i. NKK Public Accountants was assigned for the first time to audit the financial statements of Bakumoa Enterprises Ltd for the period ending 30 June 2020. In obtaining an understanding of internal controls the following issues were identified.

i. There are poor controls over inventory in that only three people are employed in monitoring stock. The stock controller places the order of inventory and receives the inventory. The two assistants interchangeably assist with recording the new stock received, in releasing stock to the divisions that need them. While incoming stock are recorded, there are no records kept of outgoing stock. Moreover, all three staff employed in stock keeping have a key to the storeroom where stock is stored.

ii. The cashier, who is the niece of the senior accountant, receives cash and issues the receipts electronically to the customer. At times, the cashier prepares the cash summary and the lodgment for banking of daily receipts. More often when the senior accountant is busy the cash summary and lodgments are not checked before funds are taken to the bank for depositing. While the system is updated automatically with each receipt issued, the cashier and the senior accountant are the only people who can access it and the senior accountant reviews the system once a month. Bank reconciliations were only done at the financial year end

iii. Sales staff are encouraged to offer discounts between 5% to 20% in order to increase sales at any point in time. Customers can make payment to any sales staff who issues a receipt from a sub-receipt they carry. Often, some customers who are well known to the sales staff do not ask for receipts. At the end of the day, the sales staff then submits their sales amount with sub-receipt book to the cashier who then issues a master receipt for these takings.

iv. Bakumoa recently purchased 5 new vehicles to help with delivery services. On inspection of the vehicles at close of business, only four vehicles were in the company’s yard. Enquiries of staff revealed that the fifth vehicle is driven by the wife of the CEO. According to the CEO, one of the benefits of his contract is that he is entitled to a vehicle for personal use of his family. Inspection of asset register reveals that the vehicle is included in the list and that depreciation is applied.

REQUIRED:

a. Identify 4 misstatements that could occur as a result of the weaknesses in the controls and for each misstatement, recommend how controls may be strengthened in order to reduce future misstatements. (8 marks)

b. Outline the factors that will determine whether the auditor has obtained sufficient appropriate evidence to support risk assessment. (4 marks)

c. What conclusion is the auditor likely to draw from the assessment of each of the above controls? Identify the next step for the auditor with respect to each of the control deficiencies identified.

Answer rating: 100% (QA)

a The misstatements are as follows i The business is facing poor control of the inventory This problem can be removed by hiring efficient and expert i... View the full answer