AUI3703 Assignment 2 (QUALITY ANSWERS) Semester 1 2024

This document contains workings, explanations and solutions to the AUI3703 Assignment 2 (QUALITY ANSWERS) Semester 1 2024. For assistance call or us on 0.6.8..8.1.2..0.9.3.4.... QUESTION 1 15 marks Gas Ltd is a company that is responsible for refuelling empty gas bottles. Gas Ltd has operations in various parts of the country. The company conducts its business with a variety of customers from individual households and small retailers to big manufacturing companies. Gas Ltd recently established an internal audit activity. As the senior internal auditor, you tasked one of the junior internal auditors to do a presentation to the senior management outlining the role, purpose and authority of the internal audit activity in the company. The junior internal auditor presented the following statements, which he would like to include in his presentation, to you: 1. Risk management, control and governance processes may be regarded as effective if such processes are planned and designed in a manner that provides reasonable assurance that all irregularities will be eliminated. 2. Internal auditors may provide consulting services that add value and improve an organisation’s operations. The performance of these services should be consistent with the internal audit activity’s empowerment reflected in the internal audit charter. 3. The internal audit activity customarily has a dual relationship with management and the audit committee. This means that the accuracy of engagement communication should be verified with management and the internal audit activity should then report to management and the audit committee. 4. Recommendations in audit reports may or may not actually be implemented. The internal auditor has no role to play in this regard and follow-up is the sole responsibility of management. 5. “To determine whether document flow and the provision of management information throughout the delivery department is optimised” is an audit objective that relates to the efficiency of the process. 6. The two broad groupings of information systems control activities are general controls and application controls. General controls include controls for developing, modifying, and maintaining computer programs. 7. The main purpose of the internal audit activity is to evaluate the organisation’s compliance with relevant regulations and guidelines, be they internal or external. 8. An internal audit carried out to determine whether an entity is managing and controlling its resources economically, efficiently, and effectively, would most likely be classified as a programme results audit. 4 9. Performance evaluation, identifying opportunities to make improvements and making suggestions to improve existing procedures and future actions can be seen as the general objectives of operational auditing. 10. Pressure on individuals, uncontrolled access to organisational assets and personality disorders are all factors that could be prevented by a good internal control system. REQUIRED Marks 1.1 Indicate for each of the statements listed above (1-10) whether it is true or false. Where you have indicated false, provide a brief statement as to why the statement is false. (15) QUESTION 2 28 marks Part A Adisa Dlamini is the owner of Gas Ltd. You as the senior internal auditor of Gas Ltd is in the process of setting up the internal audit activity. You had an initial meeting with Adisa and one of her major questions was around assurance and consulting services. During the follow-up meeting, you need to provide clarity regarding what is expected from the internal audit activity regarding assurance and consulting services. Adisa is still unsure whether the following activities will be classified as assurance services or consulting services: 1. Conducting control self-assessment training. 2. Assisting in developing and drafting policies. 3. Assessing that management’s policies and procedures are adhered to. 4. Providing advice to management on risk management, control, and governance issues. 5. Examining whether control procedures are mitigating the risks identified. REQUIRED Marks 2.1 Define assurance services and consulting services according to the glossary to the Internal Auditing Standards and for each of the activities listed above (1-5), indicate whether the activity can be classified as an assurance of consulting activity. (8) Part B Adisa Dlamini, the owner of the company, has requested the team to conduct a performance audit on the refuelling department. AUI3703/1/2024 5 The main activity of the refuelling department is to fill the empty gas bottles and seal the filled bottles. The sealed bottles are then forwarded to the distribution department for delivery. You have arranged a meeting with the Chief Operations Officer (COO) and the initial discussions revealed the following: 1. It was noted that currently there are three vacancies in the refuelling department. The COO is unsure of when the vacancies will be filled. 2. The biggest size gas bottles are 48 kg and are procured from Trenten Ltd on a monthly basis. 3. Targets for the refuelling department are set monthly and communicated to all staff members in the department. 4. The refuelling department does some activities that are not broken down into simple tasks, and the procedures are set out by way of drawings. 5. The warning stickers that are put on the filled gas bottles are ordered from a family friend of Adisa. 6. The filled gas bottles should be delivered to the distribution department within 24 hours of being filled to ensure that deliveries are made as soon as possible. 7. Monthly reports are completed for the refuelling department. In the monthly reports, the set targets for the refuelling department are compared to the actual gas bottles filled. 8. The biggest portion of the budget for the refuelling department is spent on buying empty gas bottles for refilling. REQUIRED Marks 2.2 For each of the statements listed above (1-8), indicate whether it relates to effectiveness, efficiency or economy and formulate an audit procedure for each of the statements that you can use to complete the audit. Present your answer in a tabular format: Statement number Effectiveness, efficiency or economy (1 mark) Audit procedure (1½ marks) (20) 6 QUESTION 3 10 marks Rethink Limited is negotiating contracts with an international company who is interested in buying the plastic brick Rethink produces from the recycled plastic. The chief operating officer (COO) explained that the new contracts entered into will have an impact on the audit plan for the year as two new departments will have to be added to the internal audit plan. The new departments will be the contract department as well as the treasury department. The contract department will be responsible for the international contracts, licensing agreements, rental agreements, sales orders, and so forth. The treasury department will form part of the finance department and will be responsible for foreign exchange transactions. REQUIRED Marks 3.1 3.2 Briefly describe the role of the internal auditor with regard to: a) Treasury auditing b) Contract