INTERNAL CONTROLS

Chapter 6
OnternalControls
OVERVIEW AND IMPORTANCE
This chapter aims to develop and test knowledge and understanding of the internal financial
controls (incl. indirect controls as well as general IT and information processeing controls)
required to ensure that an entity's accounting information system produces output that is valid,
accurate and complete. There is some overlap with Chapter 7 in that the controls dealt with in
Chapter 6 are mitigating strategies to address 'information risks', which constitute a component of
the business risks that an entity faces and needs to manage. There is also some overlap with
Chapter 4 in that in order to design tests of controls the ability to identify key controls is required.

A sound knowledge of internal control systems is of vital importance to both the registered auditor
and the professional accountant working for an organisation (e.g. financial manager). The auditor
needs this knowledge to (i) obtain an understanding of the client's internal controls (to the extent
required by ISA 315 Revised), (ii) to assess the control risk relating to an assertion (as part of the
assessment of the risk of material misstatement) if the auditor plans to test the operating
effectiveness of the controls, and (iü) to be able to evaluate whether the client's key controls,
tested by means of tests of controls, are operating effectively (in order to reduce the substantive
tests required). The professional accountant needs this knowledge to ensure the appropriate
design, implementation and ongoing operating effectiveness of the internal financial controls over
the input, processing and output of transaction data, including the environment in which these
controls operate, in order to ensure the ongoing integrity of the financial information when needed
for management decision-making.

Types of questions that you should be able to answer include:

1. General IT and indirect controls:

1.1 Identify and discuss deficiencies in the general IT and indirect controls as
described; and
1.2 Describe the general IT and indirect controls that should be implemented in order
to deal with a particular matter (e.g. controls to implement a newly acquired
accounting application).

2. Controls relating to transactions in a specific business cyle (which is computerised to a

varying degree or not at all):
2.1 Design an internal control system for a given business cycle in an entity; and
2.2 ldentify and explain weaknesses in system described and provide
recommendations to address these weaknesses.

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 CHAPTER 6

Focus on the Initial Test of Competence Examination

In the last four years, the topics related to this Chapter have been assessed frequently in
the ITC as demonstrated by the following questions (italics added):
Paper Requirement Marks
9/21 P402 Describe additional controls that should be implemented at GreatSave to prevent or detect 16
the risks of material misstatement in the existence and completeness of the cash and cash
equivalents balance.
4/21P3PII Describe the controls that should be implemented by Kidzo to ensure that the website
designed and developed by the third-party service provider functions effectively.
1/20P1Q1 Discuss the control deficiencies in the year-end financial reporting process described in the 16
scenario.
1/20P4PII Describe the general controls that MasterBus should have implemented to ensure the 12
company's data stored by the third-party service provider in the cloud are secure.
1/20P4PII Describe the application (information processing) controls, with regard to workpaper WP 03, 10
that MasterBus should implement to ensure the completeness and accuracy of the app
users' data stored on the 'registered commuter database:
6/19P4 With reference to memo A, draft an email to the management of SmartPack to be reviewed 12
by the audit partner, in which you
• discuss any internal control deficiencies in memo A (excluding the preferential
procurement arrangement); and
comment on the potential impact of each of these deficiencies on Smart-Pack.
6/18P2 With reference to the FMSS database -
• describe the business continuity risks that CLease is exposed to with regard to the
integrated nature of the FMSS and because it is partly operated in the cloud; and 6
• identify the information processing controls that ensure that the processing of
information with regard to the client contracts is valid and complete. 10

Based on experience, the type of question students experience most difficulty with is designing
internal control systems for a given business cycle, and accordingly detailed guidance in this
regard is provided below.

GUIDANCE TO ANSWER THE QUESTION:

Design a system of internal controls for an entire /aspects of a business cycle
1. ldentify the main functional areas in the business cycle that fall within the scope of the
question.
2. ldentify whether employees will perform all the tasks in each functional area. Should there be
no computer involvement, use steps 4, 5 and 6.
3. Consider the nature of the computer involvement in the execution of activities in each
functional area - i.e. will there be:
A () Input
(ii) Processing of Transaction Data
(i) Output
B Amendments to Standing Data
4. ldentify the source documents, transaction files, records and masterfiles that are required in
the functional area (i.e. visualise the accounting information system for each functional area).
5. Make use of the internal control principles (summarised on next two pages) based on the
nature of employee / computer involvement identified for the functional area.
6. Consider whether a discussion of general |T controls is required.
6.1. Note: Normally in a question focussing on information processing controls, a detailed
discussion of general IT controls is not required.
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 INTERNAL CONTROLS

INTERNAL CONTROL PRINCIPLES

NON-COMPUTERISED ENVIRONMENTS

For each functionalarea

Validity → Authorisation by management + signature
Accuracy Independent check + signature
Completeness Sequential numbering of documents + sequence
checking

At anoveralllevel(SCRUM)
• Staff and organisation - Segregation of duties; personnel; description of duties
(probably already addressed under step 2 above);
• Custody controls - Describe how access to company assets should be
restricted + identify the need for insurance cover;
• Reconciliations;
Unused stationery- Access to be restricted, describe use of stationery
register, etc.;
• Management checks - Use of budgets with comparison to actual results,
'spot checks' on work of employees, et.

COMPUTERISED ENVIRONMENTS

INPUT CONTROLS

Batch Input On-linelnput

Preparationof (manual) sourcedocuments Validity
• Authorisation + signature • Access Controls
Independent check + signature Authorisation (by employees /
• Sequential numbering + sequence computer)
checking
AccuracY
Batch Controls Edit checks
User establishes batch controls o Field size
• Data capture, using batch controls to o Alphanumeric
ensure completeness, accuracy and Limit
validity o Range
o Validity / check digits
Other relevant inputcontrols o Missing data
• Access controls Screen design, layout and
Edit checks dialogue
• Sequence checking + exception report
Error correction procedures Completeness
?? [Use common sense]

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 CHAPTER 6

PROCESSING CONTROLS

1. Good general IT controls, for example:

1.1 Soundsystemsdevelopment / acquisition/ maintenancecontrols (to ensure sound
program logic); and
1.2 Sound computer operations controls.

2. Sound controls over masterfiles (masterfile amendment controls)

3. Sound controls over input (see previous page)

4. Automated controls:
4.1 Sequence checking + exception report;
4.2 Duplicate checking + exception report;
4.3 Use of Reasonableness checks / Limit checks + exception report; and
4.4 Use of Run-to-run totals + exception report.

5. User review of the following output (describe who should review I act on these reports
generated, and when / how this should be done):
5.1 Exception reports (generated in 4. above);
5.2 Transaction logs / audit trails;
5.3 Override reports; and
5.4 Logs of computer generated transactions.

OUTPUT CONTROLS

Accuracy/completeness
User review of output
Documents printed should be sequentially numbered

Validity(confidentiality)-appropriatedistributionofreports
Onscreen = logical access controls
Printouts = use of distribution schedules / lists / registers, etc.

MASTERFILE AMENDMENT CONTROLS

1. All amendments to standing data to be documented on pre-numbered masterfile

amendment forms (C).
2. All masterfile amendment forms must be authorised prior to entry (V).
3.
4
Restriction of access to masterfile amendments function e.g. through passwords (V).
Edit checks to be performed over data input (A).
5. Log of all masterfile amendments should be produced by the computer.
6. The logged amendments should be checked by an independent manager back to authorised
masterfile amendment forms (V) / (A).
7. Documentation and computer generated logs to be pre-numbered and sequence checked
(C).
8 Management should conduct a reqular review of all the standing data contained on the
masterfile. (A)

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GUIDANCE TO ANSWER THE QUESTION:

ldentify the weaknesses in a system of internal control designed and
implemented fora given business cycle

1. 'Break down' the given systems description into the main functional areas.

2. Evaluate the appropriateness of the employees allocated to perform tasks in each functional
area (e.g. consider appropriate segregation of duties; competence to perform task).

3. ldentify the nature of computer involvement in the execution of activities in the functional area.

4. Evaluate the appropriateness of the source documents, transactions files, masterfiles and
other accounting records in each functional area (i.e. are these adequate to keep track of the
activities in the functional area?).

5. For each functional area, evaluate whether the controls are adequate to ensure that the data
recorded in that functional area will be complete, accurate and valid. In other words, are the
controls currently in place adequate to address the 'information risks? If not, a weakness
needs to be identified.
[HINT: To evaluate the adequacy of controls, consider what can go wrong (e.g. invalid
transactions recorded), and use the tables on the previous pages to identify whether the
applicable mitigating controls have been implemented by management - if not, this may point
to a weakness.]

6. When asked to 'explain'a weakness ensure that in addition to identifying the problem you also
clearly indicate the consequence, i.e. what can go wrong as a result of the weakness you have
identified.

Note: If a control procedure is not specifically mentioned in a scenario, you may assume that it
is not present.

Illustration of how to apply GUIDANCE

An illustration of the thought process utilising the above guidance is documented as part of
W the support material at www.advancedcasestudies.c0.za

Specifically, to get guidance on the design of a system of internal control for a specific
business cycle / activity, see the file labelled 'guidance for answering question' for Cases 6:14
and 6:18.

For guidance on identifying weaknesses in a system of internal control, see the file labelled
'guidance for answering question' for Cases 6:2 and 6:4.

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 CHAPTER6

CASE 6:1 (WWW. (40 Marks : 48 Minutes)

Three years ago your friend Bongani Vilakazi, a former Bafana Bafana player, retired from
professional foottball and formed Newsa Sports CC. The corporation sels the Bongani range of
sportswear to retail stores throughout the Eastern Cape.

You have recently completed the financial statements for the year ended 28 February 2022. You
noted that turnover has increased considerably but profitability remains minimal. Your
investigations have revealed that the main causes of low profitability appear to be an abnormally
low gross profit percentage (despite a good mark-up percentage which is applied to arrive at the
selling prices) and a large bad debt expense.

Although no audit is required, you have agreed with Bongani that you should investigate the
corporation's system of internal control and assist him in implementing a proper system.

You have established that:

1. All sales are on credit.

2. The corporation employs seven (7) sales representatives who visit customers and collect
orders. Customer orders are recorded on pre-numbered order pads which reflect pre-
printed selling prices. Representatives are allowed to offer discounts to customers at their
discretion.

3. The corporation also employs a sales manager.

4. When representatives return to the premises, they hand in their order pads to the stores
manager.

5 The stores manager prepares pre-numbered delivery notes in duplicate from the order
pads.

6. The delivery notes are handed to the storeman who packs the goods. Access to the
warehouse is adequately restricted.

7. The corporation's deliveryman then collects the goods and the two copies of the delivery
notes from the storeman and delivers them to customers. One copy of the delivery note is
kept by the customer. The deliveryman ensures that the customer signs the second copy
of the delivery note, which he returns to the stores manager

8 The signed delivery notes are attached to copies of the orders by the stores manager, and
handed to the invoicing clerk.

9. The invoicing clerk prepares invoices from these documents.

10 The bookkeeper enters the invoices in the sales journal and accounts receivable ledger.

11. The bookkeeper opens incoming mail and is responsible for entering the receipts in the
cash book and accounts receivable ledger. She banks the money on a daily basis. The
corporation does not offer settlement discounts.

12. Credit notes are prepared by the bookkeeper and entered in the same way as invoices.

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CASE 6 :1 (continued)

13. At the end of the month, the bookkeeper writes up the general ledger, prepares an age
analysis of accounts receivable (from the accounts receivable ledger) and balances the
age analysis to the accounts receivable control account.

14. A copy of the age analysis is given to Bongani's secretary. She also receives copies of all
bank deposit slips and marks payments received on the age analysis. She then contacts
all customers who have not paid in order to request payment.

15. A former policeman has recently been employed as a security guard.

16. Adequate controls are in place restricting access to unused stationery and isolating
responsibility for both used and unused stationery.

You have agreed with Bongani that:

() A computerised solution would not be appropriate at present as Bongani wishes to

implement a proper manual system first before converting to computerised records.

(i) Whilst perpetual inventory records would be desirable, the corporation does not presently
have the manpower.

(iii) The new system should not require the employment of additional staff.

YOU ARE REQUIRED TO: identify the weaknesses in the current revenue and receipts system
and recommend improvements to address these weaknesses.

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 CHAPTER 6

CASE6:2 (WNW (52 Marks : 63 Minutes)

You are the audit manager responsible for planning the audit of Mikes Construction (Pty) Ltd.

You have reached the stage where you need to obtain an understanding of the company's internal
control system. You commenced with an evaluation of the control environment and the other
indirect controls, and upon finding this to be satisfactory, you have decided to evaluate the internal
controls over the purchases and payments cycle. You have prepared the following narrative
description of the purchases and payments system adopted by Mikes Construction (Pty) Ltd.

1.
The company handles contracts which have durations varying between 9 and 36 months.

2. The head office of the company is situated in North End and site offices are established at
each major construction site. The construction sites are situated mainly in the Eastern
Cape.
3. Budgets and a list of approved suppliers are prepared for each contract by Mr Edwards, the
contract engineer. These budgets are approved by Mr Davies, the general manager, and
then given to Mr August, the buying manager. Mr August regularly telephones the suppliers
to order the goods required in terms of the budget. He keeps a record of all orders placed in
an order scrapbook.

4 If a site runs short of supplies, the site supervisor emails Mr August to report the shortage.
Mr August then phones all his suppliers until he can find one who will deliver the goods on
the same day. In this way construction at the site is not delayed.

5. The supervisor of each site is authorised to receive goods and to sign the supplier's delivery
note as proof of delivery. Before signing the delivery note, the supervisor checks the
quantity and quality of the goods and agrees the details thereof to the supplier's delivery
note. Damaged, broken or otherwise unsatisfactory goods are not accepted or signed for.
The signed delivery notes are then forwarded to Ms Button, the head office creditors' clerk.

