Trafford Co is a manufacturer of engine parts, supplying parts to the major car manufacturers. The...
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Trafford Co is a manufacturer of engine parts, supplying parts to the major car manufacturers. The company's year-end is 31 July 2022. You are an audit supervisor in Mourinho & Co and are currently reviewing documentation of Trafford Co's internal control in preparation for the interim audit. Many car manufacturers work on a just-in-time basis which means that Trafford Co has to have sufficient inventory in place to meet customer demand at very short notice. The car manufacturer's inventory systems are linked to Trafford Co and when inventory falls to a minimum level, an order is automatically placed with Trafford Co. Most customer contracts require Trafford Co to deliver orders within 12 hours of being placed. Recently, Trafford Co has experienced problems with its systems which have led to orders not being processed and penalties have been incurred for breach of contractual terms. Rather than refund customers for the penalty amount, customers deduct the amount of penalty payment due from the monthly invoice and pay the net amount. No check is performed by Trafford Co to confirm that the amount paid by customers is equivalent to the invoiced amount less penalty payment. In order to meet its contractual terms, Trafford Co's production line operates 24 hours a day. A limited number of production staff are employed to oversee the machinery as well as perform some tasks which need to be done manually. Supervisors oversee the production staff. Maintenance contracts are taken out for machinery with regular maintenance checks taking place once every year. Until the start of the year, maintenance was carried out every three months but, in an effort, to reduce costs, maintenance checks are now only performed annually. a). Employees work eight hour shifts with three shifts per day. During holiday periods, employees are offered overtime to cover employees taking leave. As this time of year is very busy, overtime is not authorized. Employees complete a timesheet each week which is sent directly to payroll and payment is made the following week. Due to sickness, the payroll department is understaffed and the payroll manager is currently processing all payroll payments. In respect of the internal control systems of Trafford Co: (i) Identify and explain THREE deficiencies (ii) Recommend a control to address each of these deficiencies, and Describe a TEST OF CONTROL the external auditors should perform to assess if each of these controls, if implemented, is operating effectively to reduce the identified deficiency. 1. 2. 3. (i) Control Deficiency (ii) Control Recommendation (iii) Test of Control b). Explain TWO limitations of internal controls. c). Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Tr afford Co's penalty payments. (3 Marks) Trafford Co is a manufacturer of engine parts, supplying parts to the major car manufacturers. The company's year-end is 31 July 2022. You are an audit supervisor in Mourinho & Co and are currently reviewing documentation of Trafford Co's internal control in preparation for the interim audit. Many car manufacturers work on a just-in-time basis which means that Trafford Co has to have sufficient inventory in place to meet customer demand at very short notice. The car manufacturer's inventory systems are linked to Trafford Co and when inventory falls to a minimum level, an order is automatically placed with Trafford Co. Most customer contracts require Trafford Co to deliver orders within 12 hours of being placed. Recently, Trafford Co has experienced problems with its systems which have led to orders not being processed and penalties have been incurred for breach of contractual terms. Rather than refund customers for the penalty amount, customers deduct the amount of penalty payment due from the monthly invoice and pay the net amount. No check is performed by Trafford Co to confirm that the amount paid by customers is equivalent to the invoiced amount less penalty payment. In order to meet its contractual terms, Trafford Co's production line operates 24 hours a day. A limited number of production staff are employed to oversee the machinery as well as perform some tasks which need to be done manually. Supervisors oversee the production staff. Maintenance contracts are taken out for machinery with regular maintenance checks taking place once every year. Until the start of the year, maintenance was carried out every three months but, in an effort, to reduce costs, maintenance checks are now only performed annually. a). Employees work eight hour shifts with three shifts per day. During holiday periods, employees are offered overtime to cover employees taking leave. As this time of year is very busy, overtime is not authorized. Employees complete a timesheet each week which is sent directly to payroll and payment is made the following week. Due to sickness, the payroll department is understaffed and the payroll manager is currently processing all payroll payments. In respect of the internal control systems of Trafford Co: (i) Identify and explain THREE deficiencies (ii) Recommend a control to address each of these deficiencies, and Describe a TEST OF CONTROL the external auditors should perform to assess if each of these controls, if implemented, is operating effectively to reduce the identified deficiency. 1. 2. 3. (i) Control Deficiency (ii) Control Recommendation (iii) Test of Control b). Explain TWO limitations of internal controls. c). Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Tr afford Co's penalty payments. (3 Marks)
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Fundamentals of Taxation 2015
ISBN: 9781259293092
8th edition
Authors: Ana Cruz, Michael Deschamps, Frederick Niswander, Debra Prendergast, Dan Schisler, Jinhee Trone
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