Your firm is appointed as GreenTech (GT) Berhad’s external auditor for the year ending 31 March 2021 which is the first year of statutory audit. GT Berhad manufactures hybrid cars and electric vehicles which are new energy vehicles that use battery power. You are the audit senior and are responsible for performing the planned audit procedures in respect of the acquisition cycle.

Extracts of the company’s policies and procedures concerning the acquisition cycle are as follows:

All purchase requisitions (PR) are to be raised by the production floors in their respective locations according to the required specifications and are submitted to the purchasing department at the headquarters. Three (3) copies of PR are prepared, one is submitted to the purchasing department, one to the accounting department, and one copy is to be filed. The purchasing department then prepares the purchase order (PO) and ensures the purchase specifications from an approved supplier and that the amounts are within the approved budgets.

Subsequently, the PO is signed by the Head of purchasing department. Four (4) copies are prepared, the original PO is sent to the approved supplier, one copy is submitted to the accounting department, one copy to the receiving department, and one copy is to be filed. If it is an unbudgeted purchase above RM1,000,000 it must be approved by the Board of Directors (BOD). In the case that the inventories are not within the required specification, these inventories must immediately be sent back to the suppliers within 14 days. All payments are to be made in lump-sump, within 30 days from the date the inventories are received at Port Klang. Both the accounting department and purchasing department are at the headquarters located in Kuala Lumpur.

Your discussion with the Chief Financial Officer (CFO) and Chief Operating Officer (COO) leads to several issues which are as follows:

1. There exist disruptions in the supply chain, due to fears of Covid outbreak in Southern China causing delays in receiving goods that GT had purchased from their suppliers. In addition, the shipping costs have also increased. The contracts are based on shipping freight on board (FOB).
2. Due to the delay and shortages of the vehicles’ batteries, GT Berhad is scouting to purchase the vehicles’ batteries spare parts from other suppliers which are based in Indonesia and also in India. Nonetheless, the COO is skeptical about the quality of these vehicles’ batteries.
3. GT has received a large bulk of these vehicles’ batteries at the end of 2020, amounting to RM 1.5 million. The COO states that these purchases were done in a hurry and he is not sure whether they had been properly approved.
4. It is a practice by GT that once the goods arrived at Port Klang, they are stored at the warehouse. A day after, these batteries are sent to their production plants located in Johor, Selangor, and Pulau Pinang. The production plants at these locations will notify the purchasing department through emails. Subsequently, the purchasing department prepares and submits the receiving reports (RR) to the accounting department.
5. You noted that GT had valued its vehicles’ batteries based on last-in-first-out (LIFO). However, the COO explained that the vehicles’ batteries have expiry dates and are used in the production process on a first-in-first-out (FIFO) basis. The final deliveries of the batteries (Type 1,2 and 3) for the financial year ended 31 March 2021 are received as follows:

28 February 2021 Battery Type 1 RM 770,000

15 March 2021 Battery Type 2 RM 1,250,000

30 March 2021 Battery Type 3 RM 5,000,000

6. There was a dispute between GT and a supplier in Indonesia who supply the battery type 1 amounting to RM500,000. The batteries have been lying idle in the warehouse for quite some time and the COO states that they cannot be used for fear that they may not pass the quality control’s inspection. The amount is still included in the year-end inventory listing at a value of RM550,000 which, according to the CFO, is the net realisable value.
7. The accounting department matches the purchase requisition (PR), the purchase order (PO), and the receiving report (RR) which will be approved by the CFO for the next process of making payments to suppliers.

You also noted that the receipt of the debit notes took three to four months. According to the CFO, this is due to the delays in receiving information. Meanwhile, the reconciliation of the supplier statements is carried out every two months.

Required:

1. How would you gather information which serves as audit evidence about issues identified from number (1) until (5)?

Identify the four (4) internal control deficiencies in the acquisition cycles (both the purchasing and trade payables’ functions), and state the specific implications when these controls are not emphasized.

(Hint! Please use the diagram below.)

No	Internal Control Deficiencies	Implications When Not Emphasised
1
2
3
4

3. For each of the internal control deficiencies in (ii) above, suggest one (1) specific test of controls and one (1) specific substantive audit procedure.

(Hint! Please use the diagram below.)

No	Test of controls	Substantive audit procedure
1
2
3
4

4. Describe the audit procedures that you need to carry out on inventories of vehicles’ battery of GT with regards to existence, valuation, and completeness.

Answer rating: 100% (QA)

Question How would you gather information which serves as audit evidence about issues identified from number 1 until 5 Answer As per the given situation the management has lots of dispensaries So the ... View the full answer