Question Details

This scenario relates to five requirements. It is 1 July 20X5. You are an audit supervisor with Canyon & Co, preparing the draft audit programmes and reviewing extracts from the internal control documentation in preparation for the audit of your client, Francisco Co. The company’s year-end is 30 September 20X5, and it is a wholesale food operator with 18 distribution depots and one central warehouse. Payroll Francisco Co employs distribution depot staff who are paid monthly based on the number of hours worked. Each employee has a staff identity card which they use to sign in and out of the depot at the beginning and end of each shift to record their hours worked, and this process is supervised by security staff as well as CCTV cameras. The hours worked per employee are automatically transferred from the signing-in system into the payroll system. The hourly wage rate is pre-set, and the payroll system automatically calculates the gross and net pay along with relevant statutory deductions and produces pay slips which are immediately emailed to employees. Access to employees' standing data in the payroll system is restricted to payroll managers through the use of a password, which the system requires to be changed on a monthly basis. Distribution depot employees are paid by bank transfer on a monthly basis. The senior payroll manager reviews the list of bank payments and agrees this to the payroll records. If any discrepancies are noted, these are investigated by the senior payroll manager who then makes the required adjustment in the payroll records. Purchases Francisco Co has a central purchasing department based at its head office. When goods are required, a production supervisor submits a request to the purchasing department. A multi- part purchase order is then generated. The purchasing manager authorises all orders below $3,000 and the purchasing director authorises orders of $3,000 and above. On receipt of goods, the quality and quantities received are checked by a warehouse team member against the supplier's delivery note, and a goods received note (GRN) is produced. A copy of the GRN is sent to both the finance and purchasing departments. When purchase invoices are received from the suppliers, they are logged into an invoices received file and the accounting system assigns each invoice a unique number based on the supplier’s code and date of input. The finance clerk then matches the invoices to a copy of the relevant purchase order and passes those two documents to the finance director for authorisation prior to the invoice being input into payables. Non-current assets Francisco Co owns approximately 55% of its distribution depots and the remainder are leased premises, which have been confirmed as correctly capitalised in line with relevant accounting standards. The lease agreements and ownership documents are held in the finance department. Earlier in the year, members of the company’s internal audit department undertook a review of the lease agreements and ownership documents but were unable to locate a number of the relevant documents. Each distribution depot is set up as a separate cost centre and is given an annual capital expenditure budget, but some cost centres have already significantly exceeded their annual budgets. When new equipment is purchased, the finance manager classifies the purchase order as capital or revenue expenditure. The classification is made with reference to formal company policy established by the finance director, who sample checks that the capital or revenue expenditure allocation has been correctly applied and then evidences this review by way of signature. Required: ISA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management, provides guidance on communicating significant deficiencies in internal control. (a) (i) (ii) Define a significant deficiency in internal control; and Describe THREE matters the auditor may consider in determining whether a deficiency in internal control is significant. Note: You do not need to refer to the scenario to answer this requirement. (4 marks) (b) In respect of the system of internal control of Francisco Co: (i) (ii) Identify and explain THREE DIRECT CONTROLS which the auditor may seek to place reliance on; and Describe a TEST OF CONTROL the auditor should perform to assess if each of these direct controls is operating effectively Identify and explain FIVE DEFICIENCIES in Francisco Co’s system of internal control and provide a control recommendation to address each of these deficiencies