Reference no: EM131624973

Question

You have been involved with the audit of River Pty Ltd. - a manufacturer of household cleaning chemicals. As part of your interim review you have completed a 'walk through' of the procedures involved with the purchases and payments cycle. The following is a summary of the procedures you have documented on your file:

• The warehouse manager is responsible for placing orders for chemical 'ingredients'. Because of the bulk quantity discounts, he will usually place an order for three months of ingredients when there is one month of ingredients left. He is able to determine how much the company uses in manufacture each month by reviewing the inventory records held at the warehouse.
• To order, the warehouse manager contacts any of the approved suppliers and places an order over the phone. No record is kept of the conversation, nor does the warehouse manager require any approval. To make sure he doesn't reorder in error he 'ticks' the inventory ledger and writes the date of order next to the product number.
• When goods are received the warehouse assistants check the delivery note against the ingredients coming in and then lets the deliverer pump the ingredients into the company's storage tank. At no point do they check the actual quantity received. A warehouse assistant then gives the delivery note to the warehouse manager. The warehouse manager will then post a journal entry to the inventory system by keying the entry into the terminal.
• When the journal is accepted, the computer will generate a journal number. (Note: the journal posted by the system is DR Raw materials inventory; CR Creditors). The warehouse manager writes the journal number onto the delivery note and sends it to the accounts payable clerk at head office. The accounts payable clerk files the note by supplier.
• The accounts payable clerk at head office receives all supplier invoices. On receipt of the invoice the clerk checks the details to the delivery note received from the warehouse. If there are no discrepancies she will prepare a cheque requisition for the mount of the invoice and forward the cheque requisition, with the invoice and delivery note attached, to the financial controller for authorisation. If the payment is over $20,000 the financial controller must forward the requisition to the managing director for authorisation.
• The financial controller and/or managing director signs the cheque requisition to indicate authorisation and forwards the documentation to the banking clerk who keys the payment into the general ledger (the journal posted by the system is DR Creditors; CR Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the cheque requisition. She then files the cheque requisition together with supporting documentation by cheque requisition number.
• All cheques are printed and signed (counter stamped) by the computer. When they have been printed they are returned to the banking clerk who checks the details and sends them to the supplier.

Required:

(a) Identify four strengths and two weaknesses in the purchases and payments system and justify your selections.

(b) For each strength identified in part a), indicate one test to be performed to test the controls.

(c) For each weakness identified in part a), identify a test which can be performed to minimise this risk.  

Prescribed text book is - Gay, G. E. & Simnett, R. (2015). Auditing and assurance services in Australia (6th ed). Roseville: McGraw Hill. Handbook: Chartered Accountants Australia and New Zealand. (2016 or 2017). Auditing, assurance and ethics handbook. Brisbane: John Wiley & Sons Australia.