Tutorial 6

Question 1 In the audit of WW Ltd, you did extensive ratio and trend analysis as part
of preliminary audit planning. Required: Evaluate the potential significance of each of
the changes in ratios or trends identified in your analysis on the fair presentation of
financial statement. Your analytical procedures identified the following:

1. Commission expense as a percent of sales was constant for several years but has
increased significantly in the current year. Commission rates have not changed.
𝑪𝒐𝒎𝒎𝒊𝒔𝒊𝒐𝒏 𝒆𝒙𝒑𝒆𝒏𝒔𝒆
𝑺𝒂𝒍𝒆𝒔
Business reason: There is no reasonable business reason to explain why the ratio of
commission expense as a percentage of sales could increase significantly if commission
rate remains constant, because if sales increase, commission expense would increase as
well, then ratio would still remain constant , this is bbnormal if no change in the
commission rate.
A non-business reason: Financial staff could have omitted the recording of sales .
Possible RMM: Sales unders tated hence affecting completeness of sales , commission
expense overstated hence accuracy of expense.

2. The rate of inventory turnover has steadily decreased for three years.
𝑪𝑶𝑮𝑺
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚

Business reason: There could be increase of competitors that sells similar products or
substitutes for the product hence leading the obsolesces for inventory.
Possible RMM: AVA of inventory as obsolescence of goods will lead to overstating of the
lower-of-cost or NRV of inventory and classification error betw een the inventory and
COGS - Goods that are sold but did not transfer to out.

3. The number of days’ sales in accounts receivable has steadily increased for four years.
Business Reason: There could be extension of credit period for WW Ltd.’s customers due
to a change in company policy , customers are experiencing financial distress hence
leading to difficulty in repaying their debt obligations and staff did not chase for
outstanding debt due to poor credit control in monitoring of AR.
Possible RMM: Accounts Receivable Overstated therefore affecting Valuation (AVA) of AR
assertion and Bad Debt Expense understated hence affecting completeness of Bad Debt
assertion.

4. The absolute amounts of depreciation expense and depreciation expense as a percent of

gross fixed assets are significantly smaller in the preceding year.
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏
𝑷𝑷𝑬
Business Reason - There could be a change in depreciation policy done by the company to
extend the useful life of the PPE. Reason to do so may be due to less intensive usage of
the fixed assets or upgrading of Assets that extends the useful life of PPE.
Possible RMM - Overstated Fixed Assets and Understated Depreciation expenses hence
affecting AVA of PPE. SFRS 16 requires the company to provide evi dence on the
depreciation method.

5. The debt equity ratio has increased substantially compared to prior year and is double
the industry average.
𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒃𝒆𝒂𝒓𝒊𝒏𝒈 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒚
𝑻𝒐𝒕𝒂𝒍 𝒆𝒒𝒖𝒊𝒕𝒚
 Interest bearing liability → Long ter m borrowing or short-term borrowing
Business reason: Company may have violated the loan payment hence having twice the
debt as compared to other companies, company may have additional borrowing or the
company may have cash flow problems and hence unable to meet debt obligations.
RMM on audit concerns: Violation of debt covenants (loan agreement that includes KIP to
protect the client’s risk, set certain ratios) → trigger lender demand immediate payment
or charging higher interest rate , problem with going co ncern due to economic downturn
Assets that are secured to the lender must be disclosed to the notes to the account. If not
disclose will lead to MM. → RMM: Presentation

6. Cost of goods sold has decreased from sixty percent of sales to fifty percent while
inventory has increased at the same time.
𝑪𝑶𝑮𝑺
𝑺𝒂𝒍𝒆𝒔

Business reason: For every $1 dollar of sales, the COGS drop from 60 cents to 50 cents as
cost of goods is cheaper due to change to low cost supplier or good in control of cost and
there is build-up of inventory holding at financial year end due to anticipated increase in
demand or anticipate increase in cost in the future hence stock up more in warehouse or
change in product mix and sold more of low -cost product.
Possible RMM: COGS underst ated affecting completeness of COGS , inventory overstated
resulting in AVA of inventory , sales overstated affecting accuracy of sales.

7. The accounts payable turnover period has slowed down but cash balance remains the
same as prior years
𝑨/𝑷
𝒙 𝟑𝟔𝟓 𝒅𝒂𝒚𝒔
𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔
Business reason: Thee could be a c hange in credit terms as company negotiate for longer
credit period or change in supplier that give longer credit term, year-end inventory build-
up
RMM: Accounts Payable overstated affecting AVA of AP , Purchases understated affecting
completeness of purchases.

