Legal Claim and Internal Control Review

Bryant & Stoker Pty Ltd was the corporate trustee of Stag Lyons Pty Ltd Superannuation Fund (SL Super). The members of SL Super were a medical practitioner (Dr Stoker) and his wife (Ms Bryant). The same couple were also the trustees for Bryant & Stoker Pty Ltd.

In 2012 Dr Stoker and Ms Bryant sought and acted upon advice from Terry Jones, an investment specialist. He recommended that Dr Stoker and Ms Bryant invest their superannuation funds into an investment vehicle, FI Investments Pty Ltd (FI), specialising in fixed interest securities. Data-Easy Pty Ltd administered SL Super but was also related to FI. Terry Jones was a director of both FI and Data-Easy.

When transferring funds to FI, Dr Stoker repeatedly made it clear to Jones that he did not want SL Super funds invested in loans. Although Dr Stoker did not ever ask Jones whether those instructions had been adhered to, the trustee of SL Super believed that all of SL Super's investments were in cash and shares. Dr Stoker subsequently conceded that, until 2017, he had a great deal of trust in Jones. Unfortunately, from 2012 onwards, the FI management team invested all of SL Super's cash into secured loans but classified them as 'cash' in the SL Super financial statements.

To satisfy his expectation, as trustee, that the SL Super financial statements 'gave a fair and true picture of its status and performance', Dr Stoker relied on the auditor. Each year Dr Stoker received documents (including an auditors' report and trustee representation letter to the auditor), delivered by Terry Jones, from the fund’s administrator, Data-Easy.

The auditor was Mr Barry Vann, who served as the appointed auditor of SL Super between 2012 and 2017. During all of those financial years, the audit reports for the fund were always unqualified. Dr Stoker took the view, from the documents provided by Jones that Mr Vann had prepared SL Super's financial accounts, audited them and submitted the Australian Tax Office (ATO) returns.

During the months of September and October 2017, Dr Stoker told Terry Jones several times that he wanted to withdraw all of SL Super's invested funds to purchase a commercial property. Mr Jones never actioned that request and in November 2017 FI and Data-Easy were both placed into voluntary administration. No funds were ever recovered from FI or Data-Easy by SL Super.

Bryant & Stoker Pty Ltd has instigated legal action against Barry Vann, claiming negligence for not detecting the fraudulent misstatement of investments in SL Super's financial statements.

Opportunities for Reducing Liability

Required

With reference to relevant case law, auditing standards, and legislation submit a report that outlines and evaluates:

a)the strength of Bryant & Stoker Pty Ltd's legal claim against Barry Vann; (10 marks) and

b)the opportunities for Barry Vann to reduce his liability, should he be proved negligent.

Internal controls and tests of control

Bilbo Enterprises Ltd manufactures a range of parts for medical equipment. The company’s purchases and accounts payable procedures are as follows:

1.Purchase requisitions are made by production managers and given to the purchasing department. These may be made verbally or in writing.

2.The purchase requisition is then used by the purchasing officer to prepare purchase orders (PO). The purchasing officer uses her discretion to select a supplier from a management approved list.

3.If the order is over $5,000, the PO will be given to the purchasing manager to check and approve. The manager will use a unique code to authorise the PO and return it to the same purchasing officer.

4.If the PO is under $5,000, approval from the purchasing manager will not be required.

5.Following steps three or four, the purchasing officer will file one copy of the PO under date order in the purchasing department. A second copy will be sent to the Accounts

Payable department and filed under the supplier’s name. The third copy will be emailed to the supplier for processing.

6.When the order is received from the supplier, the receiving department clerk will check the order by weight. This will then be compared to the expected weight of the delivered items. If these values are the same, the delivery slip will be signed by the receiving clerk and taken with the inventory items to the inventory storeroom. If the delivery weight of the box and contents varies from expectations it will be returned to the supplier.

7.An inventory clerk then takes the delivery slip and the inventory items from the receiving clerk.

8.The inventory clerk scans and emails the delivery slip to the accounts payable department. The accounts payable clerk compares the purchase order to the delivery slip for potential discrepancies.

9.The accounts payable clerk will give the delivery slip and the purchase order to the accounts payable manager to authorise payment if it is over $5,000. This requires the manager to input a unique code into the accounting software system to authorise.

10.Once authorised, payment is made.

11.If the order is under $5,000, the accounts payable clerk may make the payment.

12.The purchase order and delivery slip are then filed together under the supplier name.

Your audit partner has asked you to review and report back to her about Bilbo Enterprises Ltd’s controls over their purchases and accounts payable process.

Required:

Prepare a report for your audit partner that identifies and justifies:

a.ten (10) control strengths over Bilbo's purchases and accounts payable process. 

b.a test of control for five (5) of the ten (10) controls identified in (a).)

c.five (5) control weaknesses. 

d.three (3) audit assertions most impacted by the findings in (c).

e.five (5) control improvements that Bilbo could implement to address the weaknesses identified in (c).