Accounting Chapter 13 Effectiveness and efficiency of operations and compliance

ANSWERS TO CASE STUDIES AND EXAMINATION QUESTIONS

Millichamp and Taylor, Auditing, 10th edition

71

Chapter 13

Case Study 2

Lecturers using this material as a core text should be encouraged to try this

exercise as a group exercise.

The answer given (hopefully!) contains all the material weaknesses in the

system but students may, creatively, find others not mentioned. Lecturers

should evaluate these on their merits

Major weaknesses are:

Weakness Implication Recommendation

72

73

expenditure. Providing

order limits are

observed (see above)

they can exercise this

by approving invoices

for payment. Simply

being used as a coding

clerk is a waste of

management time.

carried out by the

accounts department

The purchase ledger is

updated monthly. This does not give

managers an up to date

position of the spend

with any particular

supplier except after a

month end, nor

presumably is the

nominal ledger updated

so the costs figures in

the nominal ledger are

always lagging behind

actual expenditure

The ledgers should be

updated as purchase

invoices are batched for

entry into the system,

at the least on a weekly

basis.

74

There is no evidence

that hours worked are

authorised

The company could be

paying for hours not

worked

Clock cards should be

authorised by

departmental

supervisors or

managers before being

passed to the wages

department

There is no evidence of

supervision when

employees clock on

Staff may clock in each

other or cover for late

or absent employees.

The company will pay

for hours not worked

Clocking in by staff

should be observed by a

supervisor or manager

each day

Examination Questions

1.(Note – this is an abbreviated answer)

The controls the purchasing department should exercise over ordering and

control over receipt of goods and services should include

75

76

(b) procedures for checking a purchase invoice before processing include

xall incoming invoices should be recorded

(c) frequently procedures over services are less strong and less effective

than those over receiving goods.

For some types of expense e.g. utilities control may be exercised by

comparison with budgets costs or costs from previous periods and with prices

charged by alternative suppliers. In many cases e.g. electricity, water, gas,

usages are measured and the company should keep their own record of

readings for matching with invoices.

77

2. (a)

Auditors’ responsibility

xObtain an understanding of the system of control,

Directors’ responsibility

Implement control systems suitable for the size of the business to provide

reasonable assurance on the achievement of the entity’s objectives with

regard to the reliability of financial reporting, effectiveness and efficiency of

operations and compliance with applicable laws and regulations.

Directors are also responsible for monitoring the operation of internal control

systems.

Part (b)

xUse of computer controls to:

xconfirm the sequence of numbering on time logs and invoices

to identify missing numbers

78

Part (c)

xOn a sample basis match time log details to entries in the debtors

ledger via invoices

xOn a sample basis vouch entries in the receivables ledger back to

xInvestigate credit balances

(ICAEW)