Scribd
Upload
34 views4 pages

Auditing Application Controls Tutorials

Uploaded by

thembelihle.shumba05
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
34 views4 pages

Auditing Application Controls Tutorials

Uploaded by

thembelihle.shumba05
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

RHODES UNIVERSITY

DEPARTMENT OF ACCOUNTING
AUDITING 3
APPLICATION CONTROLS
TUTORIALS

Tutorial Marks Time


Tutorial 1: Chapter 5,Question 13,Input controls 15 27 Minutes
Tutorial 2: Chapter 5,Question 14,Processing and 24 43 Minutes
Masterfile Controls
Tutorial 3: Le Mauritia 14 25 Minutes
Tutorial 4: Electrifying (Hand in) 25 45 Minutes
TOTAL 78 140 Minutes
TUTORIAL 3 - Le Mauritia (14 Marks, 25 Minutes)
(Adapted from Advanced Case Studies, Frans Prinsloo)

Le Mauritia (Pty) Ltd is a large manufacturer of leisure products, e.g. scuba diving,
fishing and para-sailing. The company recently decided to join an Electronic Data
Interchange (EDI) network, which would enable it to receive electronic orders from 10 of
its major customers.

When the EDI system was implemented, the following risk factors were inter alia
identified:
1. Unauthorised intruder accessing information. a. Hackers (from outside the
company) accessing the data stored on the company’s computer systems.
b. Reading of messages during transmission

2. Unavailability of EDI system due to: a. Fire, flood, or earthquakes


b. Sabotage by employees

3. Loss of data integrity a. Loss of messages during transmission


b. Modification of messages during transmission

4. Lack of Legal guidance

REQUIRED:
State two possible control procedures that could have been implemented by Le
Mauritia (Pty) Ltd to address each of the risk factors listed above (14)
TUTORIAL 4: Electrifying (25 Marks, 45 Minutes)
(Adapted from University of The Free State, 2016 Exam)

Background Information

You are an audit manager at Audits Unlimited Inc, a local audit firm in Bloemfontein. Audits
Unlimited has been the auditor of the Electrifying Ltd [hereafter Electrifying] group of
companies for several years. The group consists of a number of companies. Electrifying is
listed on the Johannesburg Stock Exchange (JSE). All the companies in the group have a 30
September year end. The overall materiality for the group of companies has been set at R6
million. The audit deadline for submission of the final audit report is 30 October 2016.

The following Working Period end: 30 September A2.1


Paper has been presented 2016
to you: Client: Electrifying
Ltd
Prepared by: Audit trainee Date: 11 October 2016
Reviewed by: Audit manager Date: 17 October 2016
Understanding the entity and its environment: System description of Wage Cycle
at Main Power Station
Electrifying employs approximately 300 wage earners at their main power station in
Johannesburg. These workers are divided between three areas within the power station.
Each area is headed by a foreman, who reports to Joan, the power station
administration manager.

Electrifying has clocking machines situated in each area of the power station. Every
Friday Izak, the timekeeping clerk, prepares a clock card for each employee in each
section, from the employee masterfile. He then places the clock cards on a shelf,
situated next to the clocking machines. On arrival and departure from work each day,
each employee removes his clock card from the shelf in the relevant section.

He then enters the clock card into the machine, which records the time-in or time-out
(whichever is applicable) on the clock card. The section foreman supervises the daily
clocking function. Each Friday afternoon, the end of the wage week, Izak collects the
clock cards from each section. He then hands them to Lucy, the payroll preparation
clerk, to be used in the preparation of the payroll.

The company's payroll function is computerised and a reliable software package, called
PIV, is used to prepare the weekly payroll. Lucy types the number of hours worked into
the PIV system, for each employee, from the hours on the clock cards. Once the hours
have been captured into the computer system, the software calculates the gross wage,
the relevant deductions e.g. PAYE, UIF, medical aid etc. as well as the net wage for
each individual employee.

Lucy then prepares a reconciliation of the current week's payroll to the previous week's
payroll. Late on Friday afternoons, the wages are paid out by the wage manager in the
presence of the section foremen. The wage manager records all wages that have not
been collected during the pay-out, in an unclaimed wage register.

