Your firm is the external auditor of Downe Ltd (Downe). It has accepted a non-audit engagement to review and report on the internal controls over sales, purchases and cash at Downe. Downe operates a chain of sandwich shops and has a head office. The following internal control deficiencies were identified during the engagement:

(1) Managers at the shops regularly used cash from the cash register to pay local suppliers for ad hoc purchases. On several occasions the managers did not adhere to company policy to record the purchase on an expense form and then put the form in the cash register.

(2) At the end of each day, the reconciliation of cash in the cash register with the register’s records (“cashing up”) was often performed by a single individual who was also responsible for banking that day’s takings.

(3) Employees working in the shops regularly failed to log in or out of the cash register system. This resulted in some employees using the cash register when logged in as another employee.

(4) There was no evidence that bank reconciliations performed at head office had been reviewed by the financial controller.

(5) No checks were carried out in respect of fresh ingredients delivered by suppliers directly to the shops.

Requirements:

a) Draft points for inclusion in your firm’s report to Downe on the internal control deficiencies identified. For each deficiency you should outline the possible consequence(s) of the deficiency and provide recommendations to address it.

b) You are responsible for planning the external audit of Downe and you are considering the audit procedures relevant to the audit of inventory. Downe does not keep continuous inventory records. It performs a yearend inventory count at each shop. For each type of audit procedure listed below, describe two procedures relevant to the audit of Downe’s inventory:

• Tests of controls

• Tests of details

• Analytical procedure

Answer rating: 100% (QA)

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