Part 2: Project

To complete this part of the assessment, you will be required to review a number of scenarios, where you are required to review corporate governance requirements, make recommendations and implement and monitor internal controls. 

Once completed you will need to submit this assessment to your assessor for marking.

1 Scenario – James Cotes Pty Ltd

The Office of Internal Audit Services conducted an audit of the warehouse operations of James Cotes Pty Ltd. The overall objective of the audit was to assess the adequacy and effectiveness of internal controls over warehouse operations. You were part of the audit team. 

James Cotes Pty Ltd is responsible for the efficient, uninterrupted supply of goods and services to the United Nations (UN). This is done through an asset management system that aims to ensure that vehicles, generators, supplies, construction materials, spare parts, computer equipment etc. are always available to support the UN’s operational activities. The Newton Inventory Management System is the primary computer system for recording and managing inventory.

The variations in adopting corporate governance requirements that the audit report identified are as follows:

1) Absence of formal warehouse security reviews – No security assessment of warehouses was conducted, and security measures were normally only taken in response to specific incidences at warehouses. These measures included for example, the removal of security guards when they were suspected of stealing items and sealing of exits to reduce incidents of theft.

2) Lack of adequate procedures over inventory management – It has been established that the Newton records were incomplete, and the data recorded were inaccurate. This was due to weak internal controls and non-compliance with the organisational policies and procedures. From 1 July 2017 to 30 June 2018 James Cotes Pty Ltd did not conduct a complete physical verification of stock. Also, discrepancies between the results of physical stock count and asset records were not followed up and investigated and stock records were not adjusted accordingly.

3) Absence of performance indicators for warehouse operation – Contrary to organisational policy and procedures, James Cotes Pty Ltd had not established performance measures for warehouses and warehouse staff.

TASK 1

Review and analyse the findings of the audit report. Develop draft internal control procedures that will respond to the audit findings and improve the internal control and corporate governance of James Cotes Pty Ltd. Write your recommended procedures in the first column of the table below.

TASK 2

Show your draft procedures to your trainer or assessor. Seek clarification and feedback from your trainer or assessor on your procedures.

TASK 3

Update your draft procedures, incorporating the clarification and feedback you received.

TASK 4

James Cotes Pty Ltd has asked you to develop a timetable for the implementation of your recommended procedures. Use the template below to create your timetable. Include in your timetable:

• Your recommendations.

• Risk category.

• Risk rating.

• Actions needed to close the recommendation.

2 Auditing

As an auditor you were asked to perform some compliance tests in the accounts receivable and sale subsystems of the Blue Arrow Pty Ltd.

Your sales samples are based on the following:

• Approximate sales for year $4,000,000

• Tolerable error rate (TER) is 4%

• Expected error rate (ERT) is 3%

• 80% of sales were on credit

• Average credit sale value is $1,000

• 10% of population were examined

• 50 invoices did not have corresponding despatch slips

• 60 sales were not authorised

REQUIRED

I. Calculate the population size of sales invoices

II. Calculate the sample size

III. Calculate TER rate of despatch slips and provide a comment on the result

IV. Calculate TER rate of sales and provide a comment on the result 

V. Evaluate the results of your calculations to determine if this business has a problem with its sales systems.

3 Graphs

The following graphs are graphs of generic internal control key performance indicators. The graphs are in 3 categories:

• Some indicate normal operations

• Some indicate an abnormal situation.

• Some do not provide any indication of a problem or normal operation.

You are required to examine the graphs and select the correct explanation for the graph from the 4 options available, a, b, c or d. 

Write either a, b, c or d in the explanation column that matches the graph.

a) Possible fraud or serious error in the accounts

b) No obvious problem

c) Possible deliberate falsification of accounts e.g. valuation of assets 

d) Graph does not indicate a problem or normal operation.

4 Case study: On-Demand Transport Pty Ltd

Read the following case study and answer the questions.

On-Demand Transport Pty Ltd is a hybrid taxi and bus service. Customers can log on to an app and request a ride to a set of destinations:

• Local shopping centre

• Local library

• Train station

• Local hospital

A small bus will pick the passengers up and take them to one of the set destinations. 

Passengers pay the driver a fare of between $4.00 and $10.00, depending upon the distance travelled and who they are (seniors, children & students receive a discount). The fares are paid to the driver. 

Passengers can also be picked up along the route if they hail the bus.

At the end of the driver’s shift the takings are delivered to the reception desk at the depot, where the cash is counted and the money is then kept in a safe and at the next available opportunity, deposited into the bank. If the reception desk is closed the cash tin is put into a locked cupboard in the bus garage. All drivers and supervisors have a key to the cupboard.

At the end of the week a reconciliation is done to reconcile the week’s takings with the bookings from the app. Sometimes people book a ride but do not show up to the bus stop.

To encourage people to use public transport the state government pays a subsidy to On-Demand Transport of $0.15 per passenger per kilometre. 

The state government commissioned an auditor to audit their payments to On-Demand Transport. The outcome of the audit was that the auditor was not happy with the current internal control and governance procedures in place. Though not said directly, they inferred that On-Demand Transport was receiving less payments from the government than they should. The auditor suggested that the number of passengers and the revenue from fares was understated and that fraud may be a possibility.

Review the internal controls and governance of On-Demand Transport and answer the following questions: 

I. Identify where On-Demands current procedures do not meet commonly accepted standards of internal control and governance.   

II. Evaluate how these variations from accepted standards may cause problems for this business. 

III. On the template below develop an internal control procedure for cash receipts for On-demand Transport.

IV. The Corporations Act places a legal obligation on company directors to carry out their duties with a degree of care and with diligence. Could the directors of On-Demand Transport be accused of acting without due care or diligence. Provide reasons to support your answer.