6. Ms Button files all the delivery notes alphabetically by supplier name. When the invoice
from the supplier arrives, Ms Button matches the quantities per the relevant delivery note to
those reflected on the invoice and signs the invoice as evidence of check. All invoices are
then sent to Mr Casey, the contract accountant, who records contract allocation codes on
each invoice.

7 Ms Button then records the invoices in the purchases journal and files the invoices
alphabetically by supplier name. At the end of the month Ms Button summarises the
purchases journal and posts the transactions to the contracts (debtors) ledger and creditors
ledger.

8. At the end of the month Ms Button prepares, in triplicate, a payment advice which
summarises the invoices to be paid for each supplier. She then loads these amounts onto
the bank's electronic payment system and sends a printout containing the amounts and
other payment details loaded (generated by the payments system) together with the
payment advices to Mr Davies and Mr Edwards for approval.

10. If Mr Davies and Mr Edwards are satisfied with the amounts loaded, they log into the bank's
electronic payment system, using dual authentication verification, and approve the
individual amounts to be paid.

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CASE 6:2(continued)
9 Once approved, the payment advices for payments to be made are returned to Ms Button
who:

9.1 scans and emails copy 1 of the payment advice to the supplier;

9.2 forwards copy 2 of the payment advice to Mr Faint, the cash book clerk, for recording
in the cashbook; and

9.3 attaches copy 3 to the relevant invoices and delivery notes and then files the pack of
documents alphabetically by supplier name.

10. Ms Button uses the payment advices to update the creditors ledger for all payments made to
suppliers. She then reconciles the creditors ledger to the general ledger control account.

11. Upon receipt of the supplier statenment, Ms Button files the statement with the relevant
payment advice.

12. Mr Faint is responsible for preparing the monthly bank reconciliation.

13. The controls over the issuing and retention of unused stationery are satisfactory.

YOU ARE REQUIRED TO:

(a) state the factors you should have considered before concluding on your evaluation of the
control environment. (5)

(b) describe two other methods an auditor can use to document his/her understanding of the
accounting and internal control system. (4)

(c) list the other matters you should consider during the planning stage of the audit. (3)

(d) identify and explain the weaknesses in the abovementioned purchases and payments
accounting and internal control system and make suitable recommendations for each
weakness identified. Do not concern yourself with controls over the preparation of budgets.
(40)

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 CHAPTER6

CASE 6:3 (35 Marks : 42 Minutes)

You are the partner-in-charge of the audit of Cool Clothing Limited. The company employs 200
hourly paid employees who work a 40 hour week from Thursday to Wednesday. Overtime is
worked regularly in order to meet the demand of customers. The workforce is divided into six (6)
production departments each with its own manager. The department managers report to the
production director, Charlie Brown.

Other staff who are involved in the payroll and personnel system are:
• Lumka Mdingi, the production administration clerk for all production departments;
• Norm Petersen, the head of the human resources department;
• Anna Arnold and Greta Garbow, two wage clerks in the accounting department; and
• Barbara Christie, the company's financial accountant.

The following systems notes on the company's payroll and personnel system in relation to the
hourly paid workers have been produced by one of your assistants:

1. The department managers are responsible for hiring and dismissing all staff working under
them.

2. The personnel department is advised of all engagements/dismissals on a pre-printed form

signed by the department manager; the employee's grade is indicated on the form, and
each grade has a standard hourly wage rate.

3 The personnel department creates or closes an employee's file from details reflected on the
engagement/dismissal advice.

4 The personnel department is responsible for issuing clock cards to all authorised
employees at the start of each wage week.

5 There are four clocking machines in the factory which are locked 10 minutes after the start
and finish of a working day; any employee who needs to punch his/her card once the clock
has been locked, must report to his/her department manager who manually enters the time
on the card.

6. At the end of work on a Wednesday, Lumka Mdingi records the following details on each
clock card:
6.1 the normal and overtime hours worked; and
6.2 the production bonus payable, based on the employee's output during the week.
[Note: The number of garments completed (units of output) of each employee is
recorded on a production output report.]

7 Lumka Mdingi divides the clock cards into workable batches and completes a batch control
sheet by entering batch identification (section and week) and control totals.
7.1 Before the batch of clock cards is transferred to payroll preparation, the departmental
managers
. check calculations, and
• check and sign the batch control sheet.
7.2 Details of the batch are entered in a batch register, and securely transferred to the
wages for preparation of the payroll.

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CASE6 :3 (continued)
8 Greta Garbow computes the employees' gross wages and all deductions (using the
information recorded on the clock cards) and produces:
8.1 wage packets with all earnings/deductions details indicated on the outside;
8.2 the weekly payroll, and
8.3 an engagements/dismissals report; this report is checked by Norm Petersen.

9. A security company is contracted to be responsible for preparing the paypackets to be handed

out to the hourly paid employees on Friday mornings.

10. Using the electronic banking system, the financial director and managing director of the
company approve the release of the net wage payment to the security company after
scrutinising the payroll. Access to this functionality on the banking system is restricted using
strong controls enforced by the company's banker.

11. Wages are paid out from one central, secure location by the security company. Department
managers are present to identify employees.

12. Employees are required to present identification prior to receiving their paypackets,
acknowledge receipt of their wage packet by signing the payroll and count their cash and
immediately report any discrepancies.

13. At the end of the payout, the payroll and any unclaimed wage packets are returned to Greta
Garbow, when an employee subsequently claims his wages from Greta Garbow, s/he is
required to sign the payroll.

14. Wages remaining unclaimed for two weeks are banked and the deposit slip is adequately filed.

YOU ARE REQUIRED TO:

(a) briefly explain the internal control weaknesses in the payroll system of Cool Clothing
Limited; and
(b) describe recommendations to address the internal control weaknesses identified in (a)
above. (32)
Communication skills (clarity of expression; layout and structure) (3)

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 CHAPTER6

CASE 6: 4 (45 Marks : 67½ Minutes)

This question comprises of THREE parts that are unrelated.

PART A (WW (12 marks)

The Van Gogh Society operates an art gallery for the benefit of the community. During hours
when the gallery is open to the public, two clerks are positioned at the entrance to collect a R20
admission fee from each non-member (of the Society). Patron members of the Van Gogh Society
are permitted to enter free of charge upon presentation of their membership cards.

At the end of each day, one of the clerks delivers the day's takings to the curator. The curator
counts the cash in the presence of the clerk and places it in a safe. Each Friday afternoon the
curator and one of the clerks deliver all cash held in the safe to the bank, and receive a bank
stamped deposit slip which provides the basis for the weekly entry in the cash receipts journal.

The board of trustees of the Van Gogh Society has identified a need to improve their system of
internal control over cash admissions. The board has however agreed that, due to cash flow
constraints, no additional capital expenditure should be required by the improved system.

As a member of SAICA, you have been asked by the board of trustees to review the present
system of internal control over admission receipts and provide suggestions for improvement.

YOU ARE REQUIRED TO: identify and state weaknesses in the present system of internal control
over admission receipts and recommend improvements for the weaknesses identified.
Note: Do not concern yourself with the controls over the issue of membership cards.

PART B (18 marks)

The audit committee of Indusco Ltd recently received a report from the internal auditors regarding
their review of selected aspects of the company's accounting information system. Some of the
key findings are listed below:

1. A number of programme changes were requested by users and duly approved by the
responsible managers, but these changes were never made to the software programmes. It
transpired that the reasons for this were twofold: () a lack of expertise on the part of the staff
in the IT department; and (ii) some requests were simply forgotten about - as they could not
be dealt with at the time the requests were received by the IT department. (6)

2. Errors were found in the sales system due to incorrect capturing of data by the sales staff in
the company's call centre. Upon further investigation it became apparent that the staff batled
to capture orders from customers during times of high call volumes, especially when they also
had to capture changes to customer's personal details (e.g. address, telephone numbers). (6)

3. A number of fictitious credit notes, amounting to R451,000, were found to have been recorded
to the account of XYZ Retailers. Whilst the credit note transaction file indicates that the credit
notes were captured by Joe Bloggs, a returns clerk employed by Indusco Ltd, he emphatically
denies having captured these. Further supporting Joe's case is the fact that at the time the
credit notes were recorded, he was in hospital undergoing major surgery. (6)

YOU ARE REQUIRED TO: outline the controls that should have been implemented to prevent
and/or detect and correct the matters giving rise to the internal audit findings. (18)

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CASE 6: 4(continued)
PART C (15 marks)

Bermuda College offers tuition to approximately 1,000 students in the Southern Cape. The Dean
of Students has been instructed to design a new system to manage the election of the college's
Students Representative Council (SRC), following allegations of irregularities that arose following
the previous round of elections. Given your expertise in the field of internal control systems, the
Dean has requested your assistance with this matter.

The following pertinent facts about the election were provided to you:

1.
Only registered students of Bermuda College may participate in the election.

2 A voter turnout of 40% is expected.

3 Each student voter may only vote for one candidate - those candidates who attain the
highest number of votes are then appointed to the SRC.

4 Voting will take place from 08:00 to 18:00 - and no more than 50 students are expected to
vote per hour.

5 The voting process will be undertaken manually as the small number of voters and the
infrequency of voting do not warrant the development and operation of computerised
systems.

6 The following university staff will be assigned to administer the voting process:
the chief electoral officer (who is the university's assistant registrar); and
two staff members (assigned by the Registrar from university administration).

7 Two security guards will also be on duty at all times to ensure that no one interferes with
the voting process.

YOU ARE REQUIRED TO: describe the controls that should be in place to ensure integrity of the
voting process for the SRC election at Bermuda College. (14)
Communication skills (clarity of expression) (1)

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 CHAPTER6

CASE 6:5 (30 Marks : 45 Minutes)

Napoli Furniture (Pty) Ltd is a family-owned company specialising in the manufacture of top of the
range' dining room furniture (e.g. tables, chairs and sideboards). The furniture manufactured
includes both standard items from the company's catalogue and custom-made items, based on
customers' specific requirements.

Gino Napoli incorporated the company in the 1970's upon arriving in South Africa from Italy
(where his father owned a furniture manufacturing company, Milan Mobili S.R.L.). Napoli
Furniture (Pty) Ltd operates from its factory in Knysna. Over time the company has grown into a
medium-sized concern employing 300 employees in three different production departments
(shaping, assembly and finishing).

You have recently been appointed as the financial manager of Napoli Furniture (Pty) Ltd. As one
of your first assignments you have been asked to evaluate the company's wages system - which
has been a concern to the company's board of directors for some time. You have documented
the wages system of Napoli Furniture (Pty) Ltd as follows:

Each of the three production departments (shaping, assembly and finishing) is managed by a
foreman, who reports to Mr Florence, the production manager. Each department also has an
admin assistant.

All requests for the appointment or dismissal of staff, originate from the foreman of the respective
department. All requests are documented and signed by the foreman. For appointments, this is
supported by the minutes of the relevant interview committee. The requests are sent to Mr
Florence for approval. All approved requests and supporting documents are sent to the personnel
department where the personnel clerk completes a payroll amendment form, which is cross-
referenced to the requests received. All supporting documents are filed in the employee file,
while the payroll amendment forms are submitted to the computer clerks in the Data Processing
Centre, who are responsible for capturing the standing data which is updated to the payroll
masterfile.

A clocking machine is located at the entrance to each production department. The clocking in/out
of staff is supervised by the departmental foreman on a daily basis. The pre-numbered clock
cards are prepared by the personnel clerk based on departmental employee lists generated by the
system from the payroll masterfile. Once prepared, these cards are placed on racks at the
entrance to each department. At the end of each week, the departmental admin assistant collects
the clock cards and:
agrees the number of cards to the list of employees in the department; and
calculates the ordinary and overtime hours worked.

After the admin assistant has completed the above tasks, the clock cards are handed to the
foreman who scans the clock cards for possible errors, and then forwards these to the Data
Processing Centre where the computer clerks capture the details per the clock cards.

The details captured are updated to a weekly wages transaction fle, which is then used to update
the payroll master file. The system also produces the following output:
A number of copies of the payroll; and
Payslips for each employee, detailing the gross wages, deductions and net pay.

One of the copies of the payroll and the payslips are sent to the accounting department. Here the
cashbook clerk loads the details of the net amount of the wages to be paid to employees and the
third paty deductions payable onto the company's internet banking system. He then takes all
supporting documents to the accountant and Mr Sicily (financial director) who both review and
sign the payroll, and thereafter, access the internet banking system to release the payments.

The payslips are then distributed via the foremen to the employees in their departments.
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INTERNAL CONTROLS

CASE 6:5 (continued)

You have also established that:
Sound general IT controls are in place, except where the contrary is apparent from the
information provided;
Strong logical access controls are in place for the capturing of data;
• The software used by the company contains strong edit checks and screen layout/dialogue
controls to ensure the accuracy of input, and strong automated controls for the processing
of data; and
• Sound masterfile controls are in place to ensure the integrity of the employee data
(including their banking details).

YOU ARE REQUIRED TO: based solely on the information provided, identify and explain the
weaknesses in the wages system currently used by Napoli Furniture (Pty) Ltd. (28)
Communication skills (clarity of expression) (2)

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 CHAPTER 6

CASE 6:6 (20 Marks :30 Minutes)

Backqround:
Starz Productions (Pty) Ltd was incorporated by a group of film school graduates in January 2022
with the purpose of producing reality-television series. The project currently being worked on is
the 36-episode 'Durban2Dubai' series that will feature eight teams of two contestants each who
must compete against one another to complete a journey from Durban, South Africa, to Dubai,
United Arab Emerites, as quickly and cheaply as possible, while attempting various challenges.
The two contestants in the winning team will each receive a top-of-the range 4X4 overland vehicle
as a prize. The appeal of the concept is that not only will the series involve a reality television
experience, but the viewer will be taken on a tour through Africa.

