Auditing - Planning Analytics and Risk Assessment - Dalby Logistics Limited (DLL) - Sweets R Us Pty Ltd. - Report Writing Assessment Answer

Internal Code: 1AGGJD

Auditing Assessment Answer

Assignment Task: Question 1 - You are the senior auditor for Dalby Logistics Limited (DLL). Your audit firm has carried out the audit of DLL for several years but this is the first time you have been assigned as the lead auditor. DLL is a bulk cargo and logistics conglomerate, founded in 2010 through the merger of two companies, primarily involved with the transport of iron ore, mineral sands and forestry products. Grain (agricultural products), oil and gas, coal, manganese, and lithium are examples of other products they transport. DLL also provide warehousing services and are currently building a large ‘hub’ complex in Sydney. On completion, this facility will be leased to various exporters and importers. DLL has over 20 subsidiary companies and significant investment in five other companies (associates). The largest associate is Pilkington Ports Limited which gives DLL access to 4 ports across Australia. They have access arrangements with a further 15 ports across Australia (including Darwin), New Zealand, and a port presence in Malaysia and Singapore. There are a further 15 logistic centres in metropolitan and regional areas in NSW, Victoria, South Australia, Western Australia and Queensland. DLL's operations are divided into three divisions: Ports, Logistics, and Infrastructure & Property. The CFO, Wayne Green, advised that they have had a successful year with a remarkable increase in profit, despite lower grain volumes and two large mine contracts ceasing due to the mines reaching their end of life. All states, except NSW, experienced an increase in revenue. The group also acquired another subsidiary, for $46.15 million, which added $16.05 million to assets and $5.8 million to liabilities. Goodwill was $35 million. Wayne Green also provided details about the following related party transactions:

• paid to Associates: $6.85 million for stevedore services
• received from associates: $1.05 million rental income and $4.55 million in dividends.
• loans to key personnel: Received $2.35 million from key management personnel to finalise all outstanding monies owing as at 30/6/2017.
• loan to Pilkington $164.4 million. The original loan was issued in 2016 for a fixed 10-year term and is subordinated to all creditors. The effective interest rate is 7.3% p.a.

Question 2 - Sweets R Us Pty Ltd. is a large confectionary company that manufactures a range of standard sweet products and some specialty products for the Australian market. Most of the company’s production is in standard chocolate goods and they offer personalised packaging for promotional or fundraising purposes. They also provide uniquely moulded and decorated chocolate items for special events such as grand finals. You have been allocated the role of assessing the controls in the Purchases, Accounts Payable and Payments system, and have obtained the following details: The raw material ordering process

1. To maintain and control product quality a limited number of trusted suppliers are used.
2. The production manager oversees raw material inventory. Orders are placed based on current production orders and quantities of raw material currently on hand with next day delivery where possible.
3. No formal purchase order system is used.

Raw material warehousing procedures

1. The warehouse personnel are trusted, long-term employees.
2. One of the warehousing staff ensures that all goods received, primarily raw materials, are in good order and signs the couriers’ delivery dockets in acknowledgment of materials received.
3. Movement of in and out of the warehouse is not recorded, but the production manager monitors stock levels and movements daily.

Note: Finished goods are warehoused in a separate secured area that only the production manager and his assistant have access to. Accounts payable system

1. Supplier invoices are received in the accounts department via email and printed. The details are entered into the accounts payable system by the accounts payable clerk, who then stamps the invoice as processed. The computer system automatically calculates the payment due date based on the supplier's credit terms that have been entered into the system.
2. As there are only a few suppliers each week, the accounts payable clerk validates the outstanding invoices via a phone call with the production manager. The production manager has an excellent memory for what he has ordered, and the deliveries received.
3. The computer system automatically generates a weekly list of invoices due for payment. The accounts payable clerk flags the invoices for cheques to be processed as direct deposits are not used. The system does allow the user to exclude an invoice from the payment run. The accounts payable ledger and general ledger are automatically updated once the payment runs are complete.
4. The cheques are forwarded to the financial controller for signature. Supporting documentation is only attached to the cheques for non-major suppliers. The financial controller calls the production manager to verify the review process (step 2) has taken place, and other payments are verified to the attached invoice. If the financial controller is not available the accounts payable clerk usually has the cheques signed by the marketing manager. The payables clerk avoids asking the CEO to sign cheques as he asks too many questions. Any supporting documentation to the cheque is signed to avoid duplicate payment.
5. Monthly statements are received from the suppliers. However, the accounts payable clerk does not believe statement reconciliations are necessary.

Question 3 - You are a trainee auditor and your team leader, Will, provides you with practical personal development challenges. Will has emailed you the following internal controls that were tested in prior audits.

1. The accounting software automatically reconciles totals in each of the subsidiary master files for accounts receivable, accounts payable, and inventory accounts to the respective general ledger accounts. This control was most recently tested in the prior year. No changes to the software have been made since testing, and there are strong controls over IT security and program changes.
2. The accounts payable clerk matches vendor invoices with related purchase orders and receiving reports, and investigates any discrepancies noted. This control was tested in the prior year’s audit. No changes in this control or personnel involved have occurred since testing was last performed.
3. The sales system automatically determines whether a customer’s purchase order and related accounts receivable balance are within the customer’s credit limit. The risk of shipping goods to customers who exceed their credit limit is deemed to be significant. The control was last tested during the audit two years ago.
4. The perpetual inventory system automatically extends the unit price times quantity for inventory on hand. This control was last tested two years ago. During the current year, the client made changes to the system.
5. The client’s purchasing system was acquired from a reputable software supplier several years ago. This system contains numerous automated controls. The auditor tested those controls last year. No changes have been made to any of these controls since last tested and the client’s controls over IT security and program changes are excellent.