QUESTION $1(150$

MARKS$)$

Ubuntu $($Ltd$)($hereafter Ubuntu$)$ is a printing and advertising company that is listed on the

Johannesburg Stock Exchange $($hereafter JSE$).$ Ubuntu generates revenue through two

different streams. One stream is the manufacturing of large billboards for advertising next to

the highways across Southern Africa. The second stream is the design and printing of flyers,

business cards and posters for corporate clients. Ubuntu was established in $2004$ by Mark

Edward $($the current CEO$),$ and the company has grown rapidly over the past few years.

Joy Fakuda was recently appointed as the internal auditor at Ubuntu, to assist them with the

control environment within the organisation. Before Joy performed any test of controls on the

control environment, she arranged a meeting with Mark Edward to gain an understanding of

the organisation and the controls that they have implemented. During her meeting with Mark,

he provided her with the following information on the various departments within Ubuntu.

Meeting with Mark Edward

$6$ January $2024$

Office Park $7$

Block D

Wentworthpark

Investments in assets

For the investment in assets Ubuntu has implemented the following internal

controls to ensure that all transactions are done according to the company$$s

policy:

$1.$ All fixed asset purchases are supported by a fixed asset requisition and a capital

budget.

$2.$ Fixed assets are recorded in a fixed asset register and recorded assets are

regularly compared to physical assets by an independent senior official.

$3.$ Purchases of fixed assets are authorised by senior management on a sequentially

numbered fixed asset requisition, and missing numbers are regularly followed up$.$

$4.$ The investment in assets is authorised by the board of directors and recorded in

the minutes of meetings of the board of directors.

$5.$ Fixed assets are recorded at the amount as per the invoice received from the

supplier.

$6.$ Depreciation and other calculations are done by computer with a program, and the

computer program was tested beforehand.

$7.$ All purchases and sales of fixed assets are recorded in the fixed asset ledger

accounts and the fixed asset register from the source documents.

$8.$ The fixed asset register is reconciled with the control account in the ledger on a

regular basis by the accountant. It is also reviewed by the financial manager.

$9.$ Fixed assets are classified into the respective categories according to company$$s

policy.

$10.$ Improvements are capitalised as fixed assets and clearly distinguished from

maintenance.

$*$In December $2023$ during the festive season, three of the maintenance vehicles were

stolen from Ubuntu$$s premises. Luckily these vehicles were insured.

Purchase of materials needed to print the flyers, business cards and posters

For the ordering and receiving of materials Ubuntu has implemented the following

internal controls to ensure that all transactions are done according to the

company$$s policy:

$3$

$1.$ Ubuntu has implemented a re$-$order$-$level to control their inventory levels and

therefore materials will only be purchased should they reach the re$-$order$-$level.

$2.$ Once the materials reach the re$-$order level a requisition is generated by the

purchasing department.

$3.$ The requisition is used to generate a triplicate purchase order $($PO$)$ which is

numerical.

$4.$ The purchase order contains the following detail: name of supplier, quantity,

description and price of materials, discounts $($if applicable$),$ terms of payment,

delivery address and the signature of the buyer.

$5.$ Ubuntu has a list of approved suppliers and only suppliers from this list is used

when generating the PO$.$

$6.$ Thereafter the PO is sent to the purchase manager for authorisation and after

authorisation the PO will be sent to the supplier, receiving department and a copy

is kept for deliveries pending.

$7.$ When the materials are received, one of the receiving clerks are responsible to

inspect the materials for quality, quantity, and type against the PO$.$

$8.$ Once the materials have been inspected a duplicate goods received note $($GRN$)$ is

generated which includes the following details: quantity and description of the

materials, PO number, date on which the materials are received and the details of

the receiving clerk.

$9.$ A copy of the GRN is forwarded to the ordering department and the other copy of

the GRN together with the copy of the PO is sent to the accounts department.

For the recording of materials Ubuntu has implemented the following internal

controls to ensure that all transactions are done according to the company$$s

policy:

Invoices received from the suppliers are not entered into the records unless it has been

approved as correct by the employee responsible for checking the accuracy. The

employee responsible should check following: $$ Quality, quantity, and date on the invoice is compared to the GRN and delivery

note $($DN$)$; $$ Price, terms and account details on the invoice is compared to the PO; and

$$ The calculations on invoices.

If there are any disputed invoices they will be kept separately and a senior within the

accounts department will on a regular basis, follow up with the supplier.

Manufacturing process of billboards

The manufacturing of billboards takes place as follows:

A pre$-$numbered order is requested for the issue of raw materials for a particular production

run. The pre$-$numbered order is prepared by the foreman of the raw materials storeroom. All

issues of raw materials are accounted for on the production summary sheet and are also

listed on the completed production report daily. A copy of the completed production report is

sent to the accounting department every day. Movement of components through the production process as work in progress:

The time that is spent on each stage of production, by production employees and in

machine time, is captured by the storeman on a loose piece of paper. He then ensures that

he sends the piece of paper to the accounting department for them to capture the time

spent on each stage of the production.

