Reference no: EM132802436

Question -

CASE STUDY 1 - Hollibarn Ltd has expanded rapidly through acquisitions of smaller entities in the last two years. You are the external audit manager for Hollibarn Ltd. The Directors have been concerned about their duties and responsibilities in respect of the rapid growth of the company. Last year the external auditor suggested the establishment of an independent audit committee and an internal audit department.

Hollibarn Ltd set up an internal audit department upon the advice of the external auditor. The internal auditor reports directly to the Group Finance Director. To date no independent audit committee has been established. The Directors were uncertain how to proceed with the establishment of an audit committee, as none of them had heard of one before.

During the first year of its operations, the internal audit department has been mainly involved in documenting the current systems in place, suggesting improvements to managers to the existing systems and standardising systems whenever possible. In addition over the past year several site visits have taken place to various branches to determine that the adherence to existing systems procedures are being complied with. The internal auditor has kept a detailed record of all the work that has been carried out. The internal auditor is a member of the Institute of Internal Auditors.

As external auditor, you are considering how much reliance can be placed on any of the work carried out by the internal auditor for your forthcoming audit of Hollibarn Ltd. Upon checking last year's audit file, you see that the control risk for Hollibarn Ltd was high, and that a large amount of substantive testing was required to gain sufficient audit assurance, due to the lack of a coherent set of internal control policies for the group as a whole.

REQUIRED -

a) Explain FIVE (5) objectives of the internal audit function.

b) Discuss FIVE (5) areas the external auditor is able to rely on the internal auditor's work in the case above.

c) As an external auditor, state and explain FIVE (5) impacts of the internal audit department on the control environment of Hollibarn Ltd as a whole.

d) Present to the Board of Directors on how they should set up an audit committee and advise them on its main function(s). Explain why such having such a committee is so important.

CASE STUDY 2 - Wiggins International Co (Wiggins) is a manufacturer of electrical equipment. It has factories across the country and its customer base includes retailers as well as individuals, to whom direct sales are made through their website.

The company's financial year end is 31 March 2019. You are an audit supervisor of Cavendish & Co and are currently reviewing documentation of Wiggins' internal control in preparation for the interim audit.

Wiggins' website allows individuals to order goods directly, and full payment is taken at the point that the order is placed. Currently the website is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed.

Goods are dispatched via local couriers; however, they do not always record customer signatures as proof that the customer has received the goods. Over the past 12 months there have been customer complaints about the delay between sales orders and receipt of goods. Wiggins has investigated these and found that, in each case, the sales order had been entered into the sales system correctly but was not forwarded to the dispatch department for fulfilling.

Wiggins' retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels.

Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally, changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as supervisors.

In the past six months Wiggins has changed part of its manufacturing process and as a result some new equipment has been purchased. However, there are considerable levels of plant and equipment which are now surplus to requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little has been done to reduce the surplus of old equipment.

REQUIRED -

In respect of the internal control of Wiggins International Co:

a) Find and explain any SIX (6) weaknesses in the systems.

b) Indicate a test of control to address each of these weaknesses.

c) Assuming that your recommendations are accepted, describe a test of control Cavendish & Co would perform to assess if each of these controls is operating effectively.