Please review my answer

WHITTAKER

This scenario relates to four requirements.
It is 1 July 20X5. You are an audit supervisor with Walsh & Co. You are currently reviewing
notes in relation to the internal controls in place at your client, Whittaker Co. Whittaker Co
manufactures and sells luxury bed linen wholesale to the hotel trade and direct to the public
from its factory store. It has a year ending 31 August 20X5.
Sales
Whittaker Co implemented a new salessystem in May 20X5. The new system wasfully tested
prior to its implementation and will be run in parallel with the old system until the year end.
Whittaker Co’s internal audit (IA) department is responsible for comparing the output from
the old and new systems, investigating any discrepancies and making recommendations for
further action.

The company operates a fully automated credit check processfor all its new hotel customers.
The automated system generates a credit limit for each new customer which the sales
director approves before the customer can place any orders. The sales director evidences
approval of the credit limit in the system.
On a monthly basis, the receivables ledger clerk downloads the aged receivables report and
reviews it for outstanding debts. In line with Whittaker Co’s credit control policy, any debts
which are greater than 30 days overdue are then passed to the credit control department
which contacts the customers to resolve any issues and recover the debt.
Also, on a monthly basis, the accounts clerk reconciles the trade receivables account to the
list of individual customer balancesin order to verify the month?end receivables balance. Any
reconciling items are documented, errors are corrected on a timely basis and then the
reconciliations are reviewed and approved by the financial controller.
Payroll
Whittaker Co has a human resources (HR) department which is responsible for processing
joiners and leavers, including preparing and sending authorised joiners forms to the payroll
department so that new employees can be set up correctly on the payroll system. However,
when additional staff are required at short notice, joiners’ forms are not completed and
instead, the production supervisor notifies the payroll department by email on the day they
commence employment.
Staff are required to work overtime on a regular basis in order to meet production targets.
Overtime is paid monthly in arrears, at the end of the month in which it is worked. All
overtime reports are reviewed on a quarterly basis by the production supervisor after the
overtime has been paid. Reviews of overtime reports are evidenced by signature of the
production director.
The payroll system automatically calculates wages and deductions for all employees based
on standing data. The standing data isreviewed regularly to ensure it isstill accurate however
no checks are performed on the monthly payroll calculations.
In May each year, all employeesreceive a bonus, the amount of which varies depending upon
their performance. The payroll department receives written notification from the HR
manager of the bonus, based only on the HR Manager’s view of the employees’ performance
in the year. The bonuses for 20X5 were input into the payroll system by the payroll clerk.
After May’s payroll had been processed, a small number of employees notified the payroll
department that the bonus they had been paid did not agree to their bonus confirmation
letter. This was corrected in June 20X5.
Bank
Whittaker Co uses an internet banking system which requires a two?step verification process.
A password is required to log on to the system. An additional passcode is then required to
set up new payees or to withdraw funds. The login details including the password and the
passcode are saved in a shared file which is accessible to all payables ledger staff in the
accounts department.
The accounts clerk undertakes the bank reconciliations on a weekly basis. The reconciling
items are documented and sent to the financial controller for review. The financial controller
only investigates the reconciling items if the sum of these items is significant.

Required:
Auditors are required, under ISA 265 Communicating Deficienciesin Internal Control to Those
Charged with Governance and Management, to communicate in writing to those charged
with governance any significant deficiencies in internal control.

In respect of the SALES system of Whittaker Co:
(i) Identify and explain THREE DIRECT CONTROLS on which the auditor may seek
to place reliance, and
(ii) Describe a TEST OF CONTROL the auditor should perform to assess if each of
these direct controls is operating effectively.

My answer :

Direct Control

The new system wasfully tested prior to its implementation and will be run in parallel with the old system until the year end. Whittaker Co’s internal audit (IA) department is responsible for comparing the output from the old and new systems, investigating any discrepancies and making recommendations for further action.

This is to ensure that sales are correctly recorded and eliminate the risk of misstatement in the FS with regards to sales.

Test Of Control

Review the documents of internal audit to see if there is any discrepancy between the old and the new systems and whether the correct method has been used to deal with the discrepancy.

Direct Control

The company operates a fully automated credit check processfor all its new hotel customers. The automated system generates a credit limit for each new customer which the sales director approves before the customer can place any orders. The sales director evidences approval of the credit limit in the system.

This is to ensure that all credit is approved by sales director and reduces the risk of bad debt due to credit being assigned to ineligible customers.

Test Of Control

For a sample of sales on which credit limit has been assigned , verify if there is signature of sales director as evidence of approval of the credit limit.

Direct Control

On a monthly basis, the receivables ledger clerk downloads the aged receivables report and reviews it for outstanding debts. In line with Whittaker Co’s credit control policy, any debts which are greater than 30 days overdue are then passed to the credit control department which contacts the customers to resolve any issues and recover the debt

This is to ensure that all debts are recovered in a timely manner.

Test Of Control

For a sample of debts which have been due for more than 30 days
review if the customers have been contacted by the credit control department by verifying the documents to see if the credit controller has recorded details about the call in the phone details log .

Direct Control

Also, on a monthly basis, the accounts clerk reconciles the trade receivables account to the list of individual customer balancesin order to verify the month?end receivables balance. Any reconciling items are documented, errors are corrected on a timely basis and then the reconciliations are reviewed and approved by the financial controller.

This is to ensure that the reconciliation of the trade receivables account has been done an d errors has been dealt with

Test Of Control

For a sample of reconciliation, ensure that they bear the signature of the financial controller as evidence of the reconciliation having been reviewed and approved.

Direct Control

Staff are required to work overtime on a regular basis in order to meet production targets. Overtime is paid monthly in arrears, at the end of the month in which it is worked. All overtime reports are reviewed on a quarterly basis by the production supervisor after the overtime has been paid. Reviews of overtime reports are evidenced by signature of the production director.

This is to ensure that the overtime reports are correctly prepared

Test Of Control

For a sample of overtime reports, vrerify if there it bears the signature of the production director as evidence that the correct overtime has been recorded.