Modesto Trading Berhad has recently appointed Messrs. Suresh Kumar & Co., Chartered Accountants, to audit the company’s financial statements for the year ended 30 June 2021. You are assigned by the audit manager to prepare the audit programme for the purchasing business process. The audit senior has documented the following internal control procedures designed and implemented by the company:

(i) All requesting department must complete a purchase requisition form and approved by the head of department. If the request is for the purchase of property, plant and equipment worth in excess of RM100,000 prior approval must be obtained from the Board of Directors of the company.

(ii) All approved purchase requisition forms are sent to the purchasing department. The purchasing clerk will check the purchase requestion form before preparing a pre-numbered purchase order, in triplicates. The clerk will initial on the purchase order as evidence of preparing the order before the purchase order is signed by the purchasing manager.

(iii) The original copy of the purchase order is sent to the vendor. The second copy is sent to the receiving department and the third copy is forwarded to the accounting department.

(iv)The purchasing department, receiving department, accounting department and the various requesting departments are independent to each other.

(v) The receiving department staff will compare the items received from the vendor against the information stated on the purchase order. The staff will prepare and sign on a goods receive note to confirm that the items received matched with the items stated in the purchase order and the vendor’s shipping document. The signed goods received note, vendor’s shipping document and the second copy of the purchase order are attached together and sent to the accounting department for payment.

(vi) The accounts payable clerk compares the information in the vendor’s invoice against the third copy of the purchase order, and the bound signed goods receive note, vendor’s shipping document and the second copy of the purchase order from the receiving department. If the information agrees, the accounts payable clerk prepares and signs on the purchase voucher to recognize the liability. At the end of the credit period, payment voucher is prepared and signed by the accounts payable clerk before payment is approved by the accountant, who signs on the payment voucher as proof of payment.

Question:

(a) Discuss the audit strategy that would be used by the auditor should the auditor plan to design audit procedures involving the internal controls developed and implemented by Modesto Trading Berhad. Your answer should include a discussion of the circumstances that lead to this decision and the audit response after performing the audit procedures on the internal controls.

(b) For each of the internal controls described in the Modesto Trading Berhad case, describe the audit test that should be performed by the auditors to determine whether the control is effective.

Answer rating: 100% (QA)

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