You have been appointed as the financial manager of Starz Productions (Pty) Ltd, and you are
currently evaluating the design of the system for production expenses given that the amount of
these expenses incurred to date has been well in excess of the expectations of the company's
board of directors.

SystemsdescriptionforProductionexpenses- goodsandservices'
Note: This class of transactions comprises of disbursements and purchases by contestants and
film crew at film locations (e.g. payments for air tickets, fuel, taxi fares, meals and
accommodation).

Budget

The company's head office accountant, based in Johannesburg, prepares a location budget for
each of the film locations and this is authorised by the operations director. The operations director
accepts that, due to the nature of the operations and locations, supporting documentation for all
items of production expenses may not be available. The location accountant is therefore required
to play a key role in terms of authorising on-location expenses and monitoring expenditures.

In the event of budget overruns, the location accountant prepares a summary of expenditures
incurred to date and a summary of anticipated future expenditure, together with reasons for the
overruns. All such summaries are forwarded to the operations director who signs them on receipt.

Funds Transfers

The total amount per the authorised location budget is transferred into a bank account, opened
with the company's bankers, Afro Bank, specifically for purposes of paying for production
expenses at film locations. The necessary approvals for the use of the bank account outside of
South Africa were obtained.

All funds transfers from the company's main bank account into this separate bank account are
effected using the company's Electronic Funds Transfer (EFT) facility. Sound controls are in
place in respect of the EFT facility and related payment processes.

Disbursements on location

Each location accountant is issued with a bank card linked to the company's 'production
expenses' bank account on the first day of his/her appointment. This bank card is used to
withdraw the required amount of cash from the local ATMS or banks (either in the local currency or
US dollars). This money is kept in a locked cash box and only the location accountant has a key
to the cash box.

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CASE 6 :6 (continued)

Whenever purchases have to be made, the contestant or film crew member completes a
sequentially pre-numbered cash request form that indicates the estimated amount required and
the type of expense. The location accountant then advances this amount to the requestor, who
signs the form as evidence of receipt. If purchases are anticipated to exceed the equivalent of
R5,000, the location accountant requests the head office accountant to complete and sign an
authorisation form.

Subsequent to the utilisation of the funds, the requestor has to provide the best possible
documentation available to support the purchase to the location accountant, together with any
change. The change is placed in the cash box, and the supporting documentation is filed,
together with the cash request form (in order of the date of purchase). Supporting documentation
presents a challenge, as some purchases must necessarily be made from street vendors and taxi
operators who do not issue receipts. The location accountant must sign the cash request form for
such purchases after assessing the reasonableness of the amount spent.

Recordingofdisbursements
Once filming at a location is completed, all supporting documentation is boxed and the package is
couriered to the cash book clerk at Starz Productions (Pty) Ltd's head office in Johannesburg.
Upon receipt of this box, the cash book clerk records the details from the 'cash request forms' into
the accounting records (the amounts of which, amongst others, are debited to the 'production
expenses - goods and services' account in the general ledger). The bank reconciliation for the
separate bank account is prepared by the head office accountant, and reviewed by the financial
manager.

Location accountants

Due to the language constraints, the company's board resolved that four different location
accountants be appointed on short-term contracts (i.e. each taking responsibility for one of the
English, French, Arabic and Portuguese-speaking areas where filming will take place). Each of
the contracts runs from a few days before the teams and film crew arrive in the applicable area
until a few days after filming is completed.

Advertisements for the location accountant positions are placed in suitable newspapers at least
one month prior to the services of the location accountant being required. CV's of the candidates
are ranked in terms of qualifications and skills required and telephonic interviews are conducted
with the top four candidates by the operations director. The candidate considered best is then
appointed as location accountant.

Upon the termination of each location accountant's contract, appropriate controls are in place to
cancel the bank card issued to him / her.

YOU ARE REQUIRED TO: identify and explain any deficiencies in the internal control system
designed and implemented by Starz Productions (Pty) Ltd in respect of the 'production expenses
- goods and services' class of transactions. (18)

Communication skills (clarity of expression; logical argument) (2)

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 CHAPTER 6

CASE 6:7 (40 Marks: 60 Minutes)

You are the senior responsible for the audit of Secure Park (Pty) Ltd ("Secure Park') for the
financial year ended 30 April 2022. Secure Park is a profitable owner-managed business which
provides long-term parking management services to suburban shopping centres, and short-term
parking management services for special events, such as conferences and trade shows, in and
around Cape Town. The company has its head office in the Cape Town CBD. Simon Matebula,
who incorporated Secure Park in 2009, is presently the company's managing director. His wife,
Rebecca Matebula, the financial director, handles the accounting and financial matters of the
company.
You have documented your understanding of the internal control system over revenue, extracts
of which are reproduced below:

A. Revenueand costofsales
In terms of the contracts with the property owners, all parking fees collected are for the account
of Secure Park. In exchange, Secure Park has to pay a fixed monthly amount over to the
property owners. The amount payable to the property owners varies depending on the location
and period of the contract, as well as the number of parking bays available. These payments
are recognised by the company as cost of sales.

B. Long-termparkingmanagementservices
The company manages casual parking at 15 shopping centres in the suburbs of Cape Town.
Access to each parking area is controlled using a boom system. Parking fees are charged at
R5 for every hour parked. Secure Park provides security personnel at all parking areas.

• Machines at the entrances to the parking area issue a pre-numbered ticket to the casual
parker. The time of entry is printed on the ticket and the boom is activated to permit access
to the parking area.
• Auto Teller Ticket Machines (ATTMS) are installed in the shopping centres and as casual
parkers leave, they insert their tickets into an ATTM. The ATTM calculates the duration of
parking and displays the fee payable. Once the fee is paid, the parking fee is printed on the
parking ticket and the ticket is encoded. A receipt is printed on request.
The casual parker inserts the encoded ticket into the machine at the exit to activate the
boom and permit the vehicle to exit from the parking area.
ATTMS periodically malfunction. In such instances the Secure Park security staff override
the system manually. They issue tickets at the entrance, writing the time of entry directly
onto the ticket. They also collect cash at the exit booms, writing the time of exit and amount
charged on each ticket.
On a daily basis, a reputable security company has been contracted to collect the parking
tickets and cash from the ATTMS and from the security staff (when the system had to be
manually operated) and perform the banking function.

C Short-term parking management services

For parking in a designated area for special events, a fixed parking fee is charged.
As part of an empowerment arrangement with the Cape Tpwn Metro (the Metro), Secure Park
recruits historically disadvantaged individuals as contract workers to work shifts as parking
attendants at these special events.
• At the start of a shift, the site supervisor at the temporary Secure Park kiosk hands each
parking attendant a set of tickets and the official yellow Secure Park vest.

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CASE6 :7(continued)
Parking attendants sell parking tickets to customers. While it is not possible to use the boom
system (as is used for casual parking), the parking attendants are placed at the entrance to
the demarcated parking area from where they sell tickets. Customers are informed via
notice boards to purchase their tickets from parking attendants with the official yellow Secure
Park vests.
At the end of a shift, each parking attendant returns the tickets, the Secure Park vest and the
cash collected during the shift to the site supervisor.
20% of the cash collected is paid to the parking attendant.
The remaining 80% is retained by Secure Park, and the site supervisor returns this money,
as well as the supporting documentation, to the Head Office cashier.
On a daily basis, the security company collects the cash from the Head Office cashier for
banking.

D. Recordingofcashandbank
Once the banking is completed, a staff member from the security company delivers the bank
deposit slips and other supporting documentation collected from the parking sites, to the Head
Office.

Rebecca's accounting assistant, Lesego Nhlapo, captures the daily takings from both long- and
short-term parking management services from the bank deposit slips (provided by the security
company once a deposit is made) into the cash book module of a purchased accounting
software package.

E. General ledger and year-end adjustments

The cash book module updates the general ledger accounts on a daily basis and the reporting
module is used to produce basic monthly financial reports.

F. Improvementstoaccountingsoftwarepackage
Mrs Rebecca Matebula is satisfied with the purchased accounting software package, other than
that she would like to improve certain aspects of the user-interface as well as the report-writing
capabilities of the package. She has identified a suitable local IT company with expert
knowledge of the package who have indicated that they will be able to make the changes
proposed. Other than these program changes, no further changes to the software used is
envisaged. The changes to the software will only be made once the audit has been completed.

Simon Matebula is very concerned about the completeness of revenue and is prepared to
appoint additional staff should there be sound reasons for doing so.

YOU ARE REQUIRED TO:

(a) describe the additional internal controls that should be implemented by Secure Park (Pty)
Ltd to provide reasonable assurance that the risk of the incomplete collection and banking
of monies from long-term and short-term parking management is minimised. Exclude from
your answer any automated controls that may be necessary. (23)
Communication skills (clarity of expression) (1)

(b) outline the controls (in addition to those described in (a) above) that are essential to
creating an environment wherein the likelihood and impact of Auto Teller Ticket Machines
(ATTMS) malfunctions is minimised. (6)
(c) describe the control procedures that are needed to manage the risks associated with the
changes that will be made to the purchased accounting software package. (10)
(PAAB adapted)
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 CHAPTER 6

CASE 6:8 (35 Marks : 42 Minutes)

You are a senior on the audit of Wild Coast DIY (Pty) Ltd for its financial year ended 30 June
2022. The company sells power tools and other 'do-it-yourself hardware to walk-in customers
from a large retail store in Mthatha. The general manager of the store, Mr David Dalumzi, has
expressed concern about several incidents that occurred during the past financial year which
threatened the integrity of the data stored on the company's computerised information system.

The following information was gathered relating to Mr Dalumzi's concerns:

You established that Wild Coast DIY (Pty) Ltd's information technology (IT) department is headed
by Kevin Starr, who reluctantly accepted the position of IT manager after pressure from his father
who is one of the owners of the company. Kevin Starr reports to Mr Dalumzi. Reporting to Kevin
Starr in turn are two recently appointed IT technicians, each with their own username and
password for gaining access to the system. It came to your attention that one of these technicians,
Buhle Buzani, had previously worked for Wild Coast DIY (Pty) Ltd (until 2020), and that despite
his resignation his username 'buhle.buzani' remained active – therefore, on his reappointment, no
additional work was required to grant him access to the company's computer systems.

From observation and enquiry, you noted that there are a number of computer terminals used by
sales clerks, linked to a mainframe computer housed at the company's premises. The mainframe
stores masterfile information and updates the debtors masterfile and sales journal in real-time as
a clerk enters sales data on the terminals. All sales clerks Iog into the company's financial
application by using a username called 'clerk000', which provides them with write-enabled access
to all modules in the financial application. The financial application includes the sales-,
purchases-, inventory-, payroll- and general ledger modules. The password associated with this
username is changed on a monthly basis by Mr David Dalumzi and is sent by e-mail from Mr
Dalumzi to all other staff. A sales clerk forwarded you the most recent 'password e-mail' and you
saw that the currernt month's password is 'imwatchingyou'.

A fellow audit team member has noted that some computer logs relating to the correction of
financial errors on the sales module had the above-mentioned IT technicians' usernames printed
next to the corrections. You have also observed, on occasion, IT technicians assisting sales clerks
with the capturing of sales transactions during peak business hours.

While walking to the general manager's office, you noticed that one of the other offices contained
a sign on the door reading "Office of the Starr – Keep out!" The door was wide open and inside sat
a man who identified himself as a friend of Kevin Starr. A large computer stood on the floor and
you realised that the computer is in fact the mainframe server used for central processing of the
business's finances and other operations. Later on Kevin Starr told you that the current location
of the mainframe is only a temporary arrangement, as a 'brand new data centre' is in the process
of being built.

YOU ARE REQUIRED TO:

(a) using only the information provided, describe the weaknesses in the control environment and
general IT controls of Wild Coast DIY (Pty) Ltd and explain the consequence(s)/risk(s)
associated with each weakness. (28)
Communication skills (layout and structure; clarity of expression) (2)

(b) discuss why the abovementioned information is relevant to your audit of the financial
statements of Wild Coast DIY (Pty) Ltd for its financial year ended 30 June 2022. (5)

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CASE 6 :9 (WWw. (25 Marks : 30 Minutes)

You have been assigned the role of audit senior on the audit of Pharmaco Ltd (Pharmaco') for its
financial year ended 30 June 2022. Pharmaco is a fast-growing company that operates several
large retail pharmacies in the Cape Town metropolitan area.

Pharmaco's accounting function is carried out from the company's separate head office building,
where a server containing all branches' financial data is stored and from where central data
processing takes place. Prior to April 2022, Pharmaco's information technology (IT) support
function was outsourced to Bit-Tech Ltd, a reputable IT service provider listed on the JSE. Bit-
Tech Ltd was responsible for (amongst others) maintaining user profiles and access privileges,
maintaining virus and firewall protection for networks/servers, performing IT risk assessments and
ensuring a sound IT security policy is applied in operations.

During May 2022 Pharmaco experienced an incident which resulted in the company's financial
system being inoperative for a day and some of its financial data being lost.

Upon your questioning of Mr East, the financial manager of Pharmaco, regarding the
circumstances surrounding this incident in late May 2022, his response was as follows:

This incident is most likely a consequence of the Bit-Tech Ltd contract having lapsed. The
board of directors decided not to renew Bit-Tech Ltd's contract in order to reduce the strain on
the company's cash flows. Accordingly, the board allocated the additional responsibilities of
acting IT manager to me due to my previous interactions with Bit-Tech Ltd. The board further
informed me that they 'don't want to be bothered with matters relating to IT' as they want to
rather focus on business strategy. However, I remain optimistic that we will be able to cope!

