Question 1 (35 Marks)
Thandi like many graduates struggled to find a job after completing a degree in
Marketing Management at Mangaung University in the Central Province of Mzansi. As a student she had worked during weekends and school holidays at a mega wholesaler in the city of Mangaung and it was during this time that a business idea was formed in Thandi’s mind. The idea of a business came to Thandi when she worked as a marketing officer for the wholesaler and was assigned to market the services that the wholesaler was offering to Stokvels. The Stokvel industry in Mzansi grosses R44 billion per annum and a number of wholesalers and retailers in the country have created offerings that are tailored to attract the business of Stokvels. Thandi realised, while working directly with Stokvels, that the window of opportunity for a small business that offers personalised services to the Stokvels was open.
Thandi did not pursue the business idea as she was focused on graduating and finding a job in one of the big advertising agencies in Egoli, a very prosperous province in Mzansi. Thandi could not get a job for three years after graduating and continued to work as a part-time marketing officer for the wholesaler. In December of 2017, the third year of her part-time employment Thandi was reminded of her business idea. During January 2018 Thandi registered a business named Breaking Dawn Distribution (Proprietary) Limited (BDD). The business focussed on buying goods such as groceries, toiletries and laundry and cleaning products and packaged them according to the needs and specifications of each Stokvel that is a customer of BDD. These offerings are referred to as packages for ease of reference.
Thandi spent the months of February and March cold calling on Stokvels to present her business offering. Fortunately, she was able to sign on two Stokvels who bought groceries and other food items twice a year in June and in December. She used her savings and a loan from her parents to start business operations. The satisfied customers spread the word about the excellent service that they received and committed to remain as customers and Thandi gained more Stokvels to add to her customer base. The revenue of BDD totalled R300 000 in December 2018 and revenue more than tripled by December 2019 to R1 000 000.
Thandi recognises that the business is growing and she can no longer operate with the help of casual staff members as BDD has recently been approached by stokvels from other cities in the Central Region Province. The business that these Stokvels are bringing will translate into revenue amounting to R6 000 000. Thandi is also working on a campaign to promote the idea of buying groceries twice a year to the majority of the Stokvels that only make purchases in December, this has the potential of adding to the growth of the business in 2020.
Thandi has approached you on the recommendation of a business associate to assist her in ensuring that appropriate systems are in place to accommodate the anticipated business growth. You have been successfully running your own consultancy business for small and medium businesses.
In a meeting with you Thandi outlined how she envisages the business operations specifically relating to sales:
• The business will operate on a cash basis but cash is not handled on the premises as customers will be requested to make an EFT or direct cash deposit into the bank account of the business and bring along the proof of payment when placing an order in person or email the proof of payment together with the order.
• Thandi will continue to take responsibility for the day to day running of the business, however there is a need for the following full-time staff:
? Sales supervisor and three sales clerks who will be responsible for taking customer orders and recording the transactions in the accounting records. Thandi will personally be responsible for keeping the accounting records and reconciliations.
? Warehouse supervisor and seven delivery clerks who will be responsible for packaging the customer orders and dispatching.
• The customers can send a representative from the Stokvel to place an order on condition that the order is in writing on an official BDD order form and has been signed by the stokvel chairperson, secretary and treasurer. The written order form can also be emailed. The order form lists the different goods that can be ordered and has space for quantity and price. The delivery address and the contact details of the stokvel member that will receive the products must filled in on the order form.
• Anyone of the sales clerks can take the orders and orders can be emailed to anyone of the sales clerk. Upon receiving the order form the sales clerk compares the proof of payment to the order form and checks that the total amount on the order form and the proof of payment is the same. Once the confirmation of the total amounts on the order form and proof of payment is complete the customer signs and the sales clerk makes a copy of the order form. One copy of the order form and proof of payment are filed in the sales department. The original proof of payment is returned to the customer and the original order form is sent to the warehouse/dispatch for the goods to be picked and prepared for delivery.
• The warehouse manager assigns the orders to anyone of the available delivery clerks to pick the products and load them in the delivery vans. BDD contracts individuals who own delivery trucks and they are paid a fee per delivery. To ensure that the goods are delivered to the customers of BDD the delivery clerk that prepared the order accompanies the driver to deliver the goods.
• Thandi plans for the delivery clerks to rotate in the duty of checking the delivery vehicles as they leave the business premises to deliver the orders.
YOU ARE REQUIRED TO:
Write a report for Breaking Dawn Distribution (Proprietary) Limited (BDD) that discusses the following aspects regarding the envisaged revenue and receipts function detailing the following:
1.1 Describe the revenue and receipts cycle for Thandi. Your description needs to clearly indicate that the business operates on cash basis. (½ x 4 = 2)
1.2 Describe the departments, people, source documents, and activities (what should happen in a function), that should be part of the following functions of the revenue and receipts cycle of BDD:
• Receiving and processing customer orders
• Shipping the products (as you discuss this function consider using two of the delivery clerks for other positions that are needed in this function)
The answer to 1.2 should be in the format of a table as follows:
Receiving processing orders and customer Shipping the products
Departments (1) (1)
People (½ x 4 = 2) (½ x 8 = 4)
Source documents (1) (1)
Activities (11) (12)
Instructions for describing people:
Give the people in each function names, in example delivery cleck 1: Tiro Tau.
