ANSWERS TO WEEKLY QUESTIONS FROM LECTURE AND TUTORIAL OUTLINE FOR

LECTURE 6 WEEK OF APRIL 8th 2019

Please note-in error, there was no Question 4.

ANSWER TO QUESTION 1
Sales Order
Credit Approval Form
Shipping Order
Sales (Tax) Invoice
Remittance Advice
Credit Note
Uncollectible Account Authorisation Form

ANSWER TO QUESTION 2
Document matching is an internal control whereby information on one document is
checked against that on one or more other documents. This can be illustrated by
recourse to the payment of a supplier’s invoice as follows.

When an accounts clerk receives a supplier’s send their invoices (demands for
payment), he/she requires evidence that the invoice is for goods or services received
and ordered i, e. that a debt is owed by the customer and must be paid.

Evidence that the goods or services to which the invoice refers were actually
received by the customer is a receiving report that was completed by warehouse
staff when they received the goods and inspected them for quality.

Evidence that the goods were purchased is the purchasing order that was approved
by management and sent to the supplier.
Documents such as the purchase order and receiving report are prepared in multi-
copy form, with one copy of each being forwarded to the accounts payable clerk
when they are prepared.

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When the accounts payable clerk receives the supplier’s invoice, he/she can match
the information on that document against the information on the corresponding
purchase order and receiving report.

If the supplier’s invoice is for goods or services ordered and received in good order,
he/she can pay the invoice.

The purpose of matching the supplier’s invoice with the corresponding purchase
order and receiving report is to ensure that payment is made only for goods ordered
and received.

ANSWER TO QUESTION 3
For the following internal control objective, provide an example of an internal control that
management could put in place.

Internal Control Internal Control

Objective
Occurrence The requirement for transactions to be authorised before they are
processed. E.g. the requirement for the Purchasing Manager to
authorise purchases (by signing the Purchase Order) before it is
forwarded to the supplier.
Completeness The use of prenumbered documents (e.g. shipping orders) and having
a sequence check performed periodically by a staff member.
Accuracy The requirement that supporting documentation is
reviewed prior to the making of a payment
Cut-off Having clear instructions for recording transactions around balance
date?
Classification The requirement that a second clerk checks that account
codings on source documents are in accordance with the entity’s
chart of accounts

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ANSWER TO QUESTION 5:
The control environment is the overall attitude expressed by management towards internal
control and its importance in the entity. It comprises the following:
• Management philosophy and operating style
• Communication and enforcement of integrity
• Commitment to competence
• Participation by those charged with governance
• Organisational structure
• Assignment of authority and responsibilities
• Human resources, policies and practices

The control environment is important because it determines the overall quality of the internal
controls in the entity. It is sometimes referred to as “the tone at the top”, because it is an
expression of the approach my management and evidences the importance attached to
internal control by management.

ANSWER TO QUESTION 6
When the auditors preliminary assessment of the client's internal controls suggests that the
client’s internal controls are effective, the audit strategy will comprise a mixture of tests of
controls and substantive tests.

When the auditor's preliminary assessment of the client’s internal controls suggests that
internal controls are not effective, the auditor will not test the controls, but will perform
additional substantive procedures.

Under both audit strategies, the auditor will perform substantive tests because substantive
tests provide direct evidence concerning the fair statement (or otherwise) of the accounts.