We have signed a contract with the local University for them to make some of their final year IT
students available free of charge' to assist Pharmaco with its IT function, mainly over the
weekends. This solves our problem of needing to spend money on IT expertise and these
students gain practical experience by e.g. performing general system maintenance, performing
the company's data backups once a week and dealing with user queries that I can't address.
By making use of the students we will also save on human resources paperwork as they will be
able to come and go as they please.

Fortunately we set up the usernames of our senior accountant and some of the accounting
clerks in such a way as to provide them with temporary super-user access to the financial
information system. This allows us to cope more easily in these difficult times and as spend
my time on getting to grips with the IT function.

YOU ARE REQUIRED TO:

With reference to Mr East's response quoted above:

(i) state the weaknesses evident in the control environment and general IT controls of
Pharmaco Ltd;
(ii) explain in detail each weakness identified in (i) above; and
(iü) describe the controls that should be put in place by Pharmaco Ltd in order to address each
of the weaknesses identified and explained above. (24)
Communication skills (layout and structure) (1)

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 CHAPTER 6

CASE 6 : 10 (50 Marks :75 Minutes)

You are a manager in the IT services division of the audit firm, Tiger & Co. One of the firm's
partners asked you to conduct a review of the control environment and general IT controls
implemented by one of his clients, Links CC, a large close corporation for whom he acts as
accounting officer. Based on your meeting with Mr Player, the client's managing member, you
established the following:

1. The accountant resigned four months ago. Rather than hire another 'overpriced accountant
with an obsession for paperwork', Mr Player decided to reallocate all the accountant's duties
to the bookkeeper, Siso Hlope, and to computerise the corporation's accounting system.

2. The hardware and systems software needed for operating the new accounting system were
supplied and installed by Techdata Ltd, a network installation company whom you hold in high
regard. The system installed consists of a minicomputer linked by means of a local area
network to three terminals and a printer. The minicomputer and one of the terminals are
located in Mr Player's office. The printer and second terminal are located in Siso Hlope's
office and the third terminal is situated in the general office (0ccupied by, amongst others, two
administrative assistants).

3 In order to select the most appropriate accounting software, Mr Player listened to the
presentations made by the sales representatives from eight software development
companies. Criteria considered by Mr Player were the cost of acquiring and operating the
package and the adequacy of program documentation. Mr Player entered into a contract with
Compusoft CC, as he found the sales representative particularly likeable.

4. Compusoft CC is a small software development company and was established in 2019.

5. In terms of the agreement concluded, Compusoft CC would:

• supply and install packaged accounting software;
• undertake any program maintenance that may be necessary in future (to be effected
via a dial-up connection to Links CC's network and initiated at the complete discretion
of Compusoft CC), and
retain all program documentation (except for user manuals which will be provided to
Links CC).

6. As neither Siso nor Mr Player knew much about computers, Mr Player sent Siso on a training
course that would provide her with an overall understanding of the network. Siso Hlope also
completed a course to train her in using the accounting software, e.g. to enter transaction and
standing data, to make printouts, and to back up files. Upon completion of these courses, Mr
Player instructed Siso to go ahead and start using the new accounting package'.

7. Due to her heavy workload, Siso asked her boyfriend, Paul Rakoma, a computer operator at
D-Data for help. He assisted her with the capturing of the manual accounting standing data
onto the computer system on the last Saturday of August. Siso was impressed at the speed
with which Paul executed this request. She commenced with the entering of live' data onto
the computer with effect from the following Monday.

8. Siso recently complained that a number of invalid entries were found on the system that had
not been initiated by her - despite these being reflected on the computer logs as having been
captured by her. She was at a loss to explain how these entries got there or who captured
them. You also have no reason to question the validity of Siso's assertions in relation to this
matter.

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CASE 6: 10 (continued)
Based on you discussion with Mr Player, it became clear to you that he would prefer to manage
the operating activities of the corporation and spend as little time on accounting and financial
matters as possible. You also ascertained that he is not prepared to hire any additional staf.
However, you are confident that you will be able to persuade him to make use of the services of
the computer services division of your firm, should there be sound reasons for doing so.

YOU ARE REQUIRED TO:

(a) prepare a checklist of further criteria Mr Player should have used when selecting the
accounting software to acquire for Links CC. (7)

(b) describe the procedures that should have been performed to control the implementation of
the new accounting system. (8)

(c) using a tabular format:

i. identify and briefly explain the weaknesses in the control environment and general IT
controls of Links CC evident from the information obtained; and (14)
ii. make recommendations to address each of the weaknesses identified in part (c)
above.
(20)
Note: Your answer for part (c) should exclude the following:
• Controls over the acquisition of the accounting software (described in point 3 of the
scenario ); and
• Controls over the implementation of the accounting system (described in point 7 of the
scenario).
Communication skills (layout and structure) (1)

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 CHAPTER6

CASE 6:11 (33 Marks : 49% Minutes)

You were recently appointed as the financial manager ofA Sembel (Pty) Ltd, a manufacturing
company operating in Uitenhage. As one of your first assignments, you have decided to review
the personnel and payroll cycle, as salaries and wages constitute a large expense item for the
company.
From discussions with the personnel manager, you noted that A Sembel (Pty) Ltd has a labour
force of approximately 500 workers, divided into 10 production lines, each under the control of a
supervisor. The company has a strong personnel department, under the control of the personnel
manager, which attends to all staff appointments and terminations. Time recording is done by a
system of mechanical time clocks. The hours worked are calculated and approved by the section
supervisors. The payroll clerk is responsible for collecting the clock cards from each supervisor
on a weekly basis, and handing them over to a computer bureau, which then prepares the payroll.

You decided to visit the computer bureau, and arranged a meeting with the bureau manager.
Below is a summary what transpired on the morning of the meeting:

Being your first visit to the bureau, you telephoned the company to ask for directions. "Our
offices are located in Valley Road, bordering on the Baakens River - you know the one that
flooded last year," the telephonist explained.
You found the bureau quite easily. You parked your car and entered the bureau's luxurious
set of offices. You approached the receptionist and asked for the bureau manager. She
promptly informed you that he was 'out for a while' but asked you to wait in the data
processing centre in the meantime. She directed you down some stairs, along a passage
crowded by employees on their tea break. As you squeezed passed them, you inadvertently
knocked two disks down from the shelves along the wall. Feeling embarrassed, you quickly
replaced them, but not before noticing that the disks were labelled 'Backup - Client 1002
Accounts Receivable Masterfile' and 'Client 2431 Salaries Masterfile'.
Entering the data processing centre, the sole occupant, a computer programmer by the name
of Bill Butler, introduced himself to you. In the conversation that followed Bill said: "l received
a telephone call from one of the DP clerks before tea indicating that the payroll system
contained an error. I am quickly fixing the bug. Help yourself to a cup of coffee". You poured
the coffee from a coffee machine located on top of a large box marked 'processor 3'. Shortly
thereafter, Bill indicated that he had 'fixed the bug' and left. The data capture clerks returned
from their tea break a few minutes later.
Just after your second cup of coffee, the bureau manager arrived and introduced himself to
you. He apologised for being late, but explained that the presentation he had given to invited
managers of newly established entities (of varying sizes) on the benefits of outsourcing their
computer functions, went on longer than he had expected.
"What do you think of our computer centre?" the manager asked proudly, perspiring slightly in
the heat. Before answering, he continued: "You know that it is not easy to run a processing
centre as well as we do".

YOU ARE REQUIRED TO:

(a) state the benefits that could be derived by a newly established entity outsourcing its
computer functions, rather than handling them in-house. (5)

(b) describe the control procedures that should be performed after the supervisors have
calculated and approved the hours worked up to when the payroll clerk hands over the
clock cards to the bureau. (6)

(C) discuss fully the weaknesses in the control environment and general IT controls at the
bureau, using only the information gathered during your recent visit. (22)

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CASE 6: 12 (30 Marks : 45 Minutes)

Pestgone (Pty) Ltd, a family-controlled company, has rendered pest control services to
businesses and households in East London for the past 40 years. However, the recently
appointed managing director has decided to pursue an active growth strategy, and as a result the
company in the last twelve months has opened branches throughout the Eastern Cape.

Pestgone (Pty) Ltd's financial director, who has played a major role in running the current manual
accounting processes, will be retiring in two months time, and, in any event, transaction volumes
have grown too large for her and her small staff complement to handle. Accordingly, the board of
Pestgone (Pty) Ltd has resolved to "implement purchased software which will keep track of the
company's revenue and receipts transactions and related balances". The computer system on
which the software will run will have the following features:

Two personal computers (PCs) will be located at Pestgone (Pty) Ltd's head office in East
London, and one PC at each of the company's branches.
All these PCs will be linked to a server at the company's head office which will make the
data and software available to the relevant employees.
• The server will be located in a secure room to which only the financial director will have
access.

There wll be batch updating of the revenue and receipts transactions that are recorded by the
company's branches to the new software package. At the end of each month the relevant
transaction totals and balances will be extracted from the new software package and journalised
to the manual accounting records.

YOU ARE REQUIRED TO:

(a) describe the procedures that should be followed for the implementation of Pestgone (Pty)
Ltd's new revenue and receipts system software. (10)

(b) outline, in broad terms, the other control considerations inherent in the new information
systems environment planned by the board of Pestgone (Pty) Ltd. (20)

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 CHAPTER6

CASE 6 :13 (45 Marks : 67½ Minutes)

Homeware Providers (Pty) Ltd was recently incorporated as a discount retailer of products for the
home (e..g bathroom accessories, lamps, chairs, picture frames). The company's first large
'supermarket-like' outlet will be opened in Gqeberha within a few months. You are the audit
partner in the audit firm of CWP & Associates, which was appointed as the first auditors of
Homeware Providers (Pty) Ltd.

The directors of Homeware Providers (Pty) Ltd convened a meeting with you to discuss their
proposed system of internal control over revenue and receipts, and to request your advice in this
regard. The following is an outline of the system which they envisage:

The outlet will have six checkout points and one goods returns point, each being equipped with a
point of sale terminal (a computerised cash register) linked to a central minicomputer, a printer,
and a laser scanner. The scanners will allow for the automatic reading of barcodes, which will be
reflected on all products sold by the company. At the checkout, the cashier / returns clerk will
pass the product over the scanner, which will read the bar code and convert it into a unique
(product) number. The computer will search the product masterfile for the price of the product
containing that number, and print the description and price on the customer's receipt. The cashier
I returns clerk will be able to capture the bar code number on the POS terminal when the scanner
cannot read the bar code (e.g. when it is illegible).

Staff will be appointed to the following positions to handle transactions in the revenue and receipts
cycle:
• Cashiers;
Returns clerk;
• Checkout supervisor;
Sales manager;
• Banking clerk; and
Financial manager.

YOU ARE REQUIRED TO:

(a) discuss whether it would be appropriate for you to advise the directors of Homeware
Providers (Pty) Ltd on controls over the new revenue and receipts system. (5)

(b) describe the controls that should be implemented at Homeware Providers (Pty) Ltd to
ensure that:
(i) all sales transactions, including adjustments, will be recorded into the company's
accounting records promptly, in the correct amount, and that no invalid sales
transactions will be recorded; and (32)
(i) all cash takings from customers will be banked intact. (8)

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CASE 6:14 (WWW (40 Marks : 60 Minutes)

You are the financial manager of Gadget (Pty) Ltd, a national distributor of components used in
the manufacturing industry. The components are sourced from a range of South African
manufacturers.

The accounting system is computerised and is run on a local area network (LAN) consisting of
microcomputers linked to a central minicomputer. The ordering. inventory receiving and
recording, inventory dispatch and sales functions are all integrated.

Below pertinent activities relating to the purchasing system for inventory are summarised:

1 The sales research department monitors the demand for the various components as well as
overseas trends. Based on these projections, this department provides the purchasing
department with handwritten notifications of the inventory requirements.

2 Based on each notification received, the purchasing department places orders with authorised
suppliers. Details of the orders are captured by the buyers on computer terminals in the
purchasing department. An on-line input system is used to capture orders.

3 When goods are received, the details of the order are accessed using the computer terminal
in the warehouse, and the actual quantities received are captured.

4. Once the details of the goods received have been captured, the goods are stored in the
warehouse.

6. The details of inventory received are recorded in an Inventory - GRN accrual' transaction file
and the general ledger and inventory masterfiles are updated.

7 When an invoice is received from the supplier, the creditors' clerk captures the invoice details
onto the system, whereupon the integrity of the invoice data is verified by the computer
system.

8. The invoice details captured are used to update the creditors' masterfile as well as the
appropriate accounts in the general ledger.

YOU ARE REQUIRED TO: describe the information processing controls that you would expect to
find for each of the following functions pertaining to Gadget (Pty) Ltd's purchasing system:

(a) Ordering of goods (18)

(b) Receiving of goods (10)
(c) Recording of purchases (11)
Communication skills (clarity of expression) (1)

Note: Do not concern yourself with the controls over:

• amending the standing data for the inventory masterfiles, and
• access to the computer system (both physical and logical).

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 CHAPTER6

CASE 6:15 (40 Marks : 60 Minutes)

Best Rite (Pty) Ltd ('Best Rite'), a stationery retailer, currently stocks in excess of 1,000 types of
inventory items. Consistent with the company's 'Proudly South African' philosophy, inventory is
sourced solely from local suppliers. The company operates two divisions:
• Retail division: Sales to a wide range of businesses and to the public are made from
stores, owned by Best Rite, located in the major cities in South Africa.
• Franchise division: Privately owned stationery stores, Iocated outside of major cities, may
enter into a franchise agreement to trade under the 'Best Rite' name and sell products
purchased exclusively from Best Rite.

Inventoy is supplied to company-owned stores and franchisees from the company's central
warehouse located in Gauteng.