$4$

At the end of each month, the total time recorded on the production summary sheet, is

reconciled to the total hours worked by production staff. Any differences are sorted out

during month end. No billboards are inspected for quality before they pass to the next stage, as Ubuntu has

perfect controls during the production process, thus resulting in no flaws in the billboards

that they manufacture. Transfer of manufactured goods to finished goods inventory:

Once the production process is complete the produced billboards are transferred to the

finished goods store. The raw materials, labour and machine hours worked, as well as overhead allocations on

the completed production report is inspected by the foreman to ensure all production

charges are correctly recorded. Any differences are authorised by the financial manager

before the goods are physically transferred to and accepted by the finished goods inventory

stores staff. The storeman authorises, by signature, the transfer of the manufactured goods to inventory. Acceptance of the goods into finished inventory is acknowledged by the inventory store staff

through the signing of the finished goods report. Mark mentioned that the external auditors discovered the understatement of inventory in

the prior year. This was due to incorrect cut off being applied with the finished goods.

Orders for design and printing

All orders are placed with Mr Shabalala, the capturing clerk. All orders are placed

either via telephone or email. The process followed when an order is received from

a customer is as follows:

$1.$ As soon as Mr Shabalala receives an order from a customer, he writes down the

order on piece of paper that is always placed next to the telephone.

$2.$ The only details that he asks of the customer, is the customer$$s name and the

description of what they want printed and designed. This includes the size of the

design, and print, whether the print is in colour or black and white, etc.

$3.$ Mr Shabalala then signs the piece of paper and forwards it to the design team.

$4.$ Ubuntu$$s customers are allowed to buy on credit. Should new clients want to open

an account, the account and the credit limit is granted immediately, and the client

can start placing orders for printing and designing.

$5.$ Upon receiving an order from Mr Shabalala, Simphiwe Nkuna $($the graphical

designer$)$ starts designing the flyer$/$business card based on the information that

was obtained from the piece of paper on which the order was written down.

$6.$ No delivery notes are created.

$7.$ The dispatch division then phones Thabo, the driver, to collect the finished printing

that needs to be delivered. He signs the piece of paper attached to the packages

he collects as proof of collection.

$8.$ Upon exiting the premises Thabo waves at the security guard who opens the gate

for him.

$9.$ Upon delivery Thabo presents the order to the customer who then signs the order

as proof of receipt and gives it back to Thabo. Thabo drops off the signed copy of

the order the following day to the accountant Ms Dora Ndlebe.

Payment of wages

$5$

The following process is followed during the payment of wages to factory

personnel:

$1.$ The preparation of wage packets:

The preparation of the pay$-$packets is done by the foreman every Friday morning of the

month. He ensures that all the cash is kept safe and is safeguarded against theft. The

foreman also ensures that the details of each employee are written on the pay$-$packet,

such as the name, surname, and employee number.

$2.$ The pay$-$out:

The foreman ensures that all the pay$-$packets are given to the respective employees. He

asks the staff to assist him in the process of identifying all the employees as he does not

know everyone. He asks the staff to divide into groups based on the production groups

that they work in$,$ and then nominate an employee to collect all the wages for that group.

The nominated employee will also sign as proof of receipt of the pay$-$packets.

$3.$ Unclaimed wages:

At the end of the pay$-$out the foreman agrees all unclaimed pay packets to the payroll.

Once all employees who have not claimed the pay packets have been identified, details of

unclaimed wages are written on a piece of paper to be handed over to the accounting staff

the following Monday.

All the unclaimed wages and payroll is given to the security guard to safeguard over the

weekend until the security company collects it on the Monday morning.

Changes to a computerised system

Mark provided Joy with the following description of how the computer system changes

took place and were implemented: $$ The system changes were requested by the Information Technology $($hereafter IT$)$

auditor in a letter from the audit firm. $$ The changes were approved by the IT clerk. $$ The change forms were signed off by the accountant, Ms Dora Ndlebe. $$ After the changes were made, the IT clerk tested the changes to determine if it

was made as per the approved change request and is working effectively.

After the system was upgraded and changed according to the needs of the auditor, Mark

also decided that they had to implement some proper access and business continuity

controls to ensure that all the confidential information is protected and to ensure that they

would have back$-$ups in place should their system crash.

Ubuntu implemented only the following business continuity controls: $$ Data is backed up regularly and kept off$-$site in a fireproof safe; $$ The entity$$s server room is air$-$conditioned to ensure that the servers do not

overheat resulting in the loss of vital data; $$ Protection against the elements; $$ All the relevant emergency plan & disaster recovery procedures were

implemented; $$ Adequate insurance was taken out; $$ Employment contracts; and

$$ Hiring$/$firing procedures.

