AUI3702 ASSIGNMENT 4 OF 2021

AUI3702 ASSIGNMENT 4 SOLUTIONS 2021 SEMESTER 1 AND 2

Contents
AUI3702 ASSIGNMENT 4 SOLUTIONS 2021 SEMESTER 1 AND 2 ........................... 1

1.1 For each of the procurement risks listed above, identify and describe an internal control
activity that will mitigate these risks. (6) ............................................................................ 2

1.2 Compile eight (8) audit engagement procedures that can be used to test the fairness of
the accounts receivable balance of Friedman Limited. (12) ............................................... 3

QUESTION 2 ...................................................................................................................... 4

Discuss, based on the information given above, the weaknesses in the general controls at
The Chairman (Pty) Ltd. Your discussion must focus on the categories of general controls.
[20] ...................................................................................................................................... 5




QUESTION 1

QUESTION (18 MARKS)
Part A
Friedman Limited is a company that sells new and second-hand executive cars to the
public. The company has showrooms in Cape Town, Pretoria and Johannesburg. The Cape
Town premises has spare capacity and a large warehouse is used for the sale of various
types of spare parts and accessories to motor mechanics. These items are sold on a cash or
credit basis. According to the organisation’s discount policy, a standard rate of 2,5%
settlement discount is granted for payment received within 30 days of the invoice date for
credit sales.
Car dealers are responsible for selling the vehicles in the showrooms. A limited number of
vehicles are kept in a centralised storage facility at the Johannesburg branch. When a
customer requests a vehicle that is out of stock, an order is placed with the manufacturer.
No advance payment is required from the customer when receiving the request. Due to the
popularity of these executive cars, potential customers can wait up to six months for the
desired model. All transactions are on credit.


1

, You are an internal auditor at Friedman Limited and are responsible for the audit of several
business processes. Your audit team has compiled a risk analysis of the purchasing of new
and second-hand cars. The risk analysis has indicated amongst others, the following risks:


• Car dealers might order cars for personal use, because they prepare the purchase
requisitions, process the purchase orders and take the vehicles in receipt


• Vehicles that do not meet the customer’s specific requirements might be ordered.


• Car dealers might obtain second-hand vehicles of inferior quality.


• Car dealers might place orders for new vehicles that are never acted on and delivered.
This will result in a loss of income as well as dissatisfied customers.




REQUIRED

1.1 For each of the procurement risks listed above, identify and describe an internal control
activity that will mitigate these risks. (6)


There should be division of duties on the work performed by the car dealers, the car dealers
should not prepare reacquisition, process orders and take in the vehicles. Other parties
should
be responsible.
Quality control procedures should be performed on the status of the vehicles in relation to
customer’s specifications before the vehicles are sold to the customers.
Those who receive customers’ orders should ensure that customer orders are recorded
accurately and completely also ensure that their expectations are met.
When ordering from the company procument managers should ensure that the second hand
vehicles are in good condition through inspection before they are taken in.
Vehicles should be tested for their condition before they are taken in
Car dealers should ensure that all orders for new vehicles are acted upon timeously. This
can be done by arranging and recording orders on sequentially numbered internal sales



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