ACCT704-Cubit Commercial Furniture Mini Audit Case Study - Accounting & Finance Assignment Help

Assignment Task

Task 

Background Information
HKF, Chartered Accountants is a medium size accounting firm located in Auckland with four audit partners, eight business advisory partners and four tax partners. It also has affiliations with other network firms in other countries.
The firm has been approached to audit Cubit Commercial Furniture Ltd. The firm adopts procedures for acceptance and continuance of clients following ISA (NZ) 220 and PES 1. To determine whether HKF should accept a new client, an audit partner needs to interview the prospective client to determine what services the client needs and the ability of the firm to provide those services. As the prospective audit manager on the engagement, you accompanied the audit partner Henry Foster on an interview. The following is a summary of your notes from the interviews with senior management of Cubit Commercial Furniture. 

Part A Professional Ethics And Audit Planning 

Question 1. Professional Ethics: 
When considering accept a new client, auditors need to comply with ethical requirements of the professional standards (i.e. PES 1). Referring to the information given in the case:
a) Identify three situations that may impose ethical threats to the auditors and the audit firm.
b) For each situation, evaluate and explain the potential ethical threats identified in a)
c) Discuss possible safeguards to address each ethical threat 

Question 2. Audit Planning
Assuming all potential threats can be mitigated, and Foster has accepted Cubit Commercial Furniture as an audit client. He has asked you to perform risk assessment in planning for the audit of Cubit Commercial Furniture Ltd for the 2022 financial year.
You need to consider both the narrative and financial information when performing risk assessment and your audit planning workpaper must cover the following: 

a) Identify ten risk factors (conditions) that indicates that the financial statement might be misstated.
b) Determine the potential impact of each risk factor on the financial statements or the audit (e.g. which account and assertions might be misstated).
c) Determine the audit strategies or procedures that may address the risk of material misstatement. 

Part B: Assessing control risks

Cubit Commercial Furniture uses a cloud-based enterprise management system (EMS). It has different functions such as procurement, finance, HR, sales, production, warehouse etc. Different employees are given access to the area they are responsible for. Glenn is given access to all area of the system. The access is controlled by personal login and passwords.

Cubit Commercial Furniture Purchase and Cash Disbursement Cycle
Cubit Commercial Furniture sources raw materials domestically as much as possible, but it also has multiple suppliers in different locations globally. Customised products range is made to order and the lead time for manufacturing process is 10-12 weeks when an order is placed. Other products (e.g. office chairs, ottomans) are made based on anticipated level of sales. As part of interim audit, Jane Owen the audit senior on this engagement has completed a 'walk-through' of the procedures for the inventory purchases and cash disbursement cycle. The following is a summary of the procedures she documented on the audit file:

1) Johan Weber, the factory manager is responsible for initiating orders for raw materials by using the production and warehouse management functions within the EMS. EMS system holds information of inventory item name, item code, quantities and costs. When an order for the customised products range is placed, Johan assesses and calculates what the raw materials needed to manufacture the order. He checks EMS for the availability of raw material because some materials they may already have. If the raw materials are insufficient, Johan generates a purchase order using the EMS. The EMS automatically assigns a reference number to the purchase order. For the ready-made range of products, Johan usually re-orders when there is one month of products left in the warehouse. Given that Glenn wants to maintain sufficient level of inventory to minimise backorders, Johan normally generates a purchase order for three months' production needs.

2) The purchase orders completed by Johan are sent to Eun Park (the account payable clerk) via emails generated by the EMS at end of each working day. Eun contacts any of the approved suppliers by phone or email regarding the availabilities of the materials they wanted. After he confirms with a supplier, he forwards the purchase order to the supplier and updates EMS to show the order is sent. No record is kept of the phone conversation with a supplier, nor does the purchase order needs to be approved before sending to a supplier.

3) If a purchase order cannot be fulfilled by any of the approved suppliers, Eun may look for a new supplier. When he obtains a quote from a new supplier, he passes the quote and the new supplier’s information to Rosie, the CFO for approval. Once approved, Rosie adds the new supplier into the approved supplier list.

4) When goods are received in the warehouse, Tony Young, the warehouse assistant, checks the supplier’s delivery note against the physical stock coming in. Once it is confirmed that the materials agree to the delivery note, Tony initials and dates the delivery note and then passes it to Craig Tukiri the warehouse manager. Craig will then login to the inventory function within the EMS system to update the received materials. Once the inventory records are updated, the system updates Johan that the orders have been received. Craig makes a copy of the supplier’s delivery note, files the original copy of the delivery note and forwards a copy of the delivery note to the accounting department. 

5) When inventory is updated in the prior step, EMS accounting function automatically generates a journal entry to update the accounting records. (Note: the journal suggested by the system is Dr Raw materials inventory; Cr Creditor). The system rejects the journal if the inventory item code or the name of supplier is not recognised. When the journal is accepted, the computer will generate a journal number. Eun then writes the journal number onto the delivery note forwarded by the warehouse. Eun files the delivery note by supplier names.

6) Eun the payable clerk receives all supplier invoices. On receipt of an invoice, he checks the details against the delivery note received from the warehouse. If there are no discrepancies, he prepares a payment requisition for the invoiced amount and forward the payment requisition together with the invoice and a copy of the corresponding delivery note to Rosie for authorisation. Rosie forwards to Glenn the CEO for further authorisation any payments of over $30 000 for a single transaction.

7) Rosie and/or Glenn signs the payment requisition to confirm authorisation and forwards the documentation to Kumar Singh, the banking clerk, who keys each payment into the accounting system (the journal posted by the system is Dr Creditor; Cr Bank). Once the journal is accepted by the system, the system generates a journal number which the banking clerk writes on the payment requisition. Kumar then files the payment requisition together with supporting documentations by the payment requisition number.

8) The banking clerk then loads the payments on the online banking facility with reference to the payment requisition number. Both Rosie and Glenn must approve and release the payments. The banking system automatically sends electronic transfer records to Rosie who subsequently forwards them to Eun. Eun then checks it against supplier invoices and then sends a remittance advice to individual suppliers. 

Question 3 Assessing control risk in the purchase and cash disbursement cycle 

a. Identify four control weaknesses in the purchase and cash disbursement cycle. Explain how each control weakness may affect the financial statements (i.e. which accounts and assertions may be misstated) and identify the audit procedures to test the account(s) and assertion(s) that are at risk. 

b. Identify six control strengths in the purchase and cash disbursement cycle and explain why each control is a strength (i.e. which accounts and assertions does it strengthen). For each control strength, identify audit procedures to test the effectiveness of control. 

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