Question 2 Using the information below, (I) Calculate FIVE ratios, for BOTH years,
which would assist the audit senior in planning the audit; and (ii) Using the
information provided and the ratios calculated, identify and describe FIVE risk factors
You are the audit manager of Alpha Audit LLP and you are planning the audit of Beta Pte Ltd
(Beta) for the year ended 31 March 2018 .

Beta is a distributor of househol d appliances and provides a one-year warranty to its

customers. You just had a planning meeting with the finance director and had taken the
following notes of the meeting and financial statement extracts: Beta has had a difficult year
as its revenue has dropped due to increased competition. In order to remain competitive,
management has offered significantly extended credit terms to their customers. It has also
begun to bring in some no -brand household appliances which are cheaper than the branded
ones and sold in larger volumes but at lower margins . The directors have decided to extend
the estimated useful lives of its machineries by three years on the basis that the previous
estimates are not appropriate. The supplier of the “Panda” brand of washing machin es has
decided to discontinue with the current model and plans to launch a new model next year.
Beta still has a significant inventory balance of the discounted model of washing machines in
its warehouse. To help with operating cash flow, the directors of Beta have borrowed $1
million from the bank during the year. This is due for repayment at the end of 2018. The
directors are given a profit target of $0.5m to meet. Failure to meet the profit target will
cause the directors to forfeit their bonuses
I)
Ratios 2018 2017

𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑂𝐺𝑆 16.5 − 9.5 16 − 8

𝐺𝑟𝑜𝑠𝑠 𝑀𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 16.5 16
= 42.42% = 50%

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡 1.1 1.9

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑚𝑎𝑟𝑔𝑖𝑛 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒 16.5 16
= 6.67% = 11.88%

365 365 365

𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑑𝑎𝑦𝑠 =
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 ÷ 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 ℎ𝑒𝑙𝑑 9.5 ÷ 2.1 8 ÷ 1.4
= 81 days = 64 days

𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 3.8 2.1

𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑑𝑎𝑦𝑠 = 𝑥 365 𝑥 365 𝑥 365
𝐴𝑛𝑛𝑢𝑎𝑙 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 16.5 16
= 84.06 Days = 47.91 Days

365 365 365

𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑑𝑎𝑦𝑠 =
𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 ÷ 𝐶𝑢𝑟𝑟 𝑌𝑟 𝑃𝑎𝑦 9.5 ÷ 2.1 8 ÷ 1.3
= 80.68 days = 59.31 Days
*If no purchases, use Cost of Sales (Increase)
*If no preceding year Payables info, then just
use current year Payables balance as
denominator

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 2.1 + 3.8 + 0.5 1.4 + 2.1 + 1.7

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 2.1 + 1 1.3
= 2.06 = 4.00

Make sure to
include the $1
million loan as it is
due for repayment
at end of 2018

(To exclude inventory) 3.8 + 0.5 2.1 + 1.7

𝐶𝑢𝑟𝑟 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑖𝑛𝑣 − 𝑝𝑟𝑒𝑝𝑎𝑖𝑑 𝑒𝑥𝑝 2.1 + 1 1.3
𝑄𝑢𝑖𝑐𝑘 𝑟𝑎𝑡𝑖𝑜 = =1.38 = 2.92
𝐶𝑢𝑟𝑟 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

ii)
Gross margin: The decrease in gross margin is most likely due to the increased competition in
the industry which results in lower sales price due to a need to sell at a discounted price , this
lowers sales revenue and the importing of the no -brand appliances, which are sold for a
lower margin will increase COGS, hence, the change in margin is justifiable.

Inventory days: The increased in inventory turnover days could be due to obsolescence of the
product. The supplier of the “Panda” brand of washing machines has decided to discontinue
with the current model and plans to launch a new model next year. This means that
customers are anticipating to purchase the new product and it is harder to sell off the current
model.

Receivable days: Due to higher revenue, there are mor e account receivables to be collected
from customers as Beta have extended their credit terms. Hence, longer receivable days.
Current ratio & quick ratio & payable days : Company is taking more time to repay creditors,
as they are fewer current assets to meet current liabilities this results in difficulty in meeting
debt obligations. Beta Pte Ltd has extended credit terms to its customers, thus cash is
collected at a slower pace, leading to a deterioration of its ability to meet current liabilities.

Current ratio and Quick ratio : Both have decreased due to lesser cash and receivable and the
increase in inventory and trade payable. There could be more purchases made in 2018 so the
overall liquidity has worsened. Also, a massive short-term loan of $1 million was secured in
2018, and sales have declined due to strong competition in the market and a large amount of
unsellable inventory, even if the discounted inventory can be sold, it will be at a steep
discount, thus small amount of cash can be collected. A sharp reduction in cash balance from
2017 to 2018 also served to impair the liquidity of the firm. There is a potential risk of the
company not disclosing the going concern issue according to SFRS 16.

