Acme Tires Ltd. You are an IT audit senior employed by Olsen & Abrams, Chartered Public Accountants (CPAs). You have been asked to provide an assessment of control risk for the audit of the fina

Acme Tires Ltd.

You are an IT audit senior employed by Olsen & Abrams, Chartered Public Accountants (CPAs). You have been asked to provide an assessment of control risk for the audit of the financial statements of Acme Tires Ltd. and to identify any additional audit procedures over the prior year that might be required. For control weaknesses that are to be reported to management, you have been asked to provide recommendations for improvement.

Acme is a closely held private company, with its next fiscal year ended September 30, 2019. Acme distributes automobile and truck tires from various manufacturers across Canada. Acme has been an audit client of your firm for several years and has traditionally been profitable, although net income this year has dropped by about 15%.

Based on your review of the working papers (including various memoranda and review notes prepared by the audit staff and the engagement partner) and the proposed financial statements and audit opinion, you have noted the following issues that have arisen during the past year:

1.   Acme has five highly automated regional distribution centres that distribute to hundreds of local sellers of tires. Each regional centre also has ―warehouse sale daysǁ when the warehouse is open to the public, which can purchase certain tires that Acme is having trouble selling to retailers at discounted prices. Acme has increased the frequency of the warehouse sale days to three days every two weeks. Because of staff cutbacks, it is the same two employees that run this sale and manage the inventory for the sale.

2.   Acme’s head office is in Vancouver. The company’s information technology outsourcers, who maintain the new secure website implemented this year and support Acme’s software, are also located in Vancouver. Acme’s secure website has a customer portal that is used by many customers to order products, determine the status of an order, and to use credit cards to pay for their purchase online.

3.   Acme has the same accounting software package suite implemented at four of its five distribution centres. The fifth centre, Halifax, implemented a different accounting software package suite this year, using its operating budget, since it wanted to reduce costs in the accounting office. The regional manager stated that the software approved by head office is too difficult to use.

4.   Since there have been no major information systems acquisitions for several years, and none are planned, Acme disbanded its IT Steering Committee about three years ago. At that time, the committee had finished some major work approving updates to the company’s privacy policies, security policies, employee information systems practices,

disaster recovery plans, and long-term information systems strategies. Discussion with the CEO indicates that the company believes it will be necessary to re-activate the committee in three to four years.

5.   Each region has a local area network that includes two point-of-sale terminals (used for over-the counter sales and the warehouse sale days) and about 15 other stations.

6.   Because of plummeting sales and revenues, the company has modified its service contracts so that on-site maintenance of computing equipment is done quarterly rather than monthly. Some functions, such as anti-virus updates are automated. However, there was a problem with the Halifax network, and the Vancouver senior accountant complained that he has recently received virus-infected spreadsheets from Halifax.

7.   Payroll is handled using a reputable service organization that has thousands of accounts. The senior accountant in Vancouver is responsible for payroll data entry.

Required

a)      Explain five (5) IT control weaknesses that are to be reported to management, provide recommendations to management for improvement, and identify the impact on the audit. Identify any additional audit procedures over the prior year that might be required.

IT Control Weakness

Impact on the Audit

Recommendations to Management for

Improvement

Additional Audit Procedures

b)      Provide an overall assessment of the IT control risk at Acme Tires Ltd. Support your answer with valid reasons

c)       Identify and explain matters that affect the audit process in the coming year.