You have recently been appointed as financial manager of Best Rite. As part of your orientation,
you have, among others:
established that the general IT controls at Best Rite are sound; and
• reviewed descriptions of the purchases and franchise fee revenue systems compiled by
your predecessor. These descriptions follow:

Purchases
1 It is company policy that all inventory purchases for Best Rite are made centrally by head
office and delivered by suppliers to the company's central warehouse.
2. The off-the-shelf software package used for the purchases system has been reviewed by
computer audit specialists and it was found to contain strong automated controls over
processing and the accuracy of input.
3 On a weekly basis, the buyer at head office uses the computerised perpetual inventory
system to identify inventory items with minimal quantities on hand and then initiates the
ordering process. After accessing the ordering application by capturing his username and
password, the buyer inputs the pertinent data to generate a purchase order (using one of the
suppliers on the supplier masterfile).
4 The purchase order is sent electronically to the supplier. Appropriate controls are in place to
ensure the accuracy and completeness of transmissions. Private key encryption is also
used for the authentication of transmissions.
5 Changes to the supplier masterfile are initiated solely by the head office buyer, enforced by
entering his username and password. Logs of all changes to the supplier masterfile are
printed automatically in the office of the secretary of the operations director for filing.
6 When goods are received at the warehouse, the receiving clerk logs onto the receiving
application with his username and password. He captures the order number (which is
reflected on the supplier's delivery note), which results in the original order being displayed
on the screen (without details of the quantities ordered). He then captures the quantities
received onto the system, having physically counted the goods received. The supplier's
delivery note is signed for the items received, and a copy is forwarded to the accounting
department for filing by supplier name in date order. Differences between quantities
captured and quantities ordered (per the system) are appropriately dealt with. Finally, the
receiving clerk places the goods received in the correct locations in the warehouse.

7 Using the quantities captured by the receiving clerk and the prices per the purchase order.,
the system automatically updates the following records for the goods received:
inventory perpetual records,
accounts payable master file, and
general ledger.

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CASE 6: 15 (continued)
8. When invoices are received from suppliers, the creditor's clerk captures the order number,
the invoice number and the invoice amount on the system. Sound controls are in place to
ensure that only the creditor's clerk can gain access to the invoice recording module of the
application.

9 In the event of a difference between the invoice amount and the value updated to the records
on receipt of the goods, the system generates a request for a debit/credit note, which is sent
to the supplier for adjustment. This difference is reflected as a reconciling item on the
creditor's reconciliation until it is resolved by the supplier.

10. On a monthly basis the creditor's clerk reconciles the supplier's account in the accounts
payable system to the balance on the supplier's statement. Once this has been done, the
accounts payable system is used to identify the invoices to be paid.

Franchise fee revenue

In terms of the franchise agreement which is entered into with each new franchisee, Best Rite is
entitled to a franchise fee of 2% of total sales (both cash and credit) made by the franchisee. In
exchange, in addition to the discounted supply of inventory and exposure from marketing
campaigns:
Best Rite supplies and installs a point-of-sale (POS) software computer system for the
franchisee as well as the communication technology to transmit franchisee sales data over
dedicated lines to the central server of Best Rite. Franchisee staff record sales by the
scanning in the bar codes of the products sold using a scanner linked to the POS system.

Best Rite provides accounting support to franchisees by maintaining their inventory and
trade receivables records on its central server. A separate set of accounting records is
maintained by Best Rite for each franchisee. The POS data transferred is used to update
the inventory and trade receivables records, and Best Rite's sales system updates the
inventory records with purchases made by franchisees. Franchisee staff capture details of
debtors receipts onto the system using terminals located in the stores, whereupon the trade
receivables records on Best Rite's central server are updated. At month-end, Best Rite staff
prepare and post statements to the franchisees' debtors.

In the unlikely event of disasters (such as power outages or flooding) which cause the POS
system to be inoperative, the franchise agreement specifies that the franchisee has to cease
trading.
At the end of each month, the Best Rite system automatically computes the monthly franchise fee
payable by each franchisee based on the franchisee's recorded sales for that month. Invoices
stipulating the franchise fee payable are then produced by the Best Rite system and the Best Rite
sales transaction file, general ledger and trade receivables masterfile are updated.

Backup of company data onto 'cloud' computers

The financial director of Best Rite recently saw an advert on the internet describing the backup
services offered by XYZDrive, and asked that you investigate this as an option to improve the
company's offsite backup facilities. An extract from the advert follows:

Get simple online backup and recovery from XYZDrive, the preferred provider of data
solutions. Use XYZDrive backup 'cloud' computers to protect your critical data by
automatically streaming it to XYZDrive's off-site data centres, after only a few minutes of
set up. Should disaster strike, keep your business up and running by restoring critical
files from anywhere in the world.

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 CHAPTER 6

CASE 6: 15 (continued)

YOU ARE REQUIRED TO:

(a) identify and explain the weaknesses in the purchases system of Best Rite (Pty) Ltd. When
explaining each weakness, clearly state the consequence(s) of the weakness to the
company.
(17)
Communication skills (clarity of expression) (1)

(b) describe the information processing controls that should be present (at both the franchisee
and at Best Rite (Pty) Ltd) to ensure the completeness and accuracy of franchise fee
evenue recorded in the general ledger of Best Rite (Pty) Ltd. lgnore all controls relating to
the maintenance of standing data.
Use the following headings to answer this question:
(Ö) Initial recording of sales at the franchisee;
() Transmission of sales data from the franchisee's POS system to the central server
of Best Rite (Pty) Ltd; and
(iii) Generation and recording of franchisee fee invoices. (16)
Communication skills (clarity of expression) (1)

(c) describe the risks that must be assessed by the management of Best Rite (Pty) Ltd before
taking the decision to use the backup services offered by XYZDrive. (5)

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INTERNAL CONTROLS

CASE 6:16 (50 Marks :75 Minutes)

This case consists of TWO parts that are unrelated.

PART A (30 marks)

You are a Trustee of the Save our Seahorses' (SOS) Society, a non-governmental organisation
that works for the protection of an endangered species of seahorse that lives along the Southern
Cape coast. Given that you are the only Trustee on the Board of Trustees with expertise of
internal control systems, the Board often asks you to assist it with the design or review of the
Society's systens of internal control.
The staff complement of the SOS Society comprises:
Gqeberha Head Office
• Society Manager
• Receptionist
• Bookkeeper
George Office
• Office Administrator

The SOS Society uses an off-the-shelf accounting software package, which contains cash book,
debtors, and creditors modules.

Recently, the society manager expressed his frustration with the company's accounting records
being 'wrong' due to errors in the cash book. You have established that on a weekly basis, the
society manager downloads the bank statement using the Society's internet banking facilities, and
emails this file to the bookkeeper. The bookkeeper imports the file into the cash book module of
the accounting software package.
• For those receipts / payments on the file already recorded in the cash book module, she
electronically matches these (i.e. as part of reconciling the cash book entries to the bank
statement).
• For those receipts / payments on the file not yet in recorded in the cash book, she captures
the code of the appropriate ledger account where these amounts should be posted. The
cash book and general ledger are then updated for these additional receipts / payments.

As your point of departure in investigating this concern, you have decided to undertake a review of
the adequacy of controls in this area.

As part of its fund-raising initiatives, the Board of Trustees resolved to run a competition for the
first time during 2022. The salient features of the competition follow:
• The major prize will be an all expenses paid cruise for two on the Queen Mary, which will
sail from Southampton to Sydney over a 20 day period commencing 12 February 2023.
• 50,000 tickets will be printed, and distributed to members from the Society's offices in
Ggeberha and George.
• The 230 members of the SOS Society, who reside in the Eastern and Southern Cape, will
be responsible for selling the tickets. The three members who sel the most tickets will get
sizeable financial rewards.
The selling price of a ticket will be R50.
• The closing date of the competition is 31 December 2022 (i.e. six months from the launch
date).

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 CHAPTER 6

CASE 6 : 16 (continued)

The Trustees have requested that you assist with designing the system for the sale of competition
tickets and that the following be taken into account:

The system is to be kept as simple as possible. For example, no use is to be made of

computerisation other than that relating to the use of the Society's accounting software
package
The receptionist (Gqeberha) and the office administrator (George) will issue ticket books to
members (who will sell tickets to the public).
The Trustees have resolved that no more than 100 tickets can be issued to a member at a
time. Only when the proceeds thereof are banked and recorded, can more tickets be
issued to the member.
When tickets are issued to members, they will be 'invoiced' for the face value of the tickets
using the off-the-shelf accounting package. The 'outstanding balance' on each member's
ticket sales account will be reduced when the bank deposits (see next point) are recorded.
• Members will be encouraged to deposit the proceeds from tickets sales into the Society's
bank account as soon as possible.

PART B (20 marks)

You are a trainee accountant at Alpha & Bett Registered Auditors, and have been assigned to the
audit of AB Wholesalers Ltd. The following are the key findings documented by the team based
on their understanding of the system of internal control in operation at this audit client:

1 The installation and responsibility of the full operation of the wide-area network used by AB
Wholesalers Ltd has been outsourced to CD Computer Services (Pty) Ltd. The only control
implemented by the management of AB Wholesalers Ltd to deal with this matter was to
undertake a thorough assessment of CD Computer Services (Pty) Ltd in effectively
managing networks prior to their appointment.

2 The information technology (IT) department is responsible for maintaining logical access
security over the company's application software, based on access requests received from
users. All such requests are subjected to written approval by the IT manager prior to being
implemented by the programmer (by his updating the access table). All users are required
to enter a username and a confidential password to gain access to the application software.

3 Changes to customer standing data are input by the sales department staff and are
subjected to programmed edit and validation checks. Unusual changes (e.g. to the credit
limits) are automatically logged. The sales manager can also make adjustments to the
credit limits on the sales application should the need arise. He maintains a file of
documentation supporting such adjustments.

You are currently in the process of drafting a report to the Audit Committee of AB Wholesalers Ltd
regarding these findings.

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CASE 6: 16 (continued)

YOU ARE REQUIRED TO:

PART A

(a) Based on the outline of the system relating to the importation of the bank statement file into
the accounting software package used by the SOS Society, describe the automated controls
that you would expect to be in place in the cash book module to ensure:
the valid, accurate and complete importation of the bank statement file:
the appropriate matching of the entries on the file to the entries in the cash book; and
the valid, accurate and complete capturing of entries on the bank statement file not in the
cash book.
Ignore controls relating to the maintenance of standing data. (12)

(b) Describe the controls that should be implemented over:

i. competition tickets prior to their issue to members; and
i. the issue of competition tickets to members, including the valid, accurate and complete
invoicing of the member for the face value of the tickets issued. Ignore controls relating
to the maintenance of standing data and the return of unsold tickets. (16)
Communication skills (layout and structure, clarity of expression) (2)

PART B

Draft a report to the Audit Committee of AB Wholesalers Ltd wherein you identify and explain the
weaknesses in the internal control system identified during the audit of this company's annual
financial statements. You may assume that all weakness you identify are 'significant'. (17)

Communication skills (layout and structure) (3)

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 CHAPTER

CASE 6: 17 (40 Marks: 60 Minutes)

Magzone (Pty) Ltd is the publisher of a range of magazines covering fields as diverse as finance,
sport and gardening.

Magzone (Pty) Ltd derives its revenue from three main sources:
Sales of its magazines at retail outlets;
• Subscriptions for its magazine titles; and
Advertising placed in its magazines.

In order to improve the sustainability of its revenue base, the board of Magzone (Pty) Ltd is eager
to increase the percentage of total revenue derived from magazine subscriptions. Therefore a
marketing company, Markco CC, has been appointed to source customers who want to subscribe
to one or more of the company's magazines titles. A commission is payable to Markco CC based
on agreed rates depending on the magazine title and the duration of the subscription sold.

For each new subscriber, all pertinent subscription data is captured by Markco CC staff and
transferred to the central server of Magzone (Pty) Ltd via an EDI link which is used to update the
subscribers masterfile.

Full settlement of the amount due for the subscription needs to be made directly into the bank
account of Magzone (Pty) Ltd before distribution of the magazine can commence. Magzone (Pty)
Ltd has a facility whereby its bank statements can be downloaded daily from its bank's website.
However, due to difficulties in interfacing the electronic bank statement with the cashbook, the
bank statement is printed out by the cashbook clerk, who then captures the pertinent details into
the cashbook application.

The data in the subscribers' masterfile is used by the distribution department of Magzone (Pty) Ltd
when distributing magazines to subscribers. The entire process of preparing magazine parcels for
distribution to subscribers is automated.

Following the initial communication by Markco CC staff with new subscribers, all subsequent
communications are handled by Magzone (Pty) Ltd's in-house customer service department. This
department is responsible for managing the client relationship and handles matters such as:
• changes to the subscriber's address; and
adjustments if the subscriber reports that s/he has not received a magazine for a particular
week.

Wherever possible, use is made of automated controls in order to minimise the number of staff
needed to be employed by Magzone (Pty) Ltd.

The following marketing tools are used by Magzone (Pty) Ltd to induce customers to subscribe for
its magazines:

• Subscribers are entitled to discounted prices in relation to the normal cover price of
magazines. These discounts increase as the length of the subscription period increases.
The pricing structure is explained to potential subscribers by the staff of Markco CC.

• Staff of Markco CC informs the customer that when a new subscription is taken out that
s/he is entitled to a free gift. Examples of gifts available (which vary depending on the
magazine title subscribed to) are books, sporting equipment, and clothing. The cost of
such gifts approximates 15% of the value of the subscription. Two assistants are
employed by Magzone (Pty) Ltd to handle the custody and issuing of free gifts. All gift
issues are captured onto the Magzone (Pty) Ltd computer system - and these details
reflected against the applicable subscriber on the subscriber masterfile. The two
assistants report to Magzone (Pty) Ltd's subscriptions manager. The distribution of such
gifts has been outsourced to a large courier company.

