ExpertMedium20 marksExtended Response
ACCA · Question 17 · Internal Control
SECTION B - CONSTRUCTED RESPONSE
MediChain Pharmaceuticals is a cross-border medical supplier. You are evaluating the internal controls for the year ended 31 May 20X6.
During your review of the procurement and payroll systems, you note the following:
- Purchase orders for medical supplies are raised by warehouse clerks when inventory looks low. They do not require authorization before being sent to suppliers.
- New suppliers are added to the purchase ledger master file by the accounts payable clerk without any secondary review.
- Goods received notes (GRNs) are filed sequentially in the warehouse, but copies are not sent to the finance department.
- Factory employees clock in and out using paper timesheets, which are often filled out at the end of the week from memory.
- The payroll manager processes the payroll, authorizes the bank transfer, and adds new employees to the payroll system.
Requirements:
(a) Identify and explain FIVE deficiencies in MediChain's procurement and payroll systems, and provide a recommendation to address each deficiency. (15 marks)
(b) Describe FIVE tests of control the auditor should perform to assess the operating effectiveness of the payroll system. (5 marks)
SECTION B - CONSTRUCTED RESPONSE
MediChain Pharmaceuticals is a cross-border medical supplier. You are evaluating the internal controls for the year ended 31 May 20X6.
During your review of the procurement and payroll systems, you note the following:
- Purchase orders for medical supplies are raised by warehouse clerks when inventory looks low. They do not require authorization before being sent to suppliers.
- New suppliers are added to the purchase ledger master file by the accounts payable clerk without any secondary review.
- Goods received notes (GRNs) are filed sequentially in the warehouse, but copies are not sent to the finance department.
- Factory employees clock in and out using paper timesheets, which are often filled out at the end of the week from memory.
- The payroll manager processes the payroll, authorizes the bank transfer, and adds new employees to the payroll system.
Requirements:
(a) Identify and explain FIVE deficiencies in MediChain's procurement and payroll systems, and provide a recommendation to address each deficiency. (15 marks)
(b) Describe FIVE tests of control the auditor should perform to assess the operating effectiveness of the payroll system. (5 marks)
How to approach this question
For part (a), use a three-column format: Deficiency (what is wrong), Implication (what could go wrong financially/operationally), and Recommendation (how to fix it). For part (b), write tests of control, which must test the *system*, not the numbers. Use words like 'Observe', 'Inspect for signature', 'Review access rights'.
Full Answer
This question tests Syllabus Area C: Internal Control. Identifying deficiencies requires understanding standard business cycles (Purchases and Payroll). Recommendations must be practical controls. Tests of control must generate evidence that the recommended controls are actually operating effectively.
Common mistakes
In part (a), providing vague recommendations like 'improve the system'. In part (b), giving substantive procedures (e.g., 'recalculate the wage expense for the year') instead of tests of control.
Practice the full ACCA AA — Audit and Assurance Practice Exam 2
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