Grace Co is a company listed on a stock exchange. It manufactures furniture which it supplies to a wide range of retailers across the region. The company has an internal audit (IA) department and the company’s year end is 30 June 20X9. You are an audit supervisor with Zain & Co, preparing the draft audit programs and reviewing extracts from the internal controls documentation in preparation for the interim audit.
Grace Co generates revenue through visits by its sales staff to customers’ premises. Sales ledger clerks, who work at head office, carry out credit checks on new customers prior to being accepted and then set their credit limits. Sales staff visit retail customers’ sites personally and orders are completed using a four‐part pre‐printed order form. One copy is left with the customer, a second copy is returned to the sales ordering department, the third is sent to the warehouse and the fourth to the finance department at head office. Each sales order number is based on the sales person’s own identification number in order to facilitate monitoring of sales staff performance.
Retail customers are given payment terms of 30 days and most customers choose to pay their invoices by bank transfer. Each day Lilla Shan, a finance clerk, posts the bank transfer receipts from the bank statements to the cash book and updates the sales ledger. On a monthly basis, she performs the bank reconciliation.
Purchases and inventory
Receipts of raw materials and goods from suppliers are processed by the warehouse team at head office, who agree the delivery to the purchase order, check the quantity and quality of goods and complete a sequentially numbered goods received note (GRN). The GRNs are sent to the finance department daily. On receipt of the purchase invoice from the supplier, Shami Green, the purchase ledger clerk, matches it to the GRN and order and the three documents are sent for authorization by the appropriate individual. Once authorized, the purchase invoices are logged into the purchase ledger by Camilla, who utilizes document count controls to ensure the correct number of invoices has been input.
The company values its inventory using standard costs, both for internal management reporting and for inclusion in the year‐end financial statements. The basis of the standard costs was reviewed approximately 18 months ago.
Grace Co employs a mixture of factory staff, who work a standard shift of eight hours a day, and administration and sales staff who are salaried. All staff are paid monthly by bank transfer. Occasionally, overtime is required of factory staff. Where this occurs, details of overtime worked per employee is collated and submitted to the payroll department by a production clerk. The payroll department pays this overtime in the month it occurs. At the end of each quarter, the company’s payroll department sends overtime reports which detail the amount of overtime worked to the production director for their review.
Grace Co’s payroll package produces a list of payments per employee which links into the bank system to produce a list of automatic bank transfer payments. The finance director reviews the total to be paid on the list of automatic payments and compares this to the total payroll amount to be paid for the month per the payroll records. If any issues arise, then the automatic bank transfer can be manually changed by the finance director.
(a) In respect of the internal controls of Grace Co:
(i) Identify and explain SIX deficiencies
(ii) Recommend a control to address each of these deficiencies, and
(iii) Describe a TEST OF CONTROL the external auditors 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.