The personnel department, consisting of Shaxe, the personnel manager, and two
personnel clerks, maintains a personnel file for each employee. They also maintain the
employee masterfile, which contains the following details for each employee: the
employee's name, employee number, section number, date of appointment, authorised
wage rates, as well as tax and deduction details.
Attachment 1: Extract of email received from the senior accountant
To: Audit manager ([Link] Unlimited@[Link])
From: Senior accountant (SA@[Link])
Date: 12 September 2016
Re: Business risks identified

Dear Audit Manager,

The chair of the audit committee asked me to send you the business risks identified
during the year. He requested that you should use these risks to assist you in the
effective planning of the audit engagement. The three top risks identified by the audit
committee are as follows:
• Decrease in client satisfaction due to frequent load shedding;
• Extension of credit terms in the current financial year; and
• Ongoing strikes by employees in the rural areas where power stations are located

REQUIRED
1. Based on the information provided in working paper A.2:
a) Describe the controls that should be in place to ensure that all amendments to the
employee masterfile occurred and are authorised, accurate and complete. (11)

b) With regards to the clock cards, describe batch controls that should be implemented
to ensure that all valid clock cards are accurately captured on the PIV system. (9)

[Link] on the information provided in attachment 1 (page 6), respond to the senior
accountant, explaining whether the business risks identified by the audit committee is of
relevance to the audit firm. (5)

Common questions

Powered by AI

An appropriate control would be a system of dual approval and audit trails. Dual approval requires changes to the employee masterfile to be approved by two independent authorities before execution. Audit trails ensure that all amendments are logged with details of who made them, when, and what changes were made, allowing for subsequent review and verification .

Improper control over clock cards can lead to errors such as incorrect time recording, buddy punching, or data manipulation by employees, resulting in inaccurate payroll processing and unauthorized payments. Preventive measures include implementing biometric systems to prevent fraudulent clock-ins, establishing a robust supervisory system for monitoring clock card use, and regular audits of time records to identify discrepancies early .

To mitigate the risk of unauthorized intruder access such as hackers accessing data, Le Mauritia (Pty) Ltd could implement a firewall and encryption. A firewall serves as a barrier between the company's internal network and external networks, monitoring incoming and outgoing network traffic and blocking unauthorized access. Encryption ensures that even if data is intercepted during transmission, it cannot be read without the decryption key .

Le Mauritia (Pty) Ltd can establish a disaster recovery plan and implement a redundant system architecture. This includes having offsite data backups, which ensure data restoration after incidents such as fire or flood. A redundant architecture with failover capabilities ensures continuity of operations in case of system failure or sabotage .

Unauthorized amendments to the employee masterfile can result in improper payroll calculations, unauthorized access to sensitive data, and discrepancies in personnel records, potentially leading to financial losses and legal liabilities. Solutions include implementing stringent access controls, conducting regular audits of file changes, and utilizing encryption to protect sensitive information .

Electrifying Ltd can implement batch totals and hash totals as batch controls. Batch totals involve summing the number of recorded hours or entries, which can be compared against expected totals to ensure completeness. Hash totals add up irrelevant figures, such as employee numbers, to ensure all records are processed without errors .

Without appropriate legal guidance, Le Mauritia (Pty) Ltd could face issues related to data privacy violations, non-compliance with electronic communication regulations, and disputes over electronic contract enforceability. Mitigation strategies include consulting legal experts to ensure compliance with relevant laws, implementing robust data protection policies, and clearly defining terms in electronic transactions to ensure enforceability .

To ensure data integrity during message transmission, Le Mauritia (Pty) Ltd should implement checksums and digital signatures. Checksums help detect errors that might have been introduced during data transmission. Digital signatures authenticate the identity of the sender and ensure that the message has not been altered in transit .

An effective method would involve creating a detailed risk report that includes a risk matrix, potential impact assessments, and examples of industry practices addressing similar risks. Present the report through a formal meeting or workshop with management, supported by case studies highlighting the financial and operational benefits of proactive risk management. Visual aids, such as graphs illustrating risk impacts, can help in making the significance clear. Following the presentation, facilitate a Q&A session to address management’s concerns and suggestions .

The business risks identified, such as decreased client satisfaction due to load shedding, affect revenue recognition and the company’s reputation, influencing financial stability. Extension of credit terms might impact liquidity and cash flow reporting, requiring evaluation of credit risks. Ongoing strikes could result in operational inefficiencies affecting payroll and labor cost assessment. Each of these risks is significant for assessing potential financial misstatements and should guide audit planning to ensure a comprehensive review of related controls and risk mitigation .

You might also like