Question 1

You are a junior auditor working for Roberts & Kent, the auditor of Complete Food Ltd (Complete Food) for 2014. Complete Food is a national supermarket chain with a mix of company-owned and franchised stores that aims to provide its customers with quality products at budget prices.

In 2010, Complete Food was approached by SUN, a Chinese firm that wanted to invest in Complete Food. SUN is an Asian-based company owning supermarkets throughout Asia. Katrina Worthington, the CEO of Complete Food, felt that the partnership with SUN was ideal as it would give Complete Food access to cheaper overseas produce as SUN was ordering many of the same products stocked at Complete Food stores at a fraction of the price that Katrina was able to secure. SUN agreed that it would supply all Asian produce to Complete Food at cost price in return for a discount on the acquisition price of its 20% interest in Complete Food.

You review the relationship between SUN and Complete Food and determine the following:

• Products sourced from SUN now account for approximately 60% of all goods sold in Complete Food stores.

• Complete Food is required to pay SUN in Chinese currency, Yuan, not Australian dollars. You are aware that Complete Food has no hedging experience.

• Over the last year, due to continuous late payment by Complete Food, SUN has reduced the credit terms available to Complete Food. Payments are currently required to be paid by Complete Food within seven days from invoice date. If invoices are not paid within set terms, SUN will stop further supply.

• There are rumours in the marketplace suggesting that SUN is considering entering the Australian market with its own branded supermarkets, which would then directly compete with Complete Food.

Required

(a) Given the information provided above, list at least two (2) business risks to Complete Food. Provide an explanation as to why you consider these items to be business risks.

(b) For the business risks identified in (a) above, provide explanations of how they could lead to a risk of material misstatement in the accounts of Complete Food as at 30 June 2014.

Criteria HD/DI CR PS

Two business risks are clearly identified with clear explanations as to why they are business risks Three business risks are identified with very comprehensive explanations as to why the risks are business risks Two business risks are identified with good explanation as to why they should be considered as business risks Two business risks are identified with little or no explanation as to why they are business risks
For each of the risks identified explanations are provided as to the reason why each risk could lead to a material misstatement in the accounts. For each of the three business risks identified there is a deep explanation as to how each risk could lead to a material misstatement. This explanation demonstrating a sophisticated understanding of the impact that business risk has upon management. For each risk identified there is a clear explanation as to how each risk could lead to a material misstatement For each risk identified there is an attempt to provide an explanation as to how each risk could lead to a material misstatement

Professional communication

Work contains distinct Understandable statements with no errors.

Extremely well organised.

Content is structured in a manner that facilitates the reader's understanding. Minor spelling, grammar and punctuation errors. Work shows evidence of proofreading.

Well-structured with one main idea or argument provided per paragraph arguments/ideas. Some spelling, grammar and punctuation errors found but the work is readable and structured.

Work may Include too many ideas in one paragraph.

Question 2

Coscut Ltd is a medium sized manufacturing company listed on the ASX. It has manufacturing operations at multiple locations across Australia with headquarters in Sydney.

Coscut Ltd recruits a Human Resource Advisor (HRA) at each location of manufacturing operations. HRAs are responsible for hiring staff, signing employment contracts and recording their attendances/leaves. They forward employee related information to the payroll team located at head office. The payroll team is responsible for monthly salary processing of all employees. The payroll team consists of a payroll supervisor (PS) who supervises an employee services officer (ESO), a payroll officer (PO) and a payroll co-ordinator (PC).

At the joining of any new employee, HRAs forward a copy of the employment contract to the ESO. The ESO sets up details of the new employee such as joining date, bank details, salary and allowances into the payroll system (ERP system). The ERP system then prints a ‘New Employee Report' (NER). The NER is forwarded to the PS for review and approval. The PS reconciles the employee details on the NER with employment contracts and approves it manually. The approved NER is filed by the ESO in the employee's file.

Every month, HRAs forward a ‘Statement of Leave Availed' by employees to the PO. The PO updates the ERP system which then generates a ‘Payroll Report' listing all employees, their gross salaries, deductions, leave balance, bank details and net salary payable. This report is reviewed by the PS. The PS then performs data integrity tests such as (1) check all new employees are included, (2) check salary is calculated pro-rata from the date of joining, and (3) compare total salary cost for the month with previous months. If any discrepancies are detected, the PS informs the PO who makes the necessary corrections and adjustments in the ERP system. The PO then prints the final Payroll Report and after the approval of the PS, the PO processes the payroll into the banking software for payment processing.

The Finance Manager (at head office) is authorised to approve payment in the banking software. He relies on the PS for accuracies.
The PC is responsible for administration and compliance of payroll tax and fringe benefit tax. Due to lean and friendly working environment, all the three payroll staff have access in ERP for each other's role to enable them to fill in when one of them is on leave. Ultimately, the PS is responsible for ensuring segregation of duties and correctness of payment.

During the last couple of years, the PS has received complaints from employees regarding inaccurate annual leave balances. On further investigation, the company finds the erroneous leave balances to be caused due to faults in the ERP system's generation of accrued leave. The company engages an external consultant to fix the problem. Meanwhile, the PS continues to receive complains in relation to leave balances. The Finance Manager asks the PS to manually calculate accrued leave and leave balances every month. The PS generates an excel spread sheet, reconciles the manual calculations with ERP computations and accounts for any under/over provision required by a manual journal entry after the approval from the Finance Manager. The external consultant is still working to resolve these differences with ERP system.

Required:

a) Identify at least four existing controls in the payroll function identifying why each is a control

b) Identify any internal control weakness in the payroll function, its consequence and make recommendations for improvement.