Reference no: EM132582514

Fiona Furniture Bhd 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 2019. You are an audit supervisor preparing the draft audit programmes and reviewing extracts from the internal controls documentation in preparation for the audit.

Sales

Fiona Furniture Bhd 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 Miss Lily, 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 completed 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, Rebecca Lee, the purchase ledger clerk, matches it to the GRN and order and the three documents are sent for authorisation by the appropriate individual. Once authorised, the purchase invoices are logged into the purchase ledger by Rebecca, who utilises 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.

Payroll

Fiona Furniture Bhd 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. Fiona Furniture Bhd'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. Fiona Furniture Bhd deducts employment taxes from its employees' wages and salaries on a monthly basis and pays these to the local taxation authorities in the following month. At the year end, the financial statements will contain an accrual for employment tax payable.

In respect of the internal controls of Fiona Furniture Bhd,

Question a)

i) identify seven deficiencies

ii) recommend a control to address each of these deficiencies

iii) describe a TEST CONTROL of the internal auditors should perform to assess if each of these controls, if implemented, is operating effectively to reduce the identified deficiency.

Note: Answers should be in three columns headed Control deficiency, Control recommendation and Test of control respectively.

Question b) Describe TWO substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in respect of Fiona Furniture Bhd's year-end accrual for employment tax payable.