ALL FIVE questions are compulsory and MUST be attempted
1 Pear International Co (Pear) is a manufacturer of electrical equipment. It has factories across the country and its
customer base includes retailers as well as individuals, to whom direct sales are made through their website. The
company’s year end is 30 September 2012. You are an audit supervisor of Apple & Co and are currently reviewing
documentation of Pear’s internal control in preparation for the interim audit.
Pear’s website allows individuals to order goods directly, and full payment is taken in advance. Currently the website
is not integrated into the inventory system and inventory levels are not checked at the time when orders are placed.
Goods are despatched via local couriers; however, they do not always record customer signatures as proof that the
customer has received the goods. Over the past 12 months there have been customer complaints about the delay
between sales orders and receipt of goods. Pear has investigated these and found that, in each case, the sales order
had been entered into the sales system correctly but was not forwarded to the despatch department for fulfilling.
Pear’s retail customers undergo credit checks prior to being accepted and credit limits are set accordingly by sales
ledger clerks. These customers place their orders through one of the sales team, who decides on sales discount levels.
Raw materials used in the manufacturing process are purchased from a wide range of suppliers. As a result of staff
changes in the purchase ledger department, supplier statement reconciliations are no longer performed. Additionally,
changes to supplier details in the purchase ledger master file can be undertaken by purchase ledger clerks as well as
supervisors.
In the past six months Pear has changed part of its manufacturing process and as a result some new equipment has
been purchased, however, there are considerable levels of plant and equipment which are now surplus to
requirement. Purchase requisitions for all new equipment have been authorised by production supervisors and little
has been done to reduce the surplus of old equipment.
Required:
(a) In respect of the internal control of Pear International Co:
(i) Identify and explain FIVE deficiencies;
(ii) Recommend a control to address each of these deficiencies; and
(iii) Describe a test of control Apple & Co would perform to assess if each of these controls is operating
effectively. (15 marks)
(b) Describe substantive procedures you should perform at the year end to confirm each of the following for plant
and equipment:
(i) Additions; and
(ii) Disposals. (4 marks)
(c) Pear’s finance director has expressed an interest in Apple & Co performing other review engagements in addition
to the external audit; however, he is unsure how much assurance would be gained via these engagements and
how this differs to the assurance provided by an external audit.
Required:
Identify and explain the level of assurance provided by an external audit and other review engagements.
(3 marks)
