepancies this is recorded on a separate ‘variation form’ which is co-signed by the employee and supervisor.
The excel spreadsheet and the variation forms are forwarded to the payroll officer every Thursday and are used as the basis for the payroll.
Substantive tests of revenue for Smutz Pty Ltd.
Finally, Jack discusses Smutz Pty Ltd - a family business that provides cleaning services in the regional Queensland town of Warwick and its surrounding region. The managing director of Smutz, Nathan, has applied for a loan in order to fund the purchase of new vacuum cleaners, carpet cleaners and commercial vehicles (vans). Before providing the loan, however, the bank has requested an audited financial report and Nathan has approached OEV to perform this service. Jack has performed a preliminary review and has decided to focus on substantive testing. In particular, Jack has been focusing on revenues. Jack notes the following:
Nathan normally works around 48 hours per week. Some of this time involves driving between clients so it is not charged to customers. When Nathan is cleaning, he charges a rate of $55 per hour and there is no variation based on what sort of cleaning Nathan is doing.
When cleaning houses, Nathan is often paid cash in hand. When Nathan is cleaning one of his regular business clients however, payment is generally done via electronic funds transfer directly to Smutz’s bank account.
Nathan keeps a receipt book that is purchased from an office supplies chain and provides all customers with a written receipt. The book has prenumbered blank receipts and produces duplicates.
Write a memo to Jack Higgins, the audit senior at OEV that advises him on:
Question 1 (3%)
The business risk impact and the accounts (as well as the related assertions) most likely affected by the increased competition and strategic decisions made by Bowlby Ltd.
Question 2 (6%)
The conclusions that you can draw from the ratios calculated by Jack and the possible audit risks for Zing Ltd that Jack will need to investigate further.
Question 3 (6%)
The strengths and weaknesses around the internal control function and the recommended audit strategy for purchases at Evans Ltd.
Internal Controls – p. 267 7th edition.
Inherent limitations of internal control p – 268 (use assertions of occurrence, completeness, accuracy and cut-off to frame opinion of the 8-9 steps.)
Audit strategy – control risk p.269 & p. 205
Types of audit tests p. 161
Tests of controls p. 162
Substantive tests p. 162
Question 4 (5%)
The tests of control Jake will need to perform to provide evidence for the assertions of accuracy and occurrence of payroll expenses for Bryer Ltd.
See payroll on p. 347 then p. 344 for assertions of accuracy and occurrence.
Also see page 395 7th edition for tests on payroll.
Question 5 (5%)
An assessment of the substantive tests Jack could perform around the assertions of occurrence, completeness, and accuracy for the revenue of Smutz Pty Ltd.
See diagram of on page 366 to understand the context of substantive tests.
See page 377 in the 7th edition.
Online submission via Turnitin is required for this assignment. Details will be provided by your subject lecturer.