Reference no: EM133125502

Question - Hikers Sdn Bhd (Hikers), a retailer that sells hiking and camping equipment, appoints Adrian and Co to audit its financial statement. Faleeq, a senior auditor is assigned to perform the audit work, has gathered information on the current system development procedures and other related accounts of Hikers.

A computer-based cash registers of Hikers are integrated directly with accounts receivable, sales, perpetual inventory records and sales commission expense. At the time of sale, the sales clerks key-in information (product number, quantity sold, unit price, code number, date of sale, sales clerk number, cash/ credit sales, customer's code) directly into the cash register.

The total amount of sales, including tax, is automatically computed by the system and appears on the cash register display screen. The only printed information of cash sales is the cash register receipt, which is given to the customer. For sales on credit, a credit slip is prepared and one copy is retained by clerk and submitted daily to the accounting department. Perpetual inventory and accounts receivable records are updated daily in the computerized system, however, supporting records are limited primarily to machine readable records only.

To Faleeq's surprise, he also learned that the IT programmer, Agan, made an unauthorized change to the sales application program and modified the operating software security features. There were no one else who co-jointly approve any changes made. The unauthorized change forced the sales program to calculate an automatic price rebate for a customer who happens to be one of Agan's best friend, Hazam. Hazam shared the rebates he gets with Agan as a token to him for the amount saved.

Concurrently, upon verifying the accuracy of the outstanding accounts payable, Faleeq discovered that there are 320 vendors listed. He planned to do one of the three test for each item in the sample: examine vendor's statement in the client's hand, obtain a confirmation when there is no statement on hand, further search for invoices is necessary when neither any of the two information is obtained. There is no accounts payable master file available and Faleeq expects a large number of misstatements in the accounts.

Required -

(a) What major problems do the auditor encounter in verifying sales and accounts receivables? Discuss two possible problems.

(b) Describe three deficiencies in Hikers' sales system development and program change process.

(c) Discuss two recommendations on internal control improvements to the current IT system that can prevent unauthorized changes from recurring.

(d) Discuss two types of controls that can be implemented to avoid future risk of threat to the system

(e) The adoption of information technology (IT) to replace manual controls offers immerse benefits to an organization, including commercial accounting software to record and process business transactions. Briefly discuss two of the many issues an auditor faces when clients outsource some or all of their IT needs to an independent computer service centre, including cloud computing rather than maintaining an in-house or internal IT.