Question 1 (11 marks)
The role of internal audit is to provide independent assurance that an organisation’s risk management, governance and internal control processes are operating effectively. ABCD Limited is concerned about its Internal Audit (IA) function. Recently, ABCD Limited is expanding and reorganizing its Internal Audit (IA) function. Currently the Director of Internal Audit, Shuja Mehboob, reports to the corporate controller, who receives and reviews all internal audit reports. Mehboob forwards copies of the internal audit reports to the audit committee of the board of directors and to the manager directly responsible for the function being audited.
An issue of contention among the management team pertains to which department or function the Director of Internal Audits should report. Martin Stevens the CEO wants to ensure that ABCD Limited complies with the SOX and that the internal audit department is structured such that it strengthens the company’s internal control system. Also, an overarching objective for the reorganized audit function is that the external auditors are able to rely on the work performed by the internal audit department to a substantial degree. Arguments put forth by interested parties as to where the IA department should be organizationally located are presented below:
Chief Operations Officer (COO). Robert, the COO of ABCD Limited, believes that the Director of IA should report to him. Under this arrangement the IA staff members would be involved in the preparation of policy statements on internal control regarding safeguarding of assets and in the design of business processes.
Chief Information Officer (CIO). Marry, the CIO, has pushed hard to have the IA function report to him and take on an active role in the design, installation, and initial operation of a new computerized systems. IA staff will be primarily concerned with the design and implementation of internal accounting controls and conduct the evaluation of these controls during the test runs and audits.
Corporate Controller. The controller Bailey Eder, believes the IA group should remain within her functional area. Currently the IA staff performs a number of controller related tasks. These include:
- Internal auditors reconcile bank statements of the corporation each month. The controller believes this strengthens the internal control function because the internal auditor is not involved in either the receipt or the disbursement of cash.
- Internal auditors review the annual budget each year for relevance and reasonableness before the budget is approved. At the end of each month, the controller’s staff analyzes the variances from budget and prepares explanations of these variances. These variances and explanations are then reviewed by the internal audit staff.
- Lastly, the internal auditors make accounting entries for complex transactions when employees of the accounting department are not adequately trained to handle such transactions. The controller believes this gives an added measure of assurance to the accurate recording of such transactions.
Required: We have discussed internal audit independence during our interactive tutorials. Your answer should be based on our discussion. Please answer the following questions.
- For each of the proposed tasks to be performed by the IA function, explain whether ABCD Limited’s internal audit independence will be materially impaired. For this explanation, consider each manager’s arguments independently. [6 Marks. Word Limit: Up to 300 words]
- To maintain independence, where should the Director of Internal Audits report? Explain your answer. [5 Marks. Word Limit: Up to 200 words]
ANSWER: ** Answer box will enlarge as you type
Question 2 (11 marks)
Richard has been a highly regarded employee of the Brier Corporation for almost 20 years. Her loyalty to the company is reflected in her dedication to her job as general accounting clerk from which she has not taken a vacation in almost 12 years. Because of her dedication and long tenure, she has acquired many related responsibilities, which has allowed the Brier Corp to reduce its work force through attrition, control salary expenses and become more efficient and competitive. The following describes Richard’s responsibilities.
Richard receives copies of credit sales orders from the sales department. From these documents she accesses the AR subsidiary ledger from her office computer and records the AR. She then records the sale in the sales journal and posts the transactions to the general ledger accounts. Cash receipts in payment of customer AR come directly to her office. She records the cash receipts in the GL cash and AR accounts and updates the AR subsidiary ledger. She then endorses the checks “for deposit only” and deposits them in the bank at the end of each day.
- Identify any control problems in the procedures described above. [3 Marks. Word Limit: Up to 200 words]
- Based on the control problems identified above, what sorts of fraud are possible in this system? [4 Marks. Word Limit: Up to 200 words]
- What controls are needed to reduce the risk of fraud? [4 Marks. Word Limit: Up to 200 words]
Question 3 (7 marks)
Paul Williams recently joined XYZ2 Limited as the head of accounting department. Williams spent the first few weeks to analyse the account information system. Based on this analysis, Williams is concerned about the purchase system of XYZ2 Limited. Here is the details of purchase system.