auditing The role of internal auditing in contract auditing involves four distinct phases. List the four (4) phases of contract auditing. (6) (4) QUESTION 4 20 marks Part A John Mabida is the manager of the deliveries department of Gas Ltd. It is John’s responsibility to ensure that all the processed orders received from the distribution department are delivered on time. The following information was brought to your attention: John Mabida has full control over all deliveries, delivery vehicles and drivers. When questioned, John explained that he believes that it is better to do all the work himself, as he then knows that the work gets done properly. One of the drivers mentioned that John makes daily deliveries himself, even if it is not part of his responsibilities. He further mentioned that when John makes the deliveries, he loads additional gas bottles on the delivery vehicle that are not part of the order to be delivered. The driver suspects that John delivers the additional gas bottles to friends and family and receives cash payments for the bottles. The driver further mentioned that he is too scared to report his AUI3703/1/2024 7 suspicions as John is known as “the killer” and will ensure that he is fired or removed from his position. Every driver should have a logbook to log all kilometres travelled and the amount of petrol that they put into the vehicles. When John does deliveries, he refuses to complete any logbook as he feels that he is the manager and not a driver. The drivers feel that this is unfair and decided not to complete logbooks anymore. John agrees with the drivers and indicates he knows what is happening in his department and there is no need for logbooks. Reconciliations should be completed monthly between the bottles received from the distribution department, the deliveries made, and the bottles stored in the warehouse ready for delivery. When asked for the reconciliations, John mentioned that he believes that the reconciliations were a waste of time. He fully trusts his employees. It was also noted that there are no policies and procedures for the delivery department. John lives a very extravagant lifestyle. He owns several upmarket properties as well as a fleet of luxury cars. John feels that he deserves the luxuries in life and states that he is just a “lucky” person. The management of Gas Ltd has instructed you to complete an internal audit on the delivery department and whilst busy with the audit, to also investigate to allegations made against John Mabida. REQUIRED Marks 4.1 Indicate how the tasks of the internal auditor during a fraud investigation would differ from the tasks performed during a normal internal audit assignment of Gas Ltd. Indicate four tasks for each. (8) 4.2 Identify six (6) weaknesses from the scenario that indicate a breakdown in internal controls. For each of the weaknesses, identified, recommend an internal control that should be put in place to avoid similar control breakdowns or fraud. Structure your answer in the following table format: No Weakness identified Recommend internal control 1. (1 mark) (1 mark) (12) QUESTION 5 10 marks After the recent completion of the delivery department, you realised that some of the junior internal auditors did not formulate the findings correctly. The following information was obtained: 8 1. There is currently a delay in the delivery of the refilled gas bottles. 2. The target of the delivery department is to complete all deliveries within 48 hours after the order has been received. 3. Penalties are payable on all orders delivered after the 48-hour turnaround time. 4. The reputation of Gas Ltd will be negatively affected by the late deliveries. 5. Logbooks are not completed for deliveries and there is no record keeping of the kilometres travelled. 6. Exception reports, highlighting late deliveries, should be completed monthly and reasons for the late deliveries should be obtained. 7. Procedures should be implemented to ensure that all logbooks are completed on time and submitted to the finance department on a weekly basis. 8. All the drivers employed in the delivery department should have a valid driver’s license. Once the findings have been completed and the report finalised, you as the internal audit manager need to present the internal audit report to the management team of Gas Ltd. REQUIRED Marks 5.1 From the information provided in the scenario, for each of the statements provided (1-8), indicating the element of an audit finding that the statement most likely represents. Your answer should be presented in the following format. Statement number Element of an audit finding 1. Element of the finding (1) (8) 5.2 List two (2) reasons why you as the internal audit manager would choose to communicate the internal audit report in the form of a presentation. (2) AUI3703/1/2024 9 QUESTION 6 17 marks PART A Due to the major increase in online shopping, Rubber Limited decided to establish a whole new distribution department. The distribution department will be situated in Cape Town. A new online ordering system will be implemented, and the orders will be processed by the head office in Gauteng. The following controls will form part of the new system: 1. Rubber Limited appointed a committee to monitor and advise on the specific risks in the implementation of the new online ordering system. 2. The company makes use of firewall and anti-virus software. 3. All data in the supplier database and supporting files are kept up to date. 4. Back-up copies of all masterfiles are to be stored off-site. 5. Exception reports are printed on a weekly basis and reviewed by management. 6. All parties involved in the testing of the new system should give final approval before the system is implemented. 7. Certain controls should be embedded in the application program code and applied by the computer. 8. In terms of company policy, if an employee discloses their confidential password to another employee, disciplinary action is taken against such an employee. REQUIRED Marks 6.1 Distinguish the differences between general controls and application controls in a computerised environment. (4) 6.2 Indicate whether each of the controls listed above (1-8) for Rubber Limited, is a general control or an application control. (8) PART B An Information Technology (IT) audit is planned for Rubber Limited. Management requested your assistance in allocating the activities mentioned below to the correct phase of the IT audit process. 10 a) Analyse the organisation’s strategy and responsibility for managing and controlling computer applications. b) Assess how controls are applied, whether controls are applied consistently and who applied the controls. c) Perform the audit procedures to ensure that the audit objectives are met. d) Schedule follow-up activities and ensure that appropriate action was taken to address the findings raised. e) Select the audit team and identify the tasks that should be performed during the audit. REQUIRED Marks 6.3 Allocate each of the audit activities in the list above (a-e) to the correct phase in the IT audit process. Your answer should be in a tabular format as indicated below: