Question 1.

It is 1 July 20X5. You are an audit supervisor with Flinda & Co and you are working on the
audit of Granstan Co, which sells electronic kitchen appliances from 40 stores across the
country. You are reviewing documentation provided by the finance director of Granstan
Co, including extracts of the company’s system of internal control, in advance of the
interim audit for the year ending 30 September 20X5. Although the website, payroll and
inventory systems are stand-alone, the sales and purchases modules are fully integrated
into the computerised accounting system.

Sales

Granstan Co has both business and retail customers. Business customers can apply for a
credit account through Granstan Co’s central credit control department. After performing
necessary checks, the credit control department sets a credit limit which is authorised and
then regularly reviewed by the finance director. As well as purchasing in store, business
customers can purchase goods via the company’s website and collect them from their
nearest store or have them delivered. As part of the invoicing process, a member of the
finance team matches the details on the online order with the goods dispatched note
(GDN) before the sales invoice is raised based on these documents.

Each store charges the same prices for goods but customers who are on the mailing list
receive weekly emails with discount offers. To claim the discount customers must show
this email at the cash tills (cash registers) and have the discount barcode within the email
scanned. The system then deducts the discount from the price charged.

Granstan Co's monthly management accounts analyse revenue by store, product and type
of customer. Percentage movements in each of the categories are reported, with
comparison to the previous month and the previous year. On a monthly basis, the sales
director reviews this information, investigates any unexpected movements and completes
a report which is presented at the next board meeting.

Purchases

Granstan Co has a central purchasing department. A monthly exception report of any

changes made to the supplier master file data is automatically generated, printed and then
filed.

When goods are ordered, a purchase order is generated within the purchase ordering
module, authorised by the relevant individual and sent to the supplier. The purchasing and
finance departments as well as the stores are able to access the ordering module to view
orders.

Goods are delivered directly to the relevant store where a store employee checks the
quantity supplied to the supplier’s delivery note and the purchase order. On completion of
the checks, an electronic goods received note (GRN) is produced. Only the stores and the
finance department have access rights to view the completed GRNs within the module.

Due to staff shortages in the finance department, supplier statement reconciliations are no
longer performed.

Payroll

Granstan Co has separate human resources (HR) and payroll departments. The HR
department is responsible for setting up employee records for new employees. As part of
this process an authorised joiner form, including all relevant details, is sent to the payroll
department so that the new employees can be added to the payroll. However, when
temporary employees are required at short notice joiner forms are not completed. Instead,
the relevant store manager notifies the payroll department by email on the day the new
employee starts work.

All permanent employees are paid on a monthly basis by bank transfer. The payroll for
each store is passed to the store manager for review and approval two days before the
payment date. The store manager is required to report back to the payroll department only
if any errors are identified. Temporary employees are paid in cash and pay packets are
prepared and distributed by the payroll department. When employees collect their pay
packets, they are only required to state their name. They then count the cash in the pay
packet and sign for it.
Requirements:

a. In respect of the sales system of Granstan Co:

i. Identify and explain Three Direct Controls which the auditor may seek to place
reliance on, and

ii. Describe a TEST OF CONTROL the auditor should perform to assess if each
direct control is operating effectively.

Direct control Test of control

i. After performing necessary checks, the

credit control department sets a credit limit, Inspect the signature of the finance director
which is authorized and reviewed regularly as evidence of authorization of the credit
by the finance director. limit provided to the customers.

This ensures that the goods are only sold to

the customers who are likely to pay, which
reduces the risk of irrecoverable debts.

ii. A member of the finance team matches

the details on the online order with GDN Review the sample of invoices to verify them
before the sales invoice is raised based on to ensure that the finance director compared
the documents. online order details with GDN.

This ensures that the correct invoices are

sent to the customers for the goods they
have ordered resulting in

iii. A discount is given to customers who are Inspect the process of scanning discount
on the mailing list, where the customers barcodes to ensure that a discount is given
must show the email to claim the discount only when a valid barcode from the
and have a discount barcode within the email customer's email is scanned.
scanned.
Rescan the used barcode to ensure that the
This ensures that only the customers with an discount is only valid once with the same
email get the discount, and other barcode.
unauthorized customers are not given
discounts.

b. Identify and explain FIVE DEFICIENCIES in Granstan Co's Purchase and Payroll
systems and provide a control recommendation to address each of these
deficiencies.

Control deficiencies Control recommendations

1. A monthly exception report of any
changes made to the supplier master file
data is automatically generated, printed Review exception report regularly and
and then filed but not being reviewed. investigate any changes to follow up
payments.
There is a chance of unauthorized
changes and errors in the supplier's
master file resulting in the financial losses.

2. Due to staff shortages in the finance Supplier statement reconciliation should

department, supplier statement be performed on a regular basis to avoid
reconciliations are no longer performed. discrepencies between the records.

Discrepencies between the suppliers Review the suppliers statement by the

record and company's record may not be concerned official to ensure the correct
identified which may lead to errors in amount is being paid to the supplier.
payments and disputes with the suppliers.

3. The store manager is required to report Store manager should actively

back to the payroll department only if any acknowledge to the payroll department
errors are identified. about the errors that have been identified
to ensure correct payment have been
There is a chance of errors not being made to each employees.
corrected if the errors are not identified
resulting in incorrect payment made to the
employees.

4. When employees collect their pay

packets, they are only required to state
their name. They then count the cash in Implement a strong identification process
the pay packet and sign for it. such as providing identity cards to ensure
only genuine employee collect the pay
There is a lack of verification in packets.
identification process as pay packets may
be collected by other employees and there Obtain the signature of employee ....
is no evidence that the genuine employee
collect the pay packets as only the
signature of the employee is not sufficient.

5. Goods are delivered directly to the

relevant store where a store employee
checks the quantity supplied to the Inspection of quality and quantity of goods
supplier’s delivery note and the purchase should be done by the store department to
order. ensure defective goods is not being
received and the defected goods are
This may result in defected goods being returned immediately from the stores.
supplied to the customer leading to
customer dissatisfaction and decreased
customers goodwill.