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CASE 6:17 (continued)

YOU ARE REQUIRED TO:

(a) describe the information processing controls that should be implemented by Magzone
(Py) Ltd that will provide reasonable assurance that the following control objectives are
achieved:

(i) All valid data captured by Markco CC is transterred and processed to the Magzone
(Pty) Ltd subscribers masterfile timeously and accurately; (10)
(iü)
All payments made by subscribers are captured into the cashbook application of
Magzone (Pty) Ltd timeously and accurately, and all payments captured are valid; (9)
(in) Adjustments made by the customer service department of Magzone (Pty) Ltd are
valid, accurate and complete. (8)
Communication skills (clarity of expression) (1)

(b) describe the controls that should be in place over the custody and issue of products used
as free gifts for new subscriptions. (12)

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 CHAPTER6

CASE 6: 18 (35 Marks : 522 Minutes)

MBBM Motors (Pty) Ltd is a motor vehicle dealership operating in Somerset West. The company
has three divisions:
• Sales of new luxury motor vehicles;
• Sales of pre-owned motor vehicles; and
• Servicing (maintenance and repair) of motor vehicles.

PART A (WWw. (30 marks)

The directors of MBBM Motors (Pty) Ltd are particularly concerned about the underperformance of
the service division: Rather than contributing approximately 25% to the dealership revenues as is
the national norm, the division only comprises 15% of company revenue (per the company's
management accounts) and is losS-making. In order to remedy this situation, you as a Chartered
Accountant (SA) were engaged to undertake an investigation as to the possible causes for the
underperformance of this division.

Your preliminary enquiries revealed the following:

1. All software used by MBBM Motors (Pty) Ltd contain sound logical access control features,
including:
Strong password controls (e.g. enforced changing of passwords, minimum required
number of characters, and the passwords are not displayed on screen);
Automatic account lock-out in the event of an access violation;
Automatic time-out facility if the software is not used for five (5) minutes; and
Generation of access logs and access violation logs.

2. The staff working in the service division comprises of:

The service division manager;
Three (3) customer service agents. When a customer brings in his/her vehicle for
servicing, the customer reports to the customer service agent. The agent also deals
with the customer when the vehicle is returned;
A store manager and two assistants, who are responsible for the custody of the spare
parts used for servicing motor vehicles;
Ten (10) service supervisors, who are each responsible for the service jobs assigned to
them by the service division manager; and
Twenty (20) mechanics - two mechanics are assigned to assist each service supervisor.

3. Customers are invoiced for the time that the service team (supervisor and mechanics) spent
on the job (based on agreed charge-out rates) as well as the selling price of the spare parts
used during the service.

4 When the customer brings in a vehicle for servicing, a job card is generated by the
computerised invoicing system based on pertinent data (e.g. customer account number and
nature of work to be undertaken) captured by the customer service agent.

5 Once the job card is printed, and handed to the service supervisor assigned to the job, all
further data related to the service is recorded in writing on the job card by staff in the service
division.

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CASE 6: 18 (continued)

6. A computerised inventory system is used in the parts store to track spare part issues /
receipts. One store assistant is responsible for capturing receipts of spare parts from
suppliers, the other assistant is responsible for capturing issues to the service supervisors to
be used for servicing the vehicles.

7. A review of the controls for the receipt and recording of spare parts from suppliers confirmed
that the controls are sound and are operating effectively.

8. The computerised inventory system in the parts store is interfaced with the company's
invoicing system, which enables the immediate updating of the invoicing system with the
details of the spare parts issued.

9. Once the service is completed, the time spent by the service team data (as recorded on the
job card) is captured by the relevant customer service agent onto the computerised invoicing
system, and an invoice generated.

10. The invoice is presented to the customer when s/he collects the motor vehicle.

11. The customer must settle the invoice via cash or credit card - no credit facilities are offered.

YOU ARE REQUIRED TO:

(a outline procedures that the managers of MBBM Motors (Pty) Ltd can perform to contribute
to the operating effectiveness of the logical access controls contained in the software. (5
(b) describe the controls that should have been implemented by MBBM Motors (Pty) Ltd to
ensure that the invoices generated by the computerised invoicing system are valid, accurate
and complete.
Note: Your answer should exclude:
edit checks to ensure the accuracy of input of data by staff;
a repeat of the logical access controls already verified (refer point 1 of the systems
description) and those procedures outlined in part (a) of your answer; and
controls to ensure that the amounts due in respect of invoices are collected and
banked. (25)

PART B (5 marks)
MBBM Motors (Pty) Ltd purchased a payroll software package developed by Programming
Solutions CC four years ago. In terms of the software licence agreement that MBBM Motors (Pty)
Ltd concluded with Programming Solutions CC, a software 'patch' is e-mailed to MBBM Motors
(Pty) Ltd's ICT administrator whenever a bug is discovered in the software or the functionality of
the software requires improvement. MBBM Motors (Pty) Ltd's ICT administrator is then
responsible for loading the patch onto the server and updating the software.

Recently major problems were experienced with a patch loaded onto one of the company's other
software packages, and it was resolved that the ICT Policy and Procedures Manual of MBBM
Motors (Pty) Ltd had been amended to deal with the related risks.

YOU ARE REQUIRED TO: briefly outline the controls that should be incorporated in the
company's ICT Policy and Procedures Manual to mitigate the risks associated with uploading
software patches. (5)

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 CHAPTER6

CASE 6: 19 (30 Marks : 45 Minutes)

Getfit (Pty) Ltd operates in the health and fitness industry and owns 12 health clubs, employs 200
permanent staff, and has in excess of 30,000 members. The clubs operate in all the major
centres of South Africa. The 12 health clubs offer 'state-of-the-art' fitness equipment, swimming
pools, and the services of biokineticists and physiotherapists. Each health club has a general
manager who is responsible for its day-to-day operations.

A range of membership options are available:

Membership contracts ranging from 6 months to 24 months; and
Month-to-month membership plan: In terms of this membership option, members are
invoiced on a monthly basis (at a higher rate than contract members), and membership can
be cancelled with 30 days notice.

Accountingsystem

Each health club has an accountant and maintains its own accounting records.

An off-the-shelf accounting software package suitable for use on a single personal computer was
purchased and successfully utilised by the company's first health club in Somerset West. With
every subsequent opening of a new health club, the same software was purchased and installed
on the accountant's personal computer at the club.

In order to produce the company's annual financial statements:

each club accountant prints out the trial balance of the health club (for which s/he is
responsible) for the financial year (once all entries and adjustments for the year have been
recorded), and scans and emails it to the head office accountant (Mick Muscle);
the head office accountant captures the amounts from these trial balances onto an MS Excel
spreadsheet, together with those from the head office trial balance; and
the spreadsheet is then used to 'add together' like amounts from each trial balance to arrive
at the company's financial information for the year.

A sophisticated member services software package is also in use, located on the computer server
at head office, which maintains data on a membership database and generates the monthly
invoices. Each health club's computer system has online access to the member services software
package and membership database.

Recent developments

From discussions with Ms Hart, the corporate services director, the following information was
gathered:

1. In order to ensure that the membership fees charged by Getfit (Pty) Ltd remain competitive,
an agreement was reached with a large medical aid scheme (effective 1 July 2022) that its
members will qualify for a 25% reduction of the standard Getfit membership fee (both upfront
and monthly fees). In exchange, for each qualifying member, Getfit (Pty) Ltd will individually
invoice the medical aid for this saving, less a 30% discount.

On a monthly basis, these invoices will be generated using Getfit (Pty) Ltd's computerised
invoicing system, which will be modified to deal with this new class of transaction. Once
generated, the invoices will be automatically translated into a format which complies with the
UN/EDIFACT standards, and transmitted to the medical aid using Electronic Data Interchange
(EDI). The necessary infrastructure for this purpose has been set up. The membership
masterfile has been updated to reflect the details (e.g. medical aid number) of members who
belong to this medical aid scheme.

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CASE 6 : 19 (continued)

2. As competitors have successfully implemented 'health bars' selling, for example, fruit shakes
and low GI sandwiches, the board of directors resolved to open health bars at two of the
company's largest health clubs with effect from 1 July 2022. At each health bar one staff
member will be appointed to handle sales and another one to prepare the food and drinks.
The systems of internal control for the health bars will initially be entirely non-computerised.

Mr Ab Tone, the managing director, however, noted the following risks that would first need to
be addressed:
• ingredients purchased to prepare the items on the health bar menu may be
misappropriated and consumed for the personal use of the health club staff members and
their families, rather than to make items to be sold at health bars; and
excessive quantities of food items (e.g. sandwiches) may deliberately be pre-prepared by
the health bar staff in order for employees to consume these items for personal use at the
end of the day (note: the company policy is that fresh food has to be prepared daily, and
any left-over pre-prepared food must be distributed among the health club staff -
excluding the general manager - at the end of each day).

3. The board resolved that with effect from 1 October 2022 monthly management accounts
'consolidating' the financial information of the individual health clubs should serve at each
monthly board meeting. Accordingly, a computer software developer (Byte Programming)
has been identified who will develop software that can extract the pertinent data from each
health club's accounting software package, aggregate this with the head office data, and
generate the company's monthly management accounts.

YOU ARE REQUIRED TO:

(a) With reference to the recent developments documented:

() describe the information processing controls that should be implemented by Getfit
(Pty) Ltd to ensure that monthly invoices that are generated and submitted to the
medical aid are valid, accurate, and complete. Your answer should exclude controls
over the input of any data and the updating of any standing data required to generate
the invoice. (10)
describe the controls that should be implemented by Getfit (Pty) Ltd to ensure that the
risks noted by Mr Ab Tone relating to the planned new health bars are appropriately
addressed. (10)

(b) Describe the controls that Getfit (Pty) Ltd should put in place to minimise the risks associated
with the development and implementation of the software to generate the company's monthly
management accounts. In answering this question, you must assume that Byte Programming
is a suitable developer of this software. (10)

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 CHAPTER6

CASE 6: 20 (50 Marks : 75 Minutes)

In 2017 William Kate established a business, as a sole trader, specialising in the short-term rental
of equipment (e.g. tables, chairs, marquee tents, catering and audio-visual equipment) to event
organisers in Gauteng. Due to the growth of the business, he decided early in 2021 to incorporate
a company, Party-Hire (Pty) Ltd to house the business - and the necessary processes to effect
this were followed. Upon incorporation, William Kate and his brother in law, Harry Markle, were
appointed to the company's board of directors.

In order to place orders for rental equipment with Party-Hire (Pty) Ltd, approved customers use
the company's toll-free telephone number. At the date and time requested, the company's drivers
deliver the rental equipment item(s) ordered to the customers. Once the event has concluded,
these drivers also collect the equipment items from the customers.

Customers are invoiced:

(0) a fee for the rental of the equipment items; and

(ii) the value of any equipment that is not returned.

Tracking of rental equipment movements I Accounting for rental transactions

An off-the-shelf software package ('AccPlus') is used to maintain the company's financial records,
and a stand-alone computerised asset tracking software system ('the Tracking System') is used to
record the movement of the rental equipment items. The Tracking System is not integrated with
the AccPlus software (i.e. transactions processed in the one system cannot automatically update
the other system).

The managing director of Party-Hire (Pty) Ltd, Harry Markle, is not satisfied with the adequacy of
the controls currently in operation relating to the following control objectives:

Control objective Further information

1. The customer details (e.g. customer's full
name and VAT numbers) are correctly
recorded on the Customer Database.
|2. The rental equipment delivered to the There have been customer complaints about
customer agrees to the telephonic order the wrong quantities and/or equipment items
placed by the customer. being delivered. This has been found to be
due to (i) the order details being captured
incorrectly; or (ii) the incorrect items being
picked and despatched.
3. All rental equipment returned by the There have been customer complaints that
customer is correctly recorded on the equipment had been returned via the
Tracking System as having been returned company's driver, but was subsequently
in a timely manner. invoiced as a non-return. This is due to the
quantities of the equipment recorded on the
Tracking System as having been returned
being smaller than those actually received by
the company's driver.

The system currently in use by Party-Hire (Pty) Ltd is summarised on the next two pages.

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CASE 6: 20(continued)
Activity Procedures performed Source document Other comments
by employees of Party- produced
Hire

1. Processing of customerorders
1.1 Registeringfirst The credit controller New customer application
time customers. requests new customers form
to complete an application
form, and then undertakes
a thorough credit check on
the new customer.

For creditworthy
customers, the senior
admin officer updates the
Customer Database in
AccPlus with the
customer's data.
1.2 Receiving the The rental agent checks
telephonic order the availability of the
from the customer. item(s) ordered on the
Tracking System for the
dates requested.
1.3 Capturing The rental agent captures A number of copies of the
customer order (if the pertinent details of the rental agreement
the equipment customer order onto the (generated by AccPlus)
item(s) are AccPlus system.
|available).

2.
2.1
Picking & delivery of rentalequipment
Initiating the filling |On receipt of a copy of the A number of copies of the
of the order. rental agreement (refer picking slip (generated by
1.3), the stores admin Tracking System)
clerk uses the Tracking
System to recapture the
details of the customer
order and generate a
picking slip.
2.2 Loadingthe After locating the items on A number of copies of the The truck leaves the
equipment ordered the picking slip in the delivery note (generated premises through
onto the truck. store, the storeman scans by Tracking System). the only gate to the
the bar code of each item company's
as they are moved from premises, which is
the warehouse to the staffed by a security
truck. guard at all times.
2.3 Deliveringto the Once the rental equipment The drivers are not
customer. item(s) have been provided with bar
delivered to the customer, code scanners -
the driver forwards the this practice is to
customer-signed copy of remain.
the delivery note to the
invoicing clerk (refer4.1).

