The International Construction Company (ICC) is Involved in Building Items such as Housing Estates: Auditing & Assurance Assignment, GCD

Learning Outcomes

1. Evaluate the nature, purpose, and scope of an audit and the legal, regulatory and ethical framework for auditing

2. Describe the nature of internal control systems of relevance to the audit, including IT systems

3. Identify and apply the procedures required to evaluate control risk, including communication of the weaknesses, impacts, and professional recommendations to those charged with governance and management.

Question 1

Part 1: Case Study

The International Construction Company (ICC) is involved in building items such as housing estates and apartment complexes as well as government-funded buildings such as hospitals and schools. Each individual build is referred to by (ICC) as a contract. At any one time, ICC normally has between 5 and 8 contracts in progress. Each contract can take between 12 and 48 months to complete. Labour for each contract is provided partly from ICC’s own employees and partly by using sub‐contractors; that is using employees from other companies on a short-term basis.

Sub‐contractor authorization and payments

All sub‐contractor work is authorized by an ICC contract manager in the contracts office. The schedule of work to be performed by sub-contractors for each contract is prepared and reviewed by ICC’s contracts manager who then completes and signs a job order form (JOF).

This form is filed in the contracts department in the file relating to the relevant contract. Before the JOF is filed, details of the work required are entered onto a job authorization form (JAF) by a junior clerk. The JAF is then sent to the appropriate sub‐contractor. The JAF contains details of the work required, the date for completion of the work, and the monetary amount payable by ICC when the work is complete.

When the sub‐contract work is complete, the sub‐contractor sends an invoice to ICC’s accounts department. The invoice contains the date that the JAF was sent to the subcontractor and the sub‐contractor includes information on the payment to be made. A clerk in the accounts department recalculates the amount on the invoice to ensure the arithmetical accuracy of the invoice, and then stamps the invoice as “payment due”.

The same accounts clerk enters the sub‐contractor invoice into the computerised Purchase Day Book (PDB) and then files the invoice in order of day received. Payment is made automatically, once an invoice is entered into the PDB.

You are an audit senior in a local audit firm that was only recently appointed as external auditors to ICC.

Required:

Prepare a report for the management of ICC in which you:

1. Identify and analyse the various elements of a client company’s internal control systems that would be assessed by the auditor at the planning stage of the audit.
2. Identify FIVE weaknesses in the above-described system for authorization and payment of subcontractors at ICC. For each weakness identified explain the potential impact this could have on ICC and recommend a control that could mitigate the weakness.

Part 2:

The audit engagement partner of ICC requires an extension to be built onto his house which he mentioned to one of the directors of ICC at the audit planning meeting. The director indicated that while this was a relatively small contract for ICC, the company would be willing to carry out this work for a small fee.

Required:

Analyse all the threats to the independence and objectivity of the auditor and audit firm that may arise as a result of the above and recommend the safeguards the firm should use to mitigate the threats.