AUI3702 Assignment 2 (COMPLETE ANSWERS) Semester 1 2024 - DUE 8 April 2024

QUESTION 1 20 MARKS Luxury Outdoor Limited is a manufacturer of patio furniture and outdoor cushions. The production process is labour-intensive, and all patio furniture and outdoor cushions are custom-made. For this reason, labour costs represent the major portion of costs. Luxury Outdoor Limited has an in-house internal audit function. The audit committee recently requested the internal audit function to perform an internal audit of the payroll system. The audit committee is especially concerned about payroll because the company’s accountant, whose services were terminated last month, had neglected his duties, especially his duties concerning payroll. The company employs approximately 500 workers in six departments. Within the departments, there are a number of supervisors, each of whom is responsible for 10 to 20 workers. A production manager and her assistant are responsible for the overall operation of the factory. AUI3702/1/2024 3 The payroll cost is currently approximately R300 000 per week, and the audit committee suspects that there may be a number of irregularities such as wage payments to fictitious employees and/or the payment of a full week’s wages to employees who took time off. Due to pressure from the trade union, the company is forced to pay weekly wages in cash and cannot implement a system for the electronic payment of wages. Employees are expected to work overtime from time to time. The internal audit team has identified the following control activities: • The production manager or her assistant approves the employment of new staff in writing. A new employee form is used. • The company obtains proof of identification such as a copy of each worker’s identity document and the worker’s Unemployment Insurance Fund (UIF) card. • The employees’ normal hours of work are subject to an agreement between the company and the trade union. • Minimum rates of pay have been agreed with the trade union. The company generally pays rates that are above the required minimum rate. The managing director approves all rates of pay and pay increases in writing. • The company issues workers with formal written contracts of employment that have been signed by the managing director. • The above documents are sent to one of the clerks and retained in a permanent employee file for each worker. • The clerks are advised of terminations of employment in writing. • A mechanical time clock is located at each of the two entrances to the factory. [Adapted from: Performing Internal Audit Engagements] REQUIRED MARKS Compile recommendations concerning the system of internal control over the payment of weekly wages. Your recommendations must relate to: 1.1 Employment and termination of employment (1) 1.2 Time recording (6) 1.3 Payroll (4) 1.4 Payout (2) 1.5 Unclaimed wages (3) 1.6 General issues (4) Maximum 20 Marks QUESTION 2 25 MARKS During the preliminary review of the revenue business process, the senior on the internal audit team identified the following internal controls implemented in order to ensure that the revenue process operated in accordance with the company’s policies and procedures during the current financial year: 4 The critical business objectives are to determine that: a) Sales orders are properly prepared according to the quality description and customer details. b) All the sales orders are recorded after delivery. c) All the sales orders not delivered are followed up after 20 days after the initial order date. d) The prices and terms of all the sales orders comply with the relevant company policy. e) Sales orders are only prepared for customers who pass the credit check. f) Goods may only leave the premises if accompanied by an approved order. g) Goods are only assembled for delivery once the approved order is received. h) Invoices are prepared in the same numeric sequence as the order after the delivery of the order. i) Sales invoices are automatically processed to the accounting records during the preparation of an invoice by the computer system. j) The accounting system prepares an age analysis of all the accounts payable balances on the date the debtors’ statements are printed for review by the debtors’ administrator. REQUIRED MARKS 2.1 Prepare one (1) audit engagement procedure for each of the internal controls (a-j) above. (15) 2.2 Compile the audit risk for each of the internal controls (a-j) above. (10) QUESTION 3 5 MARKS You are the internal auditor in charge of auditing purchases at Cape Town Fish Market Limited, a company that buys fresh fish and seafood daily from various fishermen at the harbour. The company packs the fish and seafood and distributes the products to various retail outlets throughout the country. You are conducting an audit on the company’s purchases over a two-month period. During your preliminary survey, you find the following: • Three buyers who specialise in different product groups purchase the catch of the day from fishermen at the harbour. The purchasers all have more than 10 years of experience, and two of them used to be fishermen. Owing to their extensive experience and relationships with the local fishermen, they always get preferential treatment. The fishermen try to catch specific types of fish, depending on the needs of Cape Town Fish Market Limited. Since the prices of fresh fish and seafood fluctuate significantly, the AUI3702/1/2024 5 buyers have total discretionary power to buy the best and freshest products at the best prices. • The buyers and the fishermen record the details of the agreed purchases in a notebook because it is too risky to use electronic devices near so much water. Each buyer carries a notebook showing details of the fish or seafood purchased, the quantity and the total price. The fishermen clean the fish and seafood to enable Cape Town Fish Market to pack it immediately for distribution to the rest of the country. Quick delivery is essential to enable Cape Town Fish Market to fulfil its promise of delivering fresh fish daily. REQUIRED MARKS 3.1 Formulate four (4) audit objectives for the above internal audit