You are the auditor of Sofasellers Ltd., which buys furniture from manufacturers for sale to the public. You have been asked to audit certain aspects of the computerized purchasing and accounts payable system.

The company has a head office, a warehouse, and many stores throughout the country. Furniture from manufacturers may be delivered to the warehouse or directly to individual stores. Details of goods received are entered into computer terminals at the warehouse or store which are online with the head office main computer. The computerized purchasing system involves the following six processes:

1. The user department (store or warehouse) sends a purchase requisition to the purchasing department at head office.

2. The purchasing department issues a purchase order, which is sent to the supplier and recorded in the computer.

3. On delivery, the goods are checked by the receiving department in the warehouse and a receiving report is created, entered into the computer system, and allocated against the order.

4. On receipt of the invoice, the central accounting department forwards the invoice to the user department, which authorizes it and returns it to the accounting department. Invoice details are then recorded in the computer, which posts it to the accounts payable ledger.

5. The computer system allows payment only if the system has recorded:

a. the purchase order

b. receipt of the goods

6. When the purchase invoice is due for payment, the computer prints the cheque and remittance advice.

Cheques are automatically produced, so the partner in charge of the audit has asked you to identify controls over authorizing purchase invoices and changing suppliers’ details on the computer’s master file. He has explained that “application controls” comprise controls exercised by the company’s staff and by the computer.

Required

a. Describe the application controls you would expect to find in operation from creating the purchase requisition to the computer accepting the purchase invoice.

b. Explain the controls that should be exercised over access to the main computer from terminals in the head office and at the retail locations.

c. Describe the application controls that should be exercised over changing supplier details in the supplier master file in the computer. You should consider:

i. why such controls are important and how a fraud could be perpetrated in the absence of effective controls.

ii. the controls you would expect to find over changing supplier details and ensuring that supplier details are correct. Your answer should include consideration of controls over access to the computer to perform these tasks.