RUBRIC to be completed by the examiner
Adequate achievement Moderate achievement Unsatisfactory achievement
Understanding of the revenue and receipts cycle. Adequate understanding in:
• Describing the cycle for a cash business.
• Describing the departments, people, source documents, and activities.
Moderate understanding in:
• Describing the cycle for a cash business.
• Describing the departments, people, source documents, and activities. Unsatisfactory understanding in:
• Describing the cycle for a cash business.
• Describing the departments, people, source documents, and activities.
Total of 35 points 21-35 points 11-20 points 1-10 points
Question 4 (17 marks)
You are provided with the following internal control activities which relate to the purchases and payment cycle of Sneaker Street (Pty) Ltd, a shoe retailer.
At the beginning of every week, the storeroom clerk generates an automated requisition from the computerised inventory system. The requisition is solely based on pre-determined re-order levels of the inventory on-hand in the perpetual inventory system. As inventory is sold, the system keeps track of the quantity items in stock. Once an item reaches a set re-order level, it will appear on the next automated requisition. Re-order levels are determined once a year by the purchasing manager. Requisitions are printed as a single copy, each with a unique sequential number generated by the system. After the storeroom clerk has printed the requisition, it is signed, dated, and sent to one of two the purchasing clerks.
Once the purchasing clerks receive a requisition, they select an applicable supplier from a pre-approved list, to order the relevant items from. The purchasing clerk then generates a purchase order, for the items and quantity required. The purchase order is approved by the purchasing manager and produced in five copies. The original is then emailed to the supplier, while the other four go to the correct relevant departments for filing and matching.
The receiving department is responsible for accepting and recording of shipments received from suppliers. Goods from suppliers are pre-packaged in carton boxes, sealed with packing tape. Once a shipment of goods arrives on the premises, the receiving clerk inspects the condition of the boxes for any external damages.
The receiving clerk matches the quantity items on to the supplier’s delivery note to the approved purchase order received from the purchasing department. Only goods that appear on the purchase order and the delivery note is accepted. A prenumbered goods received note (GRN) is then made out by the receiving clerk as proof of delivery, indicating the quantities of the delivery note. The GRN is made out in three parts and sent to the supplier, purchasing department and the warehouse.
Upon receipt on the supplier’s invoice by the creditors department, the creditor clerk matches the invoice to the purchase order and goods received note. The creditors clerk makes sure that the supplier information, dates, quantity and description of goods and prices are correct. The purchase is then recorded, by processing of the invoice in the creditors system.
YOU ARE REQUIRED TO:
4.1 List and briefly describe, in your own words, the typical functions in a purchasing and payment cycle. (5)
4.2 Identify twelve (12) weaknesses in the section of the purchases and payments cycle described in the scenario above. (12)
TAKE NOTE: Carefully word your answers in proper, full sentences as weaknesses (making use of the phrase “lack of”) and not as recommendations, risks, compliance procedures, explanations, etc. RUBRIC to be completed by the examiner
Adequate achievement Moderate achievement Unsatisfactory achievement
Understanding of the functions weaknesses of the purchases and payments cycle. Adequate understanding in:
• Describing the functions.
• Identifying the weaknesses.
Moderate understanding in:
• Describing the functions.
• Identifying the weaknesses.
Unsatisfactory understanding in:
Total of 17 points 11-17 points 6-10 points 1-5 points
Question 5 (4 marks)
Duties within the purchases and payments cycle are segregated to ensure that no staff member will perform tasks that will create an opportunity for fraudulent activities to occur.
Required:
State the duties that should be segregated in the functions of payment and recording of creditors.
RUBRIC to be completed by the examiner
Adequate achievement Moderate achievement Unsatisfactory achievement
Knowledge of segregation of
duties Adequate knowledge Moderate knowledge Unsatisfactory knowledge
Total of 4 points 3-4 points 2 points 1 point
Question 6 (16 marks)
Fraud related to the purchases and payments cycle include the following:
• Purchase of personal goods by employees.
• Placing unauthorised suppliers on the approved supplier list.
• Paying suppliers excessive amounts for goods never received by the organisation.
• Staff colluding with each other.
Required:
1. Provide the internal control activities that the management of an organisation can implement to minimise the occurrence of the mentioned fraudulent activities.
2. Provide the control effectiveness procedures that the internal auditor will carry out regarding each of the internal control activities in 1 above.
Your answer should be in the format of a table as follows:
Fraudulent activities Internal control activities Control effectiveness procedures
Purchase of personal goods by employees.
Placing unauthorised suppliers on the approved supplier list.
Paying suppliers excessive amounts for goods never
received by the organisation.
Staff colluding with each other
RUBRIC to be completed by the examiner
Adequate achievement Moderate achievement Unsatisfactory achievement
Understanding of fraud and typical control activities in the purchases and payments cycle. Adequate understanding of the controls and control effectiveness procedures that address fraud.
Moderate understanding of the controls and control effectiveness procedures that address fraud. Unsatisfactory understanding of the controls and control effectiveness procedures that address fraud.
Total of 16 points 11-16 points 6-10 points 1-5 points

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