Reference no: EM132997197

Question - You are the engagement partner for the audit of John Mcafee Sdn Bhd (JMSB). You have performed the audit procedures on the company and gathered the following information.

JMSB is owned by John Mcafee (John) and is an advertising company. Mike is an officer of JMSB and has worked for JMSB for almost 10 years. He is among the staff trusted by John. Whenever there are potential customers that require the company's service, Mike will deal with them and decide on the charges and the payment schedules. John leaves most of the business dealings to Mike and he will be given a 5% bonus on the total amount charged to the customer.

When a customer decides to take the service of the company, an agreement is prepared by the clerk, Kamala. All the terms and agreement are decided by Mike without referring to the standard policy of the company. The customer may pay a deposit of 20% of the total amount or may defer the deposit payment, when it is agreed by Mike, after the service has been delivered to the customer.

Ivanka, who is in charge of the accounting matters, will record the deposits and other payments by the customers. It is the company's policy to receive all payments by cheques. However, if due to some unavoidable circumstances the company will accept cash payments. Ivanka is also in charge of recording the accounting entries and preparing the financial statements of the company. Besides, she is also in charge of filming some advertisements, which most of the days in a week she will be out of the office. Whenever she is not in the office, Mike will receive the payments.

John comes to the office once in two weeks to check whether the work schedules are on time. He will also check on the payment received and if there are differences between the amount recorded and the statement that he requested from the bank, he will ask Ivanka and Mike to make the necessary adjustments to the books of account. Sometimes, he himself calls the customer to ask about the progress of the payment. John employed a part-timer to prepare the bank reconciliation statement at the end of every month.

You are required to:

(a) Explain FOUR (4) internal control weaknesses that JMSB is facing.

(b) Explain the effect of each of the weaknesses identified in (i) above.

(c) Recommend to JMSB management on how to overcome each of the weaknesses identified in (i) above.

(d) Identify TWO (2) strengths in JMSB's internal control system.

(e) Explain the benefit of preparing a bank reconciliation statement.

(f) Explain the importance of performing tests on the client's internal controls.