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 CHAPTER6

CASE 6: 20 (continued)
Activity Procedures performed Source document Other comments
by employees of Party- produced
Hire
3 Rental equipment returns
3.1 Collection from the At the conclusion of the A number of copies of the The drivers are not
customer. event, an equipment equipment collection note provided with bar
collection note is (generated by Tracking codescanners -
generated and used by the System) this practice is to
driver to collect the rental remain.
equipment from the
customer
3.2 Recordingthe Upon receiving the A number of copies of the
return of the rental equipment from the driver, equipment received note
equipment. the storeman scans the (generated by Tracking
bar code of the rental System)
equipment item(s)
returned.
4 Invoicing
4.1 Generating the Once the rental equipment A number of copies of the
invoice. received note (3.2) has invoice (generated by
been matched to the AccPlus).
delivery note (2.3), the
invoicing clerk captures on
the AccPlus system:
• the customer order
number - to initiate the
invoicing of the rental
transaction; and
the details of any rental
equipment not returned.

Proposed new internet-based customer order feature

Harry Markle wants to introduce an internet-based feature to enable customers to capture their
orders for rental equipment on a website developed for this purpose - rather than having
customer make use of the toll-free telephone service. He specifically envisages the following:

• The development, maintenance and hosting of the website will be undertaken by a third party
service organisation that specialises in this field.
The website will not be linked to AccPlus or the Tracking System in order to minimize risks of
unauthorised access to the company's computerised information systems.
Accordingly, the order data collected on the website will be printed out on a daily basis and
captured by one of the company's rental agents (in a manner similar to that currently used for
the capturing of telephonic orders).
All new customers will first have to register in person with Party-Hire (Pty) Ltd (i.e. it will not
be possible for new customers to register online).

In relation to the new internet based customer order feature, the following risk has been identified
by Harry Markle:
The website developed, maintained and hosted by the third party service organisation may not
work properly, resulting in lost revenue to Party-Hire (Pty) Ltd.

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INTERNAL CONTROLS

CASE 6: 20 (continued)

Companies Act-related queries

Currently William Kate is the only shareholder of Party-Hire (Pty) Ltd, holding all of the 1,000
authorised ordinary shares. Wiliam is, however, keen that his daughter and son (who have also
worked in the business since the start) become co-owners of Party-Hire (Pty) Ltd, but on the
following terms:

1. While William is happy for his son and daughter to share equally in the dividends declared
by Party-Hire (Pty) Ltd, he still wants to retain control of the company (i.e. have a majority
vote at shareholders meetings). To achieve this he wants to introduce shares with
different voting rights, and issue shares with lower voting rights to his son and daughter.

2. William, however, realises that neither of his children have any cash to subscribe for
shares in Party-Hire (Pty) Ltd. He is therefore willing to 'write off the purchase price
provided that they remain in the employ of Party-Hire (Pty) Ltd until 30 June 2029. Should
they leave the company's employ before this date, they will have to settle the outstanding
amount with immediate effect.

At a recent meeting with XYZ Secretarial Services CC that provides secretarial services to Party-
Hire (Pty) Ltd, William enquired how the issue of shares to his son and daughter on the above
terms can be achieved in compliance with the requirements of the Companies Act.

YOU ARE REQUIRED TO:

(a) Describe the information processing controls that should be implemented by Party-Hire
(Pty) Ltd to achieve the following control objectives:

the customer details are correctly recorded on the customer database; (8)
(in) the rental equipment delivered to the customer agrees to the telephonic order placed
by the customer; and (13)
(ii) all rental equipment returned by the customer is correctly recorded on the Tracking
System as having been returned in a timely manner. (5)
Communication skills (clarity of expression / logical argument) (2)

(b) Outline the controls that you would expect to be implemented by Party-Hire (Pty) Ltd to
address the risk that has been identified by Harry Markle resulting from the introduction of
the internet-based customer order feature. (7)

(c) ldentify and briefly describe the other risks to Party-Hire (Pty) Ltd that can be identified
related to the introduction of the internet-based customer order feature. In describing
these risks, clearly state what can go wrong, and how this will negatively affect Party-Hire
(Pty) Ltd. (6)

(d) Respond to the queries raised by William Kate, by describing the procedures that should
be followed by Party-Hire (Pty) Ltd and its governance structures to give effect to his
wishes. You are, however, not required to provide the detailed procedures to convene any
meetings that may be necessary. (8
Communication skills (clarity of expression) (1)

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 CHAPTER 6

CASE 6:21 (35 Marks : 52% Minutes)

You are the newly appointed financial director of Europe Imports (Pty) Ltd, a company that sells a
range of fast-moving consumer goods imported from Europe to retailers across South Africa. Due
to the limited range of inventory items and reliable suppliers, Europe Imports (Pty) Ltd is always
able to fill orders from its customers.

Europe Imports (Pty) Ltd has an administration centre and warehouse in Kempton Park from
where all orders are dispatched directly to customers via a courier service. Twenty sales regions
in South Africa have been identified. An ofice has been set up for each region, staffed by a
mornings-only secretary and a salesman. The functions of the salesmen are to:
secure new retailers (customers) to procure goods from Europe Imports (Pty) Ltd;
• visit existing retailers to promote new consumer goods that have been added to the
product range, and
• take orders from retailers.

In addition to placing orders via the regional salesman, it is also possible for customers to place
orders directly with the secretary in the regional office (by email).

Regional salesmen are remunerated on a monthly basis as follows:

• A travel allowance: this is R750, R1,000 or R1,250 depending on the size of the region the
salesman is responsible for.
A commission: this is calculated as 5% of the total value of orders captured in a particular
month for the region the salesman is responsible for. It is company policy that as soon as
a valid order is taken, the salesman is entitled to commission (irrespective of whether the
goods have been despatched).

You are currently reviewing the system for the remuneration of salesmen, and to date you have
gathered the following high-level understanding of the functioning of the system.

1. For both orders secured during customer visits and those submitted directly to the
secretary in the regional office, the salesman records the customer code, code(s) of
item(s) ordered and the selling price(s) onto a preprinted internal sales order form.

2. Each Friday the secretary in the regional office couriers a parcel containing the internal
sales order forms for the week to the warehouse in Kempton Park.

3. The warehouse staff capture the sales order form details onto the computer system, from
which an order transaction file is generated. This file is used to initiate the filling of the
orders. However, given the manner in which salesman commission is determined, the
ordering system also computes the total order value per salesman, and at the end of each
month this data is written to an electronic file.

4. This file is imported and processed by the payroll application, and together with the
applicable standing data is used to compute the monthly remuneration payable to
salesmen.

5. A number of reports are generated on a monthly basis from the payroll application -
including the payroll and a net pay schedule (listing the net amount due to each
salesman).

6. The financial manager uses the net pay schedule to capture payments onto the electronic
funds transfer system used by Europe Imports (Pty) Ltd.

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CASE 6: 21 (continued)

YOU ARE REQUIRED TO:

(a) Describe the controls that you would expect to be in operation at Europe Imports (Pty) Ltd
to ensure that the data in the order transaction file is valid, accurate and complete.
Note: Do not concern yourself with controls for the evaluation of potential and existing
customers (including for creditworthiness) or the updating of the standing data required to
generate the order transaction file. (18)
Communicationskills - clarity of expression (1)

(b) Assuming that the data per the order transaction file is valid, accurate and complete,
describe the information processing controls that you would expect to be in place at
Europe Imports (Pty) Ltd to ensure that the net pay per salesman, as computed by the
payroll application, is valid, accurate and complete. (15)
Communication skills – clarity of expression (1)

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 CHAPTER 6

CASE 6: 22 (30 Marks : 45 Minutes)

Toptech Ltd is a retailer of high-end laptop computers and operates from twenty stores located in
upmarket shopping centres across South Africa. The inventory requirements of retail stores are
met through transfers of laptop computers from the company's central warehouse located in
Kempton Park, Gauteng. All transport of laptops between the warehouse and retail stores has
been outsourced to XYZ Couriers, an independent logistics company.

In view of the high Rand value of each laptop computer, and to counter the risks of losses due to
the introduction of newer models, Toptech Ltd has invested in an inventory management system
to minimise its investment in working capital.

Once a week, each store manager captures requests for inventory onto the inventory
management system using his/her desktop computer which is linked to the company's wide area
network. The quantities requested are based on differences between the current inventory
holdings and the store manager's estimate of the sales for the next week.

At Toptech Ltd's head office, the inventory manager must review the transfer requests before any
processing thereof can take place. Other persons responsible for key steps in processing
inventory transfers are:

• staff in the warehouse who make up the inventory lots to fill the transfer requests;
• the dispatch supervisor, who is responsible for the inventory lots until collected by XYZ
Couriers:
• staff from XYZ Couriers who collect the inventory lots from the warehouse dispatch bay
(dispatch supervisor) for transfer to the retail store; and
• the operations manager, who monitors the effectiveness and efficiency of the system.

All movement of inventory is tracked using a scanning system which requires input of the unique
bar code of each laptop computer and the bar code on the staff card of the employee who takes
responsibility for the inventory item.

Sound controls have been implemented to ensure the integrity of message transmission across
the wide area network.

YOU ARE REQUIRED TO: describe the system that should be implemented by Toptech Ltd to
control the transfer of laptop computers from the company's central warehouse to the retail stores.
Your systems description should deal with all relevant functional areas from the initiation of the
request until the inventory requested is received at the retail store.

Note: The following controls must, however, be excluded from your answer:
Controls dealing with out-of-stock situations.
Controls over transmission of data across the wide area network.
Controls over the updating of masterfiles. (28)

Communication skills (logical argument) (2)

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INTERNAL CONTROLS

CASE 6: 23 (40 Marks : 60 Minutes)

PART A (30 marks)

You are the internal auditor of High Fashions (Pty) Ltd, a manufacturer of ladies clothing. Other
than raw material costs, the company's major expense is wages. High Fashions (Pty) Ltd has a
labour force of approximately 500 workers, divided into 10 production lines, each under the control
of a supervisor. The supervisors report to the operations manager.
The company has a strong personnel function, under the control of the personnel manager,, who
attends to all staff appointments and terminations. Presently time recording is done by a system
of mechanical time clocks. The payroll clerk is responsible for preparing the payroll each week.
At a recent meeting of the board, at which you were present, the acquisition of a new
computerised time recording and payroll system was approved. The system will make use of an
off-the-shelf payroll software package, which will be tailored by the supplier to meet the
company's needs. You are satisfied with the software package selected.
The new system will work as follows:

All standing data required for the preparation of the wages payroll will be stored on computer.
Each employee will be issued with a magnetic card. Upon entering and leaving the factory,
employees will have to pass these cards through card readers located at the entrances to the
factory. The computer will record arrival and departure times, calculate the hours worked
automatically and prepare the weekly payroll from this data, combined with the standing
payroll data.
Computer terminals will be located in the personnel department (to allow for the maintenance
of standing data) and the payroll department (to allow for corrections to hours worked and the
processing of the payroll). The latter is required as from time to time the hours recorded on
the system have been found to be incorrect.
YOU ARE REQUIRED TO:

(a) briefly describe the procedures that should be followed when implementing the new payrol
software package. (7)
(b) describe the information processing controls that should be present in the new
computerised system:
over amendments to employee standing data; and (11)
to ensure that the hours worked, as recorded in the payroll, are complete, accurate
and valid. (12)

PART B (10 marks)

In the last few months High Fashions (Pty) Ltd has come under increasing pressure from its major
customers to introduce EDI (Electronic Data Interchange) facilities. Many of the company's major
customers have already successfully implemented EDI facilities
In response the board of High Fashions (Pty) Ltd has decided to establish EDI facilities that would
enable the company to receive orders electronically from its major customers. Your advice has
been sought regarding the controls to be implemented over the new system. You may disregard
any logical access controls required, as you have recently drafted a comprehensive memorandum
dealing with these controls in an EDI environment.

YOU ARE REQUIRED TO: describe the automated controls that should be implemented by High
Fashions (Pty) Ltd to ensure that purchase orders received from trading partners on the EDI
network result in sales orders that are complete, accurate and valid. (10)

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 CHAPTER 6

CASE 6: 24 (50 Marks : 75 Minutes)

You have recently been appointed as the financial manager of Networx (Pty) Ltd, a company that
installs computer networks for third party clients.

If a contract is awarded to Networx (Pty) Ltd, a project manager and network technicians are
assigned to work at the client's premises for the duration of the contract. The project manager's
main function is to supervise the network technicians, who carry out the installation work.

PART A (45 marks)

Networx (Pty) Ltd's managing director has requested that you undertake a thorough review of the
Company's system for purchasing and issuing of inventory items (i.e. the hardware and software)
needed for contracts. The system currently operates as follows:

Preparation of bill ofmaterials:

1 When preparing to submit a proposal to a prospective client (in response to, say, a 'request
for proposal' advertised), the operations director prepares a contract costing budget
(comprising inventory and labour costs) in order to determine the proposed contract fee.
The inventory costs are estimated by preparing a bill of materials.

2 The bill of materials reflects the quantities and descriptions of the inventory items needed for
the contract (as determined by the operations director). The company buyer records the
unit cost for each inventory item on the bill of materials, as follows:
• If the inventory item is on the inventory masterfile, the unit cost per the masterfile is
recorded on the bill of materials.
If not, the buyer contacts suppliers on the authorised supplier list to find the supplier who
can supply the required item at the best price. The price quoted by this supplier is
recorded on the bill of materials, together with the supplier's name.
The buyer informs the operations director of the total inventory costs, and the completed bill
of materials is filed in a pending file (by the buyer), awaiting the lient's decision on whether
to award the contract to Networx (Pty) Ltd.

Purchasing of inventoryitems:
3 If Netwox's proposal is successful, the buyer removes the applicable bill of materials from
the pending file and reviews the document for items not on the inventory masterfile. She
then updates the masterfile for such items with the following data:
• inventory item code;
• inventory item description;
the system code for the applicable authorised supplier (ascertained from the bill of
materials); and
• the item's purchase price (per unit).
A log of the masterfile update is generated by the system and reviewed by the chief admin
clerk against the applicable line items on the bill of material.

