RGM Sdn Bhd (RGM) is involved in packaging palm oil which is then sold to supermarkets. Raw materials mainly are boxes, plastic bottles and stickers used as its label. The company purchases its raw materials from a wide range of suppliers. Below is a description of RGM’s purchasing system.
When raw materials are required, the factory manager complete a requisition form and this is submitted to the purchasing department. No authorization is required on requisition forms and no reference is made to the current inventory levels of the materials being requested. A clerk in the purchasing department issues a sequentially numbered purchase order which is based on the previous supplier which the company purchased from. There is no approved supplier list.
Purchase orders are authorized by the purchasing director prior to being sent to the suppliers. When the goods are received, the warehouse department verifies the quantity to the suppliers despatch note and checks that the quality of the goods received are satisfactory. They complete a sequentially numbered goods received note (GRN) and send a copy of the GRN to the accounts department.
Purchase invoices are sent directly to the purchase ledger clerk, who stores them in a manual file until the end of each week. At the end of the week, he enters the invoice into the purchase ledger and gives each invoice a unique number based on the supplier code. The invoices are reviewed and authorised for payment by the accounts manager.
a.Explain why obtaining an understanding of the entity and its environment is important for the auditor. (5 marks)
b.Describe TWO (2) methods for documenting purchasing system of RGM; and for each method explain the advantages and disadvantages of using this method. (6 marks)
c.List FOUR (4) control objectives of RGM’s purchase system. (4 marks)
d.In respect of the purchasing system of RGM:
(i)Identify and explain FIVE (5) weaknesses; and
(ii)Recommend a control to address each of these weaknesses
(Note: Present answers using a table format) (10 marks)
e.Describe the roles of an audit committee and the benefits to companies of establishing an audit committee. (5 marks)
f.Describe FIVE (5) audit procedures undertaken by an auditor to assess if an entity’s going concern assumption is reasonable (10 marks)