ABC Ltd (ABC) is a supplier of garden tools and machinery operating from a head office, a warehouse and 20 retail stores across the UK. You are the audit senior working on the external audit of ABC's financial statements for the year ended 31 October 20X0. During the audit you made the following observations:
(1) Trade payable days at 31 October 20X0 were 48.4 days. ABC is expected to pay suppliers within 30 days of the invoice date under the terms of sale.
(2) When receiving deliveries of inventories, warehouse staff manually complete a goods received note (GRN) after checking the quantity and type of goods to the supplier's delivery note. The goods are also checked for quality. However, no other checks are performed. Each day, GRNs are sent by mail (i.e, in the post) to the accounts department at ABC's head office located 100 miles away. The accounts department updates the inventory and accounting records on receipt of the GRNs.
(3) The payroll manager has been on sick leave since August 20X0. The human resources manager has taken on his duties until a temporary member of staff with payroll experience can be recruited.
(4) On 20 October 20X0, a customer sustained a head injury at one of ABC's stores, when a shop fitting collapsed on him. On 2 November 20X0, ABC received a letter from the customer's solicitor stating that the customer was taking legal action against it, claiming £250,000 for injuries sustained and loss of future earnings.
The directors have not provided for or disclosed this claim in the financial statements for the year ended 31 October 20X0 as they intend to fight it. Further audit work identified that ABC's public liability insurance policy expired on 30 September 20X0. Due to an oversight, the
insurance policy was not renewed.
ABC's draft financial statements for the year ended 31 October 20X0 show profit before tax of £2.4 million and total assets of £12.3 million.

 

Required:
a) For each of the observations outlined in (1) to (4), identify the internal control deficiencies. For each deficiency, outline the possible consequence(s) of the deficiency and provide recommendation(s) to address it.

b) In respect of observation (4), state whether or not you would modify the audit opinion if the directors refuse to amend the financial statements. Give reasons for your conclusion and outline the modifications, if any, to the auditor's report.
 

c) Explain the attributes of auditor's communications to those charged with governance that make such communications effective when reporting deficiencies in internal control identified during an audit.

Answer rating: 100% (QA)

a Internal Control Deficiencies and Recommendations 1 Trade payable days exceeding the terms of sale Internal Control Deficiency ABC is taking longer than the agreedupon payment terms to settle its tr... View the full answer