ExpertACCA · Question 16 · Planning and Risk Assessment
CASE SCENARIO: Titanium Forge Industries
Titanium Forge Industries is a heavy manufacturing company specializing in aerospace components. You are the audit manager for the year ending 31 October 20X7.
During your planning meeting with the Finance Director, you noted the following:
- The company has significant Work-in-Progress (WIP) inventory. Manufacturing an aerospace component can take up to 6 months. WIP is valued based on standard costs, which include an allocation of manufacturing overheads based on estimated machine hours.
- Titanium Forge recently undertook a major factory overhaul, replacing several heavy stamping machines. The company's policy is to capitalize all costs associated with the overhaul, including the cost of routine maintenance performed at the same time.
- The company provides a 3-year warranty on all aerospace components. Due to a recent design flaw discovered in a batch of components shipped in August 20X7, several customers have filed warranty claims. Management has not yet updated the warranty provision, stating they are waiting to see how many more claims arrive.
Furthermore, during interim testing of the purchasing and payables cycle, your team noted the following control deficiencies:
- Purchase orders for raw materials (titanium alloys) can be raised and authorized by the same procurement clerk.
- Goods Received Notes (GRNs) are manually written and are not sequentially numbered.
- Purchase invoices are processed by the accounts team without being matched to a GRN.
REQUIREMENTS:
(a) Describe FOUR audit risks and explain the auditor's response to each risk in planning the audit of Titanium Forge Industries. (16 marks)
(b) Identify and explain THREE internal control deficiencies in the purchasing and payables cycle described above. For each deficiency, explain the possible implication and provide a recommendation to address it. (14 marks)
CASE SCENARIO: Titanium Forge Industries
Titanium Forge Industries is a heavy manufacturing company specializing in aerospace components. You are the audit manager for the year ending 31 October 20X7.
During your planning meeting with the Finance Director, you noted the following:
- The company has significant Work-in-Progress (WIP) inventory. Manufacturing an aerospace component can take up to 6 months. WIP is valued based on standard costs, which include an allocation of manufacturing overheads based on estimated machine hours.
- Titanium Forge recently undertook a major factory overhaul, replacing several heavy stamping machines. The company's policy is to capitalize all costs associated with the overhaul, including the cost of routine maintenance performed at the same time.
- The company provides a 3-year warranty on all aerospace components. Due to a recent design flaw discovered in a batch of components shipped in August 20X7, several customers have filed warranty claims. Management has not yet updated the warranty provision, stating they are waiting to see how many more claims arrive.
Furthermore, during interim testing of the purchasing and payables cycle, your team noted the following control deficiencies:
- Purchase orders for raw materials (titanium alloys) can be raised and authorized by the same procurement clerk.
- Goods Received Notes (GRNs) are manually written and are not sequentially numbered.
- Purchase invoices are processed by the accounts team without being matched to a GRN.
REQUIREMENTS:
(a) Describe FOUR audit risks and explain the auditor's response to each risk in planning the audit of Titanium Forge Industries. (16 marks)
(b) Identify and explain THREE internal control deficiencies in the purchasing and payables cycle described above. For each deficiency, explain the possible implication and provide a recommendation to address it. (14 marks)
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