ACCA AA Syllabus C. Internal Control - Capital expenditure - Past Papers ^{7 / 7}

Bonsai Trading Co (Bonsai) manufactures electrical equipment, and its year end is 30 September 2015. You are the audit supervisor of Poplar & Co and are developing the audit programmes for the forthcoming interim audit.

The company’s internal audit department has provided you with documentation relating to the non-current assets cycle including the related controls listed below.

– Bonsai has a capital expenditure committee and all purchase orders for capital items are required to be authorised by this committee.

– On receipt, each asset is assigned a unique serial number and this is recorded on the asset and in the non-current assets register.

– When the asset arrives, a goods received note (GRN) is completed which details the nature of the expenditure (i.e. whether it is capital or revenue), and the GRN classification is reviewed and initialled by a responsible official. Copies of the GRNs relating to capital expenditure are then submitted to the finance department for updating of the non-current assets register.

– Periodically, internal audit undertakes a review of assets in the register and compares them to assets on site, using the serial number to confirm existence of the asset.

– Access to the non-current assets register is restricted through passwords to a small number of staff in the finance department.

Required:
Describe a test of control which the auditor of Bonsai Trading Co would perform to assess whether or not each of the non-current asset controls listed above is operating effectively. (5 marks)

Letham Co is a large engineering company with ten manufacturing units throughout the country in which it is located. The manufacturing process is capital intensive and the company holds a wide variety of plant and equipment.

The finance director is responsible for the preparation of a detailed non-current assets budget annually, which is based on a five-year budget approved by the whole board of directors after consultation with the audit committee. This annual budget, which is also approved by the full board, is held on computer fi le and is the authority for the issue of a purchase order.

When the item of plant and equipment is delivered to the company, a pre-numbered goods received note (GRN) is prepared, a copy of which is sent to the accounting department, and used to update the non-current assets budget to reflect the movement. The equipment is carefully inspected by production personnel and tested for proper operation.

An operational certificate is prepared by the production department and this is used by the accounting department, together with the GRN, to check against the purchase invoice when it is received.

At the same time as the purchase invoice enters the purchasing system, a computerised non-current assets register is updated. Access to the non-current assets register is restricted to personnel in the accounting department. On a rolling basis throughout the year the non-current assets register is compared to plant and equipment on site by accounting department personnel, using identification numbers in the register and permanently marked onto each item in the factory.

The internal audit department also tests on a sample basis the operation of the system from budget preparation to entry in the non-current assets register. Internal audit staff also compare a sample of entries in the non-current assets register with equipment on the shop floor.

Required:

SIX STRENGTHS in Letham’s control environment in respect of non-current assets and explain why they may reduce control risk. (12 marks)