You are the auditor of Prospecting (Pty) Ltd. The company owns the right to prospect for minerals on various properties.
Prospecting (Pty) Ltd holds significant quantities of spare parts in stock of mining equipment. These parts are accounted for at standard cost using a computerised stock recording system
Spare parts of mining equipment are purchased in accordance with the following system:
1. All purchasing orders are automatically generated by the computer programme. Re-ordering levels are set by the purchasing manager. The computer generates a pre-numbered purchasing order in duplicate when the quantity of spare parts on hand falls below the re-ordering level. All purchasing orders are accumulated and are sent to the purchasing department on Fridays. Each Friday the stores manager and the purchasing manager receive a copy of the weekly listing of all purchase orders generated by the system.
2. The stores manager authorises the purchasing order, after he has reviewed the items ordered on the weekly listing. The original purchasing order is sent to the relevant supplier by the purchasing clerk. The first copy of the purchasing order is sent to the creditors clerk. He changes the status of the authorised purchasing order to that of "pending".
3 The stores manager adds details of new spare parts to the master file with the approval of the purchasing manager.
4. When the spare parts are received, the receiving clerk in the store enters the spare part number onto an on-line system. Orders with a "pending" status are displayed on the screen. The receiving clerk matches the type and quantity spare part ordered to those received and uses the option to create an electronic goods received note (GRN). The computer prints a pre-numbered GRN for the spare parts received. The original GRN is sent to the supplier and the duplicate goes to the creditors clerk. No prices are indicated on the GRNs. After a GRN has been issued the computer will change the status of the order to "complete". The standard cost records and the quantity of stock will immediately be updated when a GRN is issued and the order's status has changed.
5. The creditors clerk files the copy of the GRN in a temporary file. On receipt of a supplier's invoice the creditors clerk records the GRN number onto the system. The status of the order will be shown as "complete". The goods per GRN with the applicable prices, from the price file, will then be displayed on the screen.
6. The details of spare parts that are displayed on the screen (as above) are then compared by the creditors clerk with the physical GRN and invoice from the supplier. If any differences exist the creditors clerk can change the quoted price on the computer to the latest price. This also ensures that the price file is updated simultaneously with the latest prices.
7. If the status of the order is still "pending", the invoice will be filed in a temporary file. These invoices are compared to a list of completed orders on a weekly basis. A report of partially completed orders outstanding for longer than four weeks is produced on a weekly basis. It is sent to the purchasing manager who contacts the suppliers about the outstanding quantities. If a supplier cannot fulfil the order, then the purchasing manager is able to change the status of the order to "complete".
8. At the end of the month the computer system will:
• debit the stock control account in the general ledger with the standard cost of the spare parts received;
• debit the VAT input control account with the VAT paid;
• credit the creditor's control account with the aggregate amount of the purchases of spare parts that was processed;
• calculate the price variance for each completed order and post this to the price variance control account.
REQUIRED:
(a) Write a letter to the management of Prospecting (Pty) Ltd in which you set out the weaknesses in the system of internal control over purchases of spare parts, as described above and the potential consequences thereof; (15)
(b) Discuss the nature, timing and extent of your audit approach when verifying the balance of spare parts at year-end.

Answer rating: 100% (QA)

ANSWER A A control weakness is a failure in the implementation or effectiveness of internal controls Malicious actors can leverage internal control weakness to circumvent even the most robust security ... View the full answer