4 It is company policy for all items on the bill of materials to be ordered before the
commencement of the contract (this policy is to remain). Accordingly, once all the inventory
item standing data are contained on the inventory masterfile, the buyer captures the item
codes and quantities to be ordered onto the 'purchase ordering' application. Sound access
controls and edit checks are in place for this purpose. Once captured, a sequentially
numbered purchase order is generated and printed, after extracting the pertinent standing
data from the applicable masterfiles. The buyer then posts these purchase orders to the
relevant suppliers.

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 INTERNAL CONTROLS

CASE 6 : 24 (continued)

5. In the event of shortages arising on the inventory system (i.e. the quantity on hand is below
zero), the system automatically generates and emails a sequentially numbered stock-out
form to the buyer - in order for her to place the order (which is handled in the manner
described in point 4. above).

6. All deliveries are received in a demarcated receiving bay by the goods receiving clerk.

Receipt of inventory is recorded using an on-line 'inventory received' application. Sound

access controls are in place restricting access to this application only to the goods receiving
clerk. Upon receipt of the goods, the goods receiving clerk keys in the order number
ascertained from supplier delivery note. If the order number is not on the system, an error
message is displayed and the goods are not accepted. If the order number is on the system,
the system displays on screen all the relevant order details (e.g. supplier name, item
descriptions and quantities ordered). The goods receiving clerk agrees the details on the
screen to those on the supplier's delivery note, and signs the delivery note.

He then captures the delivery note number and quantities reflected on the delivery note.
Once this data is captured, the system automatically:
• increases the 'quantity on hand' field per the inventory masterfile for the applicable
inventory items; and
generates and prints a sequentially numbered two copy goods received note (GRN).
One copy of the GRN is filed in numerical order by the goods receiving clerk, and the other
copy, together with the inverntory, is taken into the warehouse.

Issuing ofinventoryitems:
7. When a network technician needs inventory, s/he completes a sequentially pre-numbered
requisition form (containing the item codes identified from the bill of materials) and scans and
emails it to the warehouse.

8. On receipt of the requisition, the issue clerk enters the item codes and quantities requested
using the 'inventory issue' application. A sequentially numbered issue note is printed, and
the 'quantity on hand' field on the inventory masterfile is reduced accordingly. The issue note
is handed to a storeman to pick the items requested from the warehouse.

9. Once the items have been picked and placed in the despatch bay, the network technician is
emailed by the despatch clerk and informed that the items are ready for collection. (Due to
the highly specialised nature of the items, it is company policy that the technician who
requested the goods collects them. This policy is to remain). On collection, the technician
agrees the quantity and description of the inventory to the issue note and removes the
inventory. The despatch clerk files the issue note, signed by the technician as evidence of
collection, in numerical sequence.

10. Sound physical controls are in place preventing unauthorised persons from gaining access to
the warehouse.

The managing director has indicated that the company does not wish to fundamentally change the
way the system operates (other than introduce additional internal controls), nor hire additional
staff. The operations director is, however, willing to get more involved to improve the internal
control system.

Unless otherwise specified, you can assume that the general IT controls and the controls over the
maintenance of the creditors masterfile implemented by Networx (Pty) Ltd are operating
effectively.

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 CHAPTER 6

CASE 6: 24 (continued)

YOU ARE REQUIRED TO:

(a) Using a tabular format, identify and briefly explain the weaknesses in the system used by
Networx (Pty) Ltd for the purchasing of inventory items and provide recommendations to
address each weakness identified. (30)
Communication skills (layout and structure; clarity of expression) (3)

(b) Describe the information processing controls that should be implemented for the issue of
inventory to ensure that the following control objectives are achieved:
i. only inventory items that are actually needed on the contract are issued to the
network technicians; and (7)
ii there is no undue delay in the collection of inventory items by the network
technicians. (5)

PART B (5 marks)

At a recent audit committee meeting you were tasked to review the adequacy of controls over the
access rights directory / table set up on the company's network in terms of which employees are
granted access to the various components of the computerised financial system.

YOU ARE REQUIRED TO identify the control measures that should be in place to mitigate the
risk that the access granted to employees by the access rights directory on the company's
computer system is inappropriate. (5)

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INTERNAL CONTROLS

CASE 6:25 (40 Marks: 60 Minutes)

The directors of Compo Manufacturing (Pty) Ltd (Compo'), a small owner-managed company, at
a meeting in January 2022 resolved to introduce an Electronic Data Interchange (EDI) facility
whereby the company's large customers would be afforded the opportunity of placing orders with
Compo via EDI instead of following the conventional way of emailing their orders to Compo's
sales office.

The EDI system was supplied and implemented by IT Solutions CC in April 2022. In addition to
installing the requisite hardware and systems software, IT Solutions CC had to establish a feature
allowing the EDI order messages received to be read into the sales order application of Compo.
This required that changes be made to the programme code of the sales system, allowing the EDI
order messages received to bypass the capturing of data on the 'sales order input screen'. Other
than this change, the EDI order messages received are to be processed in exactly the same way
as conventional orders (e.g. using the same employees and procedures).

The following are the key staff involved in the processing of orders in the 'conventional way':

• The credit control officer handles credit management;

• Sales order clerks capture pertinent details of the order;
• The sales order manager supervises the work of the sales order clerks;
• The storemen pick the goods in the warehouse based on approved picking slips and
capture the details of goods picked onto the sales system;
• The despatch clerk manages the despatch bay; and
• The truck drivers deliver the components to the customers.

YOU ARE REQUIRED TO:

(a) briefly describe ways in which the directors of Compo Manufacturing (Pty) Ltd can
contribute to ensuring the company's staff perform manual control procedures effectively. (7)

(b) describe the general IT controls that should have been in place at Compo Manufacturing
(Pty) Ltd to deal with the risk that the sales system software may become corrupted as a
result of the introduction of the EDI order acceptance feature. (6)

(c) describe the information processing controls (both manual and automated) required by
Compo Manufacturing (Pty) Ltd to ensure that deliveries to customers who placed orders 2
via the EDI system are valid, accurate and complete.
Note:
1. Your answer should deal with all control activities required from initial receipt of the
EDI order until delivery excluding controls over:
the maintenance of standing data; and
• any backorders that may be required.
2. Structure your answer using the following headings:
• Receiving of order messages via the EDI system from customers
• Processing of order messages received
• Picking of the goods
• Despatch of the goods (25)
Communicationskills (logicalargument l layout and structure) (2)

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 CHAPTER6

CASE 6: 26 (30 Marks : 45 Minutes)

You are the newly appointed financial manager of Sun Seekers Ltd, a company which owns and
operates four hotels located in the major centres in South Africa and one hotel in Zimbabwe
(located adjacent to the Victoria Falls). The principal sources of revenue for the hotels are:
• letting of rooms,
• bars and restaurants, and
• charges (e.g. for resident's use of telephone, laundry services, etc).

You recently learnt that the board decided in principle that Sun Seekers Ltd should "establish a
presence on the world wide web". The website to be established would, in addition to web pages
devoted to the promotion of the five hotels, enable web-surfers to place bookings for the standard
hotel rooms at significantly discounted prices. However, to prevent a significant drop in margins
only a selected number of rooms on selected days will be set aside for discounting.

The operations director (who is not computer literate) will once a month identify the days and
number of rooms that should be set aside for internet bookings, as well as the discounted price.
He will do this taking into account historical trends and the state of the tourist and business
markets in general. However, it is envisaged that should normal bookings be below expectations,
additional days and rooms may be set aside for discounting. The details of the discounted
accommodation will be kept in a 'discounted accommodation' masterfile.

The board envisaged that the customer would carry out the following steps in order to place a
booking:

1. The customer will go onto the internet and enter the hotel's website at
'http://www.sunseek.co.za'.
2. S/he will then click on the 'place a booking' category.
3. A webpage will then be displayed on the customer's computer screen requesting him/her to
capture the pertinent details necessary to process a booking.
4 The customer will then be informed of the amount that is due for the booking.
5 To save on costs, any communication with customers (subsequent to the booking being
taken) will take place by means of e-mail.
6. To prevent a loss of higher margin traditional' bookings, the directors decided that the
payment for any internet booking must be made within seven working days by a deposit
directly into Sun Seekers Ltd's current account with Super Bank. Should payment not be
made within this time period, the booking will automatically be cancelled.
7. To identify payments made for bookings in a timely manner, the bank statement will be
downloaded electronically from Super Bank daily, printed out and captured by the receipting
clerk using the cash book application.
8 Because of the low discount prices customers will not be entitled to refunds for any payments
made should they be unable to make use of the booking.

Being aware that you are knowledgeable about controls in computerized systems, the directors
asked you to describe the controls that you believe should be in place over the new internet
booking system.

YOU ARE REQUIRED TO: describe the controls that should be implemented by Sun Seekers Ltd
to ensure that bookings taken via the internet are complete, accurate and valid. (29)
Communication skills (clarity of expression) (1)

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INTERNAL CONTROLS

CASE 6:27 (35 Marks: 52, Minutes)

You are the chief financial officer of Edsale Ltd, a wholesaler of sporting accessories. The board
of Edsale Ltd recently resolved to start selling the company's products to retailers and the public
via the internet. Retailers will be able to purchase on credit, while the public will be required to
provide their credit card information upfront (i.e. before the goods are dispatched).
As retailers do not pay the same prices as members of the public who purchase via the internet,
different price catalogues will be used. All orders placed over the internet will be processed and
dispatched from Edsale's warehouse in Johannesburg. Once a valid order is accepted, it will be
written to the 'sales order transaction log', and instructions to dispatch the goods will be
automatically generated by the system. At this stage sales over the internet will only be made to
retailers/members of the public that are resident in South Africa.

To implement this new internet sales strategy, modifications will be needed to a number of the
modules in the company's accounting system. You are also aware that the control focus will shift
to increased reliance on built-in automated controls and management review of control and
exception reports.
Having asked your financial manager to prepare a checklist of the controls that are necessary for
the modifications to the software that will be needed, she produced the following:

CHECKLISTOF KEYCONTROLSOVER SOFTWAREMODIFICATIONS:

Userrequests:
A witten request should be prepared on sequentially pre-numbered change control forms for
the software modifications needed.

Programmingofmodifications:
The programmers mustcomplywith thepre-determinedstandardsin respectof systems
development and programming.
Modifications must be made on a copy of the programme in the library, not on the live
programme.
Access controls must prevent the programmers from gaining access to the live data and
programmes.
Modifications to the system must be documented in detail and all systems documentation
must be updated accordingly.

Trainingofusers
All affected users must be thoroughlytrainedin the use ofthe modifiedsoftware.
Implementation
The implementation should be scheduled so that disruption of the normal IT activities is
minimised (e.g. after hours).

YOU ARE REQUIRED TO:

(a) outline the business risks that will arise specifically from the introduction of the sale of
Edsale Ltd's products via the internet. (8)
(b) describe the further procedures the financial manager should have included in the checklist
of key controls over software modifications. (7)
(c) describe the information processing controls that should be implemented to ensure that all
orders taken via the Internet are valid, and completely and accurately recorded in the
company's 'sales order transaction logs'. Do not include controls relating to the
maintenance of standing data. (12)
(d) list the reports that should be generated in the new internet sales environment for review by
management. (8)

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 CHAPTER6

CASE 6 : 28 (28 Marks : 42 Minutes)

The NMM Heritage Society was established in January 2010 to raise awareness of the unique
historical heritage of the Nelson Mandela Metro and to lobby the owners of historical buildings to
restore these buildings to their original condition. The NMM Heritage Society raises funds in the
following ways:

• Annual membership fees;

• Fees charged for tours of historical landmarks; and
• Proceeds from the Win a trip for two to London' competition (which is run once a year).

In view of funding constraints, the Society's office is staffed by a full-time office administrator and
no further staff appointments can be made.

Tours of historical landmarks are promoted by adverts in community newspapers and by

brochures placed in locations frequently visited by tourists. If a member of the public wishes to
participate in a tour of historical landmarks, s/he has to book in advance with the office
administrator of the Heritage Society. The booking is only guaranteed once the fee is paid. A
maximum of 25 members of the public are allowed on each tour, and the tours are conducted by
the chairperson of the Society's board of trustees. The system for the taking bookings is not
computerised.

Whilst the Win a trip for two to London' competition has been very successful in recent years,
entrants have been mainly members of the Heritage Society and their acquaintances. In order to
improve the proceeds generated by the competition, an agreement was reached with a local travel
agency to include a section on its website to promote and sell tickets for the competition. This is
to supplement, rather than replace, the traditional ways of selling tickets. All data captured by
competition entrants onto the website is logged and the log is e-mailed to the office administrator
of the NMM Heritage Society on a daily basis. Competition entrants are informed on the website
to deposit their competition entry fees directly into the Society's bank account, whereafter tickets
will be issued.

In order to maximise proceeds from the competition, the board of trustees of NMM Heritage
Society would like you (a registered auditor in public practice) to perform an 'agreed-upon
procedure' engagement on the 'Win a trip for two to London' competition.

YOU ARE REQUIRED TO:

(a) describe the system of internal control that should be implemented by NMM Heritage
Society over the revenue collected from tours of historical landmarks. Exclude from your
answer controls over the cashing up and banking of the cash collections. (10)

(b) describe the risks to NMM Heritage Society from the use of the local travel agency's
website to sell tickets, and describe ways in which these risks can be managed. Prepare (14)
your answer using a tabular format.
Communication skills (layout and structure) (1)

(c) discuss whether an 'agreed-upon procedure' engagemernt would be the appropriate type of
engagement to perform to maximise revenue from the Win a trip for two to London'
competition. (3)

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