SUBJECT: INTRODUCTION TO AUDITING

Read the scenario below and answer the questions that follow.

You are the senior partner in a small-to-medium sized audit firm. Your audit firm has recently been appointed as the auditors of Blueberry SA Limited Grey Pty (Ltd), a recently listed company on the JSE Securities Exchange. The year-end of Grey Pty (LTd) is 01 January 2022. Grey Pty (Ltd) specialises in manufacturing and marketing mobile communication, media devices as well as personal computers. The company caters for both South African and overseas customers.

Grey Pty (Ltd) accepts foreign currency from overseas customers, and although it is not widely publicised, prefers to receive cash from local customers, rather than credit card payments or electronic transfers. The head office of the company is situated in Durban, and it has branches situated in Port Elizabeth, East London and Cape Town. Grey Pty (Ltd) is doing extremely well, and has recently shown a steady increase in turnover. The growth from previous years is mainly due to the fact that the company has implemented a new bonus system for the management staff of the company. The bonus system states that if turnover exceeds the budgeted turnover by more than 25%, a percentage of the excess turnover will be paid out to management. Management is extremely excited about this incentive.

Due to the recent significant growth in the company, the previous manual accounting system became inadequate for the company, and it was decided during the year ended 01 January 2022, to change over to a computerised system. The computerised accounting package is an off the shelf package. None of the staff were familiar with the package, so it was decided to employ an IT manager to oversee the processing of the accounting records, as well as monitoring the accuracy of the system. The newly appointed IT managers previous job, was as a marketing agent who advertised technology products for various companies.

Grey Pty (Ltd) suffered a substantial loss in the previous year as a result of a legal claim against the company. Big Bang Limited Ltd sued Grey Pty (Ltd) for patent infringement. They claim that Grey Pty (Ltd) had relied on its patents related to software, video coding, chipsets, display and antenna for many years. Grey Pty (Ltd) was eventually taken to court where they lost the lawsuit and were forced to pay damages. The payment of damages also resulted in Grey Pty (Ltd) facing a severe liquidity crisis.

Upon discussions with management, you discovered that the previous auditor resigned as a result of a disagreement with management. Management of Grey Pty (Ltd) refused to give your firm permission to contact the previous auditor.

Question 4 (10 Marks)

Protection of information resources requires a well-designed set of controls. Computer systems are controlled by a combination of general controls and application controls. General controls govern the design, security, and use of computer programs and the security of data files in general throughout the organizations information technology infrastructure. On the whole, general controls apply to all computerized applications and consist of a combination of hardware, software, and manual procedures that create an overall control environment. Application controls are specific controls unique to each computerized application, such as payroll or order processing. They consist of controls applied from the business functional area of a particular system and from programmed procedures. You are required to indicate the following:

4.1 General controls that can be found in an information technology environment. (5 Marks)

4.2 The categories of general controls (5 Marks)