Question Tag: Audit Testing

ACB Limited is a transport and logistics company which commenced business on January 1, 2012 and has over 250 trucks in its fleet. The operations of the company cover all the six geopolitical zones in the country. The company operates an in-house workshop as a separate business unit under the supervision of a Workshop Manager and it handles repairs of the company’s trucks and other third-party vehicles as well. All the spare parts needed for the repairs of trucks are supplied directly from the company’s central store located very close to the workshop. The company purchases spare parts mostly in bulk and keeps them in a central store for supply to the workshop when the need arises. The following procedures are followed from the purchase stage to the consumption of spare parts for repairs of trucks:

Request for the spare parts to be purchased is sent by the storekeeper to the procurement department on monthly basis for approval. The storekeeper then collects an IOU and goes to the open market together with a mechanic to purchase the items. Cash invoices collected for the spare parts purchased are attached with the IOU retirement form which is submitted to the Accountant at the end of each month. The Accountant makes entries of the spare parts purchased into the ledger on a monthly basis.

The mechanic in charge of the repair of a damaged truck sends to the storekeeper a memo requesting the supply of spare parts. The mechanic collects the spare parts from the store on the basis of the memo he sent to the storekeeper. He prepares a list of items supplied on a monthly basis and sends it to the Accountant for posting into the ledger. The spare parts supplied are posted by the Accountant into the spare parts consumption ledger at the end of each month. The storekeeper takes inventory of the spare parts in the store at the end of each year jointly with some mechanics who provide technical advice during the exercise.

The spare parts collected are used by the mechanic in charge of the damaged truck brought for repairs. The mechanics in the workshop prepare a list of spare parts collected and used for the various trucks repaired by each of them for submission to the Workshop Manager. The Workshop Manager prepares and sends his monthly report which contains a list of trucks repaired and the spare parts consumed to the Managing Director.

Your firm was appointed to carry out an audit of the company’s accounts for the last four years of operation. From the preliminary discussion the Managing Director had with you, you were informed that the operations of the workshop in the last four years resulted in a loss which he said was a result of a lack of controls in the handling of the purchase, storage, and consumption of spare parts in the workshop.

Required:
i. Identify three internal control weaknesses in the above scenario with respect to the procurement of spare parts, storage, and supply of spare parts in the store, and the consumption of spare parts in the workshop. (9 Marks)

ii. Recommend appropriate internal controls that would address the identified weaknesses. (6 Marks)

iii. Explain the audit tests to be carried out to assess if the recommended controls would work effectively to prevent or correct errors and detect occurrences of fraud in the system. (5 Marks)