The purchasing agent of XYZ2 Limited periodically checks inventory levels from a computer terminal, which is connected to a central accounting system. The agent searches the inventory file for items that need to be ordered. He then selects a supplier, prints a hard copy of the purchase order, and mails it to the vendor. The clerk files one copy of the PO in the department and sends a second copy to the AP Clerk. When the inventories arrive at the receiving department, a receiving clerk reconciles the items with the packing slip, inspects them for condition, and manually prepares a three-part receiving report. The clerk sends one copy to the purchasing department to close out the open PO, files one copy along with the packing slip in the receiving department, and sends one copy with the inventory to the warehouse.
In the purchase system, account payable clerk performs some key roles. When the accounts payable clerk receives a hardcopy invoice from the vendor, she reconciles the invoice with the purchase order, records the liability in the AP Subsidiary Ledger from the terminal in her office, and assigns a due date for payment. The warehouse clerk receives the inventory, reconciles it with the receiving report, and updates the inventory subsidiary ledger from a terminal in the warehouse.
Required: Describe the uncontrolled risks in the system of XYZ2 Limited. Against each identified risk, describe the physical controls needed to reduce the risks. [7 Marks. Word Limit: Up to 600 words]
Question 4 (7 marks)
Part (a). During the week 10 and 11, we have discussed different feasibility studies, including technical, economic, legal, operational and schedules feasibility. Based on this discussion, elaborate cost-benefit analysis as it is performed in the economic feasibility. [4 Marks. Word Limit: Up to 200 words]
Part (b). The system experts perform the design and implementation phases of the system development life cycle. However, the accountant’s role in these phases cannot be ignored. Comment on the statement. [3 Marks. Word Limit: Up to 150 words]
Question 5 (7 marks)
Miss Anglea recently joined A2A Limited as an accounting clerk. As a part of financial reporting process, she receives the following source documents to prepare journal vouchers for general ledger entries.
- purchase orders,
- sales invoices, and
- vendor invoices
At the end of each day, Angela posts the journal vouchers to the general ledger and the related subsidiary ledgers. Each month the clerk reconciles the subsidiary accounts to their control accounts in the general ledger to ensure that they balance.
Required: Discuss any control weaknesses and risks associated with the accounting information system of A2A Limited. [7 Marks. Word Limit: Up to 400 words]
Question 6 (7 marks)
You have been working in the accounting department of AAA Limited since 2000. During this period, you have performed various roles, including:
- Evaluating the purpose and role of accounting information systems in achieving the overall objectives of the organisation,
- Articulating the various transaction cycles, financial reporting, management reporting systems and ecommerce systems to technical and non-technical stakeholders,
- Evaluating systems development methodologies and the role of accountants in system development projects,
- Appraising the risks inherent in computer-based systems/ERP, including the role of ethics and the various internal control processes that need to be in place, and
- Critically evaluating the range of cultural, security, privacy and ethical issues.
Recently, you joined another company for a senior role as a chief information officer. You are excited to perform this senior role. David is the chief executive officer (CEO) of your organisation, and he is excited to implement an Enterprise Resource Planning (ERP) system. Recently, your CEO has met with a consulting ERP firm based on a friend’s recommendation at his club. During a recent meeting, David invited the chief consultant who is charming, personable, and seemed very knowledgeable. The CEO’s first instinct was to sign a contract with the consultant, but he decided to hold off until he had received your input.
Required: David wants your opinion on this issue. In particular, he asked you to write a memo presenting the issues and the risks associated with consultants. Your discussion should be based on the relevant, interactive tutorial. Further, outline a set of procedures that could be used as a guide in selecting a consultant.