Online application used to receive orders for printing and designing

The management of Ubuntu recently decided that it would be a good business investment

to develop an online application which they can use to capture orders for printing and

designing. The IT department together with the IT developers hosted an information

$6$

session to explain the functionalities of the App to Ubuntu.

The functionalities of the proposed application:

The orders for flowers are received from the customers via the telephone. All orders are

sent through to Mr$.$ Shabalala, the capturing clerk. Mr$.$ Shabalala informs the customer of

the price of the printing and designing required, and then enters the prices directly into the

system. The following details need to be completed on the system in respect of the order:

The date, the name of the client, the quantity of the order, the prices of the items,

description of the items, and any discount that was granted to the client. The company

does not accept any cash sales.

Mr$.$ Shabalala$$s computer is linked to the main computer that is situated in the data

processing department. When an order is received it is entered via a terminal onto an

$$order pending Masterfile$$ at which time it is given a sequential number. A crossreferenced computer$-$generated picking slip is printed out in the stores department. Any

changes to the $$order pending Masterfile$$ need to be done by the data processing

manager on the main computer.

You are required to:

a$)$ From the above scenario, provide the test of controls that the internal auditor $($Joy$)$

should perform for the investment in assets $($points $110).$

$(15)$

Your answer should be in tabular format, as indicated below:

Internal control Test of control

Please take note you are NOT

required to re$-$write the internal

controls. You are required to list the

number of the control in this column

as per the scenario.

Number $1-10.$

You are required to provide a detailed

description of the test of control in this

column. If the internal control and test of

control do not correspond you will not

receive any marks.

b$)$ For the investments in assets, provide the control objective being achieved for

numbers $15$ only.

$(5)$

c$)$ For the vehicles that were stolen, describe how the $$existence assertion$$ will be

tested by performing substantive procedures.

$(5)$

d$)$ From the above scenario, provide the test of controls that the internal auditor $($Joy$)$

should perform for theordering and receiving of materials $($points $1-9).(15)$

Your answer should be in tabular format, as indicated below:

Internal control Test of control

Please take note you are NOT

required to re$-$write the internal

controls. You are required to list the

number of the control in this column

as per the scenario.

You are required to provide a detailed

description of the test of control in this

column. If the internal control and test of

control do not correspond you will not

receive any marks.

$7$

Number $1-9.$

e$)$ From the above scenario, provide the substantive procedures that the internal auditor

$($Joy$)$ should perform for the recording of materials to ensure the recording is

accurate. $(5)$

f$)$ Identify the weaknesses in the manufacturing of the billboards section and for

each weakness identified, provide an internal control that should be implemented.

$(24)$

Your answer should be in tabular format, as indicated below:

Weakness $(12)$ Internal control $(11)$

g$)$ For the $$cut off assertion$,$ describe the substantive procedures to be performed for

inventory. $(5)$

h$)$ For the orders of design and printing, discuss the risk that Ubuntu will be faced

with if they continue with their current internal control environment. For each risk,

state which control objective will NOT be achieved due to the weak controls $($number

$1-9).(13)$

Your answer should be in tabular format, as indicated below:

Number as per scenario

Number $1-9$

Risk $(7)$ Control objective not

being achieved $(6)$

i$)$ Identify the weaknesses in the payment of wages section, and for each weakness,

describe the internal control that should be implemented. $(15)$

Your answer should be in tabular format, as indicated below:

Weakness $(7)$ Internal control $(8)$

j$)$ Joy had a conversation with the external auditors regarding her concerns about the

completeness of the unclaimed wages. Describe the substantive procedures that

the external auditors should perform to determine the completeness of the unclaimed

wages. $(5)$

k$)$ Identify the weaknesses in the changes to the computerised system that took

place. For each weakness identified, you are required to describe the risk as a result

of the weakness and provide an internal control that can be implemented to mitigate

the weakness and the risk. $(10)$

Your answer should be in tabular format, as indicated below:

Weakness $(3)$ Risk $(4)$ Internal control $(3)$

l$)$ Identify the business continuity controls that are absent in the above scenario for the

changes to the computerised system.

$(5)$

m$)$ Identify and describe the application controls which you would expect in the online

application to receive orders for printing and designing, to ensure that the orders

received are accurately recorded and complete. For each application control

$8$

described, explain how the application control will function in the online application.

$(20)$

Your answer should be in tabular format, as indicated below:

Application control $(10)$ Functionality of application control

$(10)$

n$)$ Design a system of internal controls that should be in place to ensure that all the

changes to the order pending Masterfile are valid, complete and accurate.

$(5)$

Precision and interpretation marks $(3$