Miles Jones has been assigned as the audit senior responsible for a new client, Starfire Electric Limited

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Question:

Miles Jones has been assigned as the audit senior responsible for a new client, Starfire Electric Limited (SEL). The engagement partner, Ms. Rogers, explained that SEL is a reputable private corporation located in Vancouver. It manufactures electrical components for residential and industrial uses. During the current year, SEL also began producing solar panel systems that can be hooked into heat pumps, for both residential and commercial use.

SEL has been growing steadily over the past ten years and has plants located in Vancouver, Calgary, and Winnipeg. It started with 10 employees and now has over 200. Transformers are manufactured at the Vancouver plant, circuit breakers at the Calgary plant, and electrical units and solar panel systems at the Winnipeg plant. In total, SEL produces about 600 products.

SEL has been experiencing some difficulty in obtaining supplies of plastics used as raw material in the production of circuit breakers. It is investigating the purchase of a plastics company located in the United States to ensure an adequate supply. SEL is considering a public offering after the year-end to raise the estimated $10 million required to purchase an interest in the company. Because SEL is considering a public offering, the directors decided that SEL should have its financial statements audited. A local public accounting firm had issued a Notice to Readers for SEL since its incorporation. SEL looked for a larger accounting firm that could better serve its expanding operations and appointed your firm as auditor for the year ending August 31, 2022. Ms. Rogers has communicated with the previous accountants, received a reply indicating no issues, and has obtained an engagement letter from SEL.

Your discussion with Ms. Rogers and subsequent planning visits to SEL reveal the following information:

Each plant operates as a separate profit centre, maintaining its own accounting systems on a local area network. The local area networks are tied together as a wide area network, enabling communication between networks and access to the corporate intranet. Head office personnel (in Vancouver) are responsible for acquiring, developing, and maintaining software. Each plant location uses a copy of the head office programs. These programs are stored in object code (machine language) on the plant’s server.

The Winnipeg accounting office supervisor has recently implemented a wireless local area network for the office area, which is under construction. This will facilitate employee access to the stations, which are being frequently moved. She used ‘freeware’ software to implement the wireless local area network.

Each plant is responsible for the control of its own computer programs, and each produces special-purpose reports for its own use using a read-only capable general-purpose report writer on an as-needed basis. The five accounting personnel at each location also handle backups and usually, one person is assigned the use of the report writer. File layouts provided by the head office are used to decide which data fields to access when using the report writer.

Each plant also submits to head office a set of accounting reports and supplementary information. These are submitted in standard Excel spreadsheets that were prepared by head office accounting personnel and are used to prepare monthly consolidated financial statements. The Winnipeg office often needs to submit these reports two or three times, as it seems that the staff accountant there keeps changing the formulae, which prevents the spreadsheets from linking properly.

SEL’s inventory consists of raw materials, work in progress, and finished goods. Raw materials include copper, used as a conductor in almost all of the components, silver, used for contacts in the electrical breakers, and plastic and steel, used in the castings for breakers and transformers. Most of the raw materials are purchased from foreign suppliers, including the U.S., China, and India.

SEL uses a standard costing system to account for its inventory. A standard cost is prepared for each product by each plant based on its own production capacity, time and motion studies, and engineering estimates. Each standard cost consists of a raw material component, a direct labor component, and a machine component (that is based on direct labor hours and incorporates overhead costs). The standard costing and perpetual inventory systems were customs written by head office programmers.

Production standard costs are evaluated yearly effective April 1. Raw material costs are monitored by the head office accounting department, and the standard cost of materials is updated on a bi-weekly basis, as needed. Labor costs are updated when union contracts change. Normally, sales prices are updated at the same time by the sales supervisor at each location, using a separate password, if costs have increased significantly.

Only two people at each plant have the password that allows them to change the standard cost master file. Password changes are controlled by the senior accountants at each location (including head office), who are informed orally of the need for any changes.

The Vancouver plant’s standard cost master file had been inadvertently changed during the performance of some routine program maintenance. The programs had been transferred to the plants’ servers by the head office senior programmer/analyst. The head office information systems department is trying to determine the cause of the problem to ensure that it does not recur.

The company website is maintained by the head office information systems group. The website has several different security levels: general access for the general public; a supplier and customer secure portal, and an employee portal (the intranet). The website also has a company directory with email links to key employee positions.

SEL management has appointed the Controller as the Privacy Officer of the company with the responsibility of ensuring compliance with PIPEDA.

Required:

Part 1.

Analyze the weaknesses in the control systems at SEL. Note that four correct weaknesses

with associated analysis are required to obtain full marks. Organize and clearly label your

analysis for each weakness as follows:

W – a situation that results in the weakness (case facts specific)

C – detailed relevant COBIT 2019 objective (½ mark). Give it a header that

contains the CobiT 2019 description. You can use the CobiT-2019 Governance System and Components for your reference. The CobiT 2019 reference number can be used as many times as you can as long as it corresponds to the control. (Only one is good enough, do not list more than one, if more than one is listed, no mark is awarded) (½ mark each to a total of 2 marks)

I -- the impact of the weakness (what could go wrong)

R – recommendation for improvement to management

A – audit impact (the effect on the audit or the audit technique required to quantify or further assess the weakness). (1 mark)

Use the following table format for your answer:

W - Weakness

C - CobiT 2019 objective (½ mark) (Only one is good enough, do not list more than one)

I - the impact of the weakness (what could go wrong) (1 mark)	R – recommendation for improvement to management (1 mark)	A – State the effect on the audit or the audit technique required to quantify or further assess the weakness (1 mark)

W - Weakness (1 mark)

C - CobiT 2019 objective (½ mark) (Only one is good enough, do not list more than one)

I - the impact of the weakness (what could go wrong) (1 mark)	R – recommendation for improvement to management (1 mark)	A – State the effect on the audit or the audit technique required to quantify or further assess the weakness (1 mark)

W - Weakness (1 mark)

C - CobiT 2019 objective (½ mark) (Only one is good enough, do not list more than one)

I - the impact of the weakness (what could go wrong) (1 mark)	R – recommendation for improvement to management (1 mark)	A – State the effect on the audit or the audit technique required to quantify or further assess the weakness (1 mark)

W - Weakness (1 mark)

C - CobiT 2019 objective (½ mark) (Only one is good enough, do not list more than one)

I - the impact of the weakness (what could go wrong) (1 mark)	R – recommendation for improvement to management (1 mark)	A – State the effect on the audit or the audit technique required to quantify or further assess the weakness (1 mark)