8/13/2019 case study 2 - Tiny Tots

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CASE STUDY 4 TINYTOTS BHD

Mr Lee is the owner of TinyTots Bhd (TinyTots) which was set up 15 years ago in Penang.TinyTots is a manufacturer of childrens building block toys. Your firm Farhan & Partners hasbeen the auditor for TinyTots for the last seven (7) years. The company sells to a widevariety of customers including large and small toy retailers across the country. Thecompanys year- end is 30 September 2013. You are currently planning the audit for thecurrent financial year.

The company has a large manufacturing plant; four large warehouses located one each inSelangor and Johor and two in Penang. The head office of TinyTots is located in Penang.Upon manufacture, the toys are stored in one of the warehouses until they are despatchedto customers. The company does not have an internal audit department and proposed thatyour firm take up the task of the internal audit. Without much hesitation you agreed to theproposal.

Sales ordering, goods despatched and invoicing

Each customer has a unique customer account number and this is used to enter salesorders when they are received in writing from customers. The orders are entered by an orderclerk and the system automatically checks that the goods are available and that the orderwill not take the customer over their credit limit. For new customers, a sales managercompletes a credit application; this is checked through a credit agency and a credit limitentered into the system by the credit controller. The company has a price list, which isupdated twice a year. Larger customers are entitled to a discount; this is agreed by the salesdirector and set up within the customer master file.

Once the order is entered an acceptance is automatically sent to the customer by mail/emailconfirming the goods ordered and a likely despatch date. The order is then sorted byaddress of customer. The warehouse closest to the customer receives the order

electronically and a despatch list and sequentially numbered goods despatch notes (GDNs)are automatically generated. Each warehouse is managed by a supervisor and assisted bytwo storekeepers. The storekeepers pack the goods from the despatch list and, before theyare sent out, the supervisor double checks the despatch list to the GDN, which accompaniesthe goods. Once despatched, a copy of the GDN is sent to the accounts team at head officeand a sequentially numbered sales invoice is raised and checked to the GDN. Periodically acomputer sequence check is performed for any missing sales invoice numbers.

FraudDuring the year a material fraud was uncovered. It involved cash/cheque receipts fromcustomers being diverted into employees personal accounts. In order to cover up the fraud,receipts from subsequent unrelated customers would then be recorded against the earlier

outstanding receivable balances and this cycle of fraud would continue.

The fraud occurred because two members of staff who were related colluded. Oneprocessed cash receipts and prepared the weekly bank reconciliation; the other employeerecorded customer receipts in the sales ledger. An unrelated sales ledger clerk wassupposed to send out monthly customer statements but this was not performed. The bankreconciliations each had a small unreconciled amount but no-one reviewed thereconciliations after they were prepared. The fraud was only uncovered when the twoemployees went on holiday at the same time and it was discovered that cash receipts fromdifferent customers were being applied to older receivable balances to hide the earlier sumsstolen.

8/13/2019 case study 2 - Tiny Tots

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Required:

(a) Identity THREE (3) risks in the Sales Ordering, Goods Despatched and InvoicingDepartment and why it posed a risk.

(6 marks)

(b) Describe the threats that Farhan & Partners might face in the audit of TinyTots andhow could the threats be overcome.

(6 marks)

(c) Identify and explain controls Tinkerbell should implement to reduce the risk of fraudoccurring again and, for each control, describe how it would mitigate the risk.

(8 marks)

(d) As auditor of TinyTots you are required to recommend FIVE (5) tests of controls theauditor would normally carry out on the sales system of TinyTots, and explain theobjective for each test.

(10 marks)

(30 marks)

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(30 marks)