Identify strengths and weaknesses in internal control system

Assignment Help Case Study
Reference no: EM131200654 , Length: word count:3000

Task - Case Study

You are the audit senior for the audit of Nirvana Produce Pty Ltd (NP), a large wholesale fruit and vegetable supplier. NP operates out of a warehouse and office near the fruit and vegetable markets and also sources product directly from organic growers. Your firm has recently been appointed as auditor of this business.

Discussions with George Bowles has revealed that George Bowles and Thomas Hayes started the business 30 years ago as equal partners. They later converted the partnership to a proprietary limited company, each owning 50% of the shares. When Thomas died last year, George's brother Marcus and his sons, George Junior and Jason bought out 50% of Thomas' share at a market value of $2m. Thomas' widow, Anna, holds the remaining 25% of shares in the business. The company now wishes to buy back Anna's 25% shareholding but needs to raise the funds for the buy back through a loan from their bank.

 Key ratios include:


Unaudited 2016

Audited 2015

Industry Benchmark

Current ratio




Days in receivables

12 days

8 days

7 days

Inventory turnover

3 days

3 days

3 days

Debt to equity




Debt is in the form of a mortgage over the warehouse and offices. The total value of shareholders' funds is relatively small as the past dividend policy has been to pay out 90% of after tax profits. 

Additional information-

NP uses basic accounting software which can import a bank statement but has no facility for generating a file of creditor payments to be uploaded into the NP bank account. The software, which comprises order/sales, purchases/creditors and payroll modules, is on a server that is accessed through a number of networked computers in the office. Passwords are required to access various modules and authorisation levels of the system.

There are two sales' clerks who take phone and email orders and generate packing/buying slips through the sales order module of the accounting software. These slips are used by warehouse and buying staff to purchase produce on the following morning and pack the produce into boxes. The debtors' clerk uses the completed packing/buying slips to generate invoices which are attached to the boxes to be collected by the purchaser or a courier later that morning.

Often when the customer arrives to collect their order they identify other produce that they want and take that with their order. These goods are then added to the original invoice in the system and the revised invoice is emailed to the customer. Payments on sales invoices are due within seven days of invoice date and are generally paid by electronic funds transfer (EFT). A brief review of debtors identified that there were a significant number of short payments on the invoices. The debtors' clerk matches the EFT payments to the invoices and chases up outstanding payments.

George and his sons do the buying in the morning on the basis of the information on the buying slips. Purchases are often made in cash at the market and the details noted on slips of paper which are passed to the bookkeeper when all the purchasing for the day has been concluded. Purchases direct from contracted growers are paid for through EFT on receipt of the goods and the purchase invoice.

Warehouse staff agree the goods to the invoice and pass the signed purchase invoice to the bookkeeper. The bookkeeper maintains and reconciles the cash purchase float daily. The bookkeeper also maintains the creditors' ledger, approves and makes payments to creditors and reconciles the bank account monthly.

Payments to creditors are made within 7 days of the date of the invoice through the bank's online payment system and then entered into the accounting software. The invoice is then stamped as paid and the date of payment and the bookkeeper's initials are entered on the invoice. A brief review of the creditors' ledger revealed that there were a number of duplicate payments to creditors which were being resolved.

The payroll is completed by the bookkeeper on the basis of normal hours worked though George must authorise any holiday pay, paid sick leave and overtime. All holiday, sick pay and overtime authorisation is completed online.

Question 1 - Analyse the ratios in conjunction with the additional information and identify implications for the audit and any particular audit steps that need to be undertaken to reduce audit risk. For example, if there was a worsening inventory turnover, one of the audit steps would include a review for obsolete inventory. Ensure that you also identify any potential weaknesses in this ratio analysis and any additional information that you will need to make a judgement about the business risk facing the company.

Question 2 - Identify the strengths and weaknesses in the internal control system described above. For each control weakness, identify the financial report assertions that may not be met. Suggest a control to correct any of the deficiencies identified. Identify how this weakness will affect your audit, indicating the additional audit steps and audit evidence that you will need to collect to reduce audit risk.

Question 3 - Outline the audit approach that you would take with the networked personal computer based accounting software in this audit engagement. As part of this audit approach develop and justify the use of at least two CAATs that you would use in this audit.

Reference no: EM131200654

To what extent is disclosure about the liability sufficient

The article refers to changes in disclosure requirements relating to environmental liabilities in many countries around the world. How important is it that companies recognise

What was the outcome of the case

List and describe the defenses of negligence used by the Defendant:(Hint: There are generally more than one) What was the outcome of the case (Use the legal terms and then ex

Advantages that small business would have in trade

What are some advantages and disadvantages that small business would have in international trade and is going international something only large and established businesses sho

How the changes will benefit the manufacturing plant

You will need to explain and support the decisions and be able to explain how the changes will benefit the manufacturing plant, including describing how the changes will be

What are student perceptions of the academic rigor

What are student perceptions of the academic rigor and level of academic support within online courses? What is the difference in perception of academic rigor of traditional v

Dmv case study

Using the DMV Case Study and the Stakeholder Analysis Exercise spreadsheet provided, you will complete the three columns of the spreadsheet for each of the ten stakeholder g

Mkt 301 case assignment

Philip Morris is the nation's largest tobacco company and sells leading cigarette brands such as Marlboro and Virginia Slims. While the health risks of smoking are well known,

What practical objectives do you intend to achieve

Do you agree that burqas and niqabs should not be broadly banned in Britain? List the likely outcomes, costs and benefits, of each option listed above and What practical objec



9/9/2016 8:02:35 AM

This case study assignment has been designed to assess your ability to: be able to demonstrate risk management methodologies and the role of internal controls in an audit context; be able to design an audit plan and select and apply appropriate audit procedures for a financial statement audit; be able to exercise critical and reflective judgment. 2000 words, need it perfect work.

Write a Review

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd