Assessing Internal Controls and Audit Procedures for Best Goods Inc.: A Purchasing & Finance Case Study

Assignment Task

Case:
You and your audit team are currently understanding the process of purchasing by the purchasing department of one of your audit clients (Best Goods Inc. - a super store) as part of the external audit assignment. Following are some of the important facts collected by one of the junior audit team members regarding the client's purchasing system:

Purchasing system:
Purchasing department has only four employees: A head of the purchasing department (purchasing manager) and three junior purchasing assistants. Whenever any of the staff members (junior/senior) in the warehouse identifies that certain goods/products are needed or out of stock, they inform their departmental supervisors, who then call/contact the purchasing department to order the goods at their earliest possible. The purchasing department then order the goods as requested by the supervisors without any further inquiries/questions or carrying out any checks if the demand of the goods is real/valid. Best Goods Inc has its own list/database of suppliers with their respective list prices. This list of suppliers with the agreed price information is saved in the central computer. Price lists saved in the system are not updated for a while. Purchase orders can only be issued to these suppliers in the database. The junior purchasing assistants in the purchasing department can add any new suppliers or delete any existing suppliers in the list at any time as everyone has the access to the database of suppliers because the purchasing department head is of the view that all information should be accessible to everyone within the department. Purchase orders are prepared manually by the purchasing manager on the letterhead of the Best Goods Inc and handed over to the junior purchasing assistants to scan and email to the suppliers. Some of the suppliers acknowledge the receipt of orders. Some of the suppliers also offer the facility to check the orders’ status online but junior purchasing assistants never got a chance to follow up the orders as they are too busy to do that.

Storeroom
There is one permanent warehouse manager and six temporary workers to move in/out the inventory items. The warehouse manager can get temporary workers from a local staffing agency whenever needed. All goods from all of the suppliers are delivered directly at the warehouse. Any of the temporary workers match/count the goods with the suppliers’ delivery note in the presence of the delivery driver, and signs the delivery note to confirm that the goods were checked and received. Right after goods are added to the inventory records by the warehouse manager, delivery documents are sent to the accounting department. The warehouse manager informs all the relevant departments about goods received. Each department then picks up their goods (if any) on the following day after checking the quality of goods. Any goods which are not claimed/picked up within twenty business days are stored in the warehouse until claimed. Some goods are never picked up and are there in the warehouse for weeks/months and disposed of eventually by the warehouse manager. Some of the unclaimed perishable items are always reported expired.

Accounting/Finance
Accounting department has one senior manager and one newly hired junior accountant/petty cashier. All invoices from the suppliers are directed to the accounting department. The accounting department staff check/match the invoices with the delivery notes/documents (sent by the storeroom). Then these invoices are recorded in the general journal and general ledger by the junior accountant/cashier.

Payments & Petty Cash:
Accounts/Finance department pay all the invoices approved by any member of the purchasing department. Some suppliers are paid cash by the senior manager himself taking cash out of the petty cash. The petty cash balance at the end of the last month was $300,000 which was just $16,000 a month earlier. Departmental heads of various departments used to get petty cash from the cashier claiming as "reimbursement of out-of-pocket expenses".

Internal Audit:
The company has recently established an internal audit department which has started attending and monitoring the monthly stock counts ONLY.

Required:
(a) Identify and explain deficiencies in the internal controls, recommend improvements for the deficiencies identified, and describe one test of control for each of your recommendations.

Note: Present your answer in a table with three columns headed as: “Deficiencies”, “Recommendations” and “Test of Controls”

(b) Describe substantive procedures you would perform to obtain sufficient appropriate evidence in relation to the year-end trade payables balance in Best Goods Inc.’s statement of financial position.

(c) Describe additional roles other than attending inventory counts, that could be assigned to the company’s internal audit department.

(d) Describe the tests which auditor must devise for the financial statement assertions relevant to an Income statement, and Statement of financial position.

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