Your firm is the auditor of Easy Hire Pty Ltd (Easy Hire).the company hires out equipment to industries such as construction, engineering & event management. It has 76 branches nationwide, with its head office located in Sydney. Each branch has designated amount of stock for hire. The amount of stock for hire is by the marketing department at head office, according to the local demand for products.
In the past, branch managers had to obtain authority form the financial controller at head office to purchase equipment from suppliers. Replacement equipment is issued due to either wear & tear or loss by the customer. In the case of a customer losing or destroying the equipment, the replacement value of the lost item is charged to the customer.
Customers are given credit, but the credit limits are set by the credit controllers at head office. Standard terms of payment are 30 days from the date of the monthly statement. The company has a new managing director who, early in the financial year, decided to decentralise decision making & give the branch managers more authority. She also introduced an incentive scheme for branch management, based on branch profits. Branch managers can now purchase replacement equipment & set credit limits for customers.
The managing director has set up a list of designated suppliers for equipment& has negotiated additional credit terms and /or special settlement discounts from them. A contract of repair of equipment has been granted to an organisation with links to the main shareholder in the company.
You have the task of planning the audit & identifying the risks of material misstatement. Your preliminary analysis, which compared the year under review to the previous year, showed the following.
a) Branch sales & profits have increased considerably
b) Debtors levels (days outstanding) have remained relatively constant.
c) Creditors levels (days outstanding) have increased marginally.
d) Equipment write offs (due to wear & tear) have reduced relative to sales.
e) Equipment stocks at branches have increased considerably.
f) Repair-of-equipment costs have increased as a % of sales
Describe three internal control activities regarding replacement purchases that you would expect to see in place.