Adelphi Health Care Ltd Case (Control Risks)
You are currently planning the audit of Adelphi Health Care Ltd, a listed company involved in the manufacture and sale of the flu vaccine. The company has a balance date of 30 June. The following notes were drafted as part of the audit plan two years ago and describe the procedures performed by the employees of the company in relation to the purchases cycle. Control risk around purchases was assessed as low during the audit two years ago. The audit plan this year includes testing controls around purchases.
Audit file note: Understanding the purchases cycle and control procedures implemented by management:
The head of the manufacturing department has the authority to approve purchases up to $50,000. The computerized inventory management system generates requisition orders when inventory levels fall below re-order levels. All purchase requisitions are processed through the centralized purchasing department. The role of the purchasing department is to ensure that purchase requisitions are duly approved, approved suppliers are used and where there are no pre-approved suppliers for a particular item, competitive quotes are sought if the cost exceeds $5,000 per item. The purchasing department then prepares a purchase order which is sent to the relevant supplier.
All goods are delivered to the central warehouse. The warehouse supervisor is responsible for checking that the goods received are in good order and that the quantities received and description of items matches the purchase order. The warehouse clerk then updates the inventory management system to reflect the receipt of the goods. If an order is only partially filled, a note is made on the purchase order and the purchasing department follows up with the supplier.
Supplier invoices are received by the accounts payable clerk who checks the invoices for mathematical accuracy and also agrees the details and quantities on the invoices to the goods received report and purchase order. Once these checks are done, the accounts payable clerk signs off on the invoice and sends it to the financial accountant for final approval. A register is maintained of all invoices received so as to avoid paying duplicate invoices. Once the accountant approves the invoices, they are batched and sent back to the accounts payable clerk for posting to the accounting system.
At each month end, the accounting system generates a payment report along with a remittance advice providing a break-down of the balances owing. The financial accountant reconciles the totals to each weekly batch summary. Once the balances are reconciled, the accountant approves the payment. The system then initiates electronic transfer of funds to all suppliers and sends either an email copy or hard copy of the remittance advice.
Conclusion: Control risk around purchases is assessed as LOW.
Required
(a) List the control procedures implemented by Adelphi over the purchases cycle.
(b) Discuss the appropriateness of using the audit notes from two years ago and the associated control risk assessment.
(c) Outline further work that would be required to assess control risk in the current audit.
Assignment File -
https://www.dropbox.com/s/6z9vhonc2j6biqr/Assignment%20Files.rar?dl=0