Ony Ltd. is a leading name within the stair lifts industry, based in Kamloops, BC. Ony Ltd. has a strong reputation for customer care and quality of service. Ony Ltd. is committed to improving accessibility for its elderly and disabled customers by providing custom built solutions. Ony Ltd. outsources the manufacturing of all parts to a large number of suppliers and then assembles the custom-made Ony from the parts procured in its plant in Kamloops.

Ony Ltd. has a fully integrated Computerized Accounting System (CAS). You are Mrs Alpine, CPA CA and it is two weeks before Ony Ltd.’s financial year end. As part of the interim audit work, you have been given responsibility for identifying the relevant internal control issues and testing the purchases, receiving and payable systems.

Purchases, receiving, and payables activity

Ony Ltd.’s Store Manager has sole responsibility for purchases. The Directors of the company have the utmost confidence in the Store Manager and therefore see no necessity in being involved in the procurement process. The Store Manager selects suppliers based on the suppliers having the necessary certification by a nationally recognized organization and on price in a competitive tender process.

The inventory control part of the CAS generates a numerically sequenced Purchase Requisition (PR) when the quantity of a particular part falls below a re-order level. The PR details the part required and the quantity to order is electronically forwarded to the Purchases Department. Staff in the Purchases Department review the PR, allocate a Purchase Order (PO) (which is identified by a unique sequential order number), to an authorized supplier and send the PO to that supplier using Electronic Data Interchange (EDI). A copy of which is filed in the PO database by the CAS. Large or out of the ordinary purchases require authorization by the Store Manager. When parts are received, the Store Clerk confirms that the inventory agrees to the bill of lading and checks the PO database to ensure that the inventory were in fact ordered by Ony Ltd. Delivery is refused where goods do not have a bill of lading. The CAS is updated to confirm receipt of goods, an electronic numerically sequenced Good Received Note (GRN) is generated and the inventory records are updated to show the receipt of inventory. The physical goods are added to the parts store and the bill of lading is stamped with the PO number and GRN number and is filed in the Goods Inwards Department.

When the supplier submits an invoice by EDI, it is matched by the CAS against Ony Ltd.’s PO and GRN for all relevant data and the CAS is updated to confirm receipt of the invoice. The invoice is added to the purchases database on the CAS.

REQUIRED:

(a) Prepare a Management Letter listing THREE weaknesses in internal control. For each weakness state the impact and recommend a control to overcome that weakness. (18 marks)

(b) Identify FIVE tests of control that an auditor would normally carry out on the purchases, receiving and payables systems at Ony Ltd, describe the reason for each procedure. (5 marks)

Answer rating: 100% (QA)

a Internal controls are the rules mechanisms and procedures you use to safeguard your financial information promote accountability and prevent and detect fraud Internal controls help you comply with l... View the full answer