Profit target, Self-interest threat, depreciation, management fraud, increased competition :

The directors are given pressure to meet profit target or their bonuses will be forfeited.
Hence, this increases the risk of RMM at FS level due to management fraud as the directors
may extend the usef ul life of the machineries by three years just to decrease operating
expenses to achieve the desired target of $0.5m profit to earn their bonuses. The 3 years
extension of the useful life of machineries must be justifiable and able to better reflect true
economic reality hence being a realistic estimate. Furthermore, Beta has had a difficult year
as its revenue has dropped due to increased competition which may further motivate the
directors to manipulate with the depreciation amount. There is evidence in t he draft done by
2018 FS, whereby the operating expenses has been reduced by $0.2mil when there was no
disposal of PPE being mentioned and no other additional operating expenses were being
incurred. Therefore, it is n ot justifiable as the extension made to the useful life of assets may
be used as a coverup. Thus, there is a high RMM.

Short term loan : To improve the operating cash flow, the company obtained a short-term
loan of $1million which is due for repayment by 2018. The risk for the short-term loan would
be having insufficient funds to repay the short-term loan incurred leading to going concern
risk. Loan should be presented as current liability instead of non-current liability hence there
affecting classification assertion. Also, m ust present the assets that are held as loan security
therefore affecting presentation assertion . The loans concern is there might be a potential
risk of a breach of loan covenan t and potential risk of the management not disclosing loans
related matter

Textbooks questions Question 3

Q6-1 What are management’s incentives for establishing and maintaining strong internal
control? What are the auditor’s main concerns with internal control?
Internal controls to management
Management is responsible for ensuring orderly and efficient conduct of the business.
Internal controls help to eliminate the risk of fraud and theft to safeguard their assets. A lack
of internal control may lead to misrepresented data on the company’s FS which then ca n
affect the decisions made by the users of the FS. It is the agency responsibility not to misled
users.

Internal controls to auditor

The auditor will be concerned that the client’s internal control will not be able to prevent or
detect material misstatem ents on a timely basis and will still evaluate the internal control to
ensure a more accurate FS, as no matter how strong the client’s internal controls are , it can
only reduce but not eliminate risk of material misstatements in the FS due to inherent
limitations of internal control. Auditors rely on internal control to identify risk of material
misstatement, risk factors that result in designing appropriate audit procedures/plan. Entity’s
ability to initiate, record, process and report financial data consi stent with management’s
assertions.
Q6-13
a. Internal Control objectives
Internal controls are the rules and procedures implemented by a company (management
decisions) to ensure the integrity of financial and accounting information, promote
accountability and prevent fraud. Besides complying with laws and regulations, and
preventing employees from stealing assets or committing fraud, internal controls can help
improve operational efficiency by improving the accuracy and timeliness of financial
reporting. Safeguarding of assets, to generate reliable financial data for internal, external
reporting and decision making.

b. Auditor’s objective in understanding controls

Auditor should understand the 5 components of internal control. (Control environment,
Entities risk assessment process, information system and related business processes relevant
to financial reporting & communication, Control activities, monitoring of con trols). The
auditor has the responsibility to obtain an understanding of internal control and assess
control risk and decide how much reliance he wished to place on the system of internal
controls. If they find the design of the control effective , auditors will test the control such as
inquiry, reperformance and observation. (refer to slide 24 of Lecture 6 for the diagram on the
importance of internal control to auditors).

c. Auditor should document:

Trace a few documents through the accounting system to confirm the auditor’s
understanding, they should then be able to assess the control risk and decide on the reliance
they wish to place on the system. Types of documents: Procedure Manuals and Organisational
Charts, Narrative Description, Flowcharts and In ternal control questionnaires

Q6-15
A.
• Is the evidence available in the IT system?
• Effectiveness of the new IT system?
• Whether the company has proper knowledge, competence and capability of IT system
• How the IT system has changed from traditional to ele ctronic; initiated, recorded,
processed and reported?
• Availability of evidence in electronic form
• Assess the availability of evidence in hard copy form, then thus whether the
substantive strategy can still be relied soon.

B. Consideration: If the audit fi rm does not have any personnel that has good IT knowledge.
Auditor can ask the expert regarding programme development, program changes, access to
programs and data and computer operations . This depends on the c omplexity of the new IT
system. Hire an expert if the firm has no knowledge in IT.

C. Control environment - new internal controls in place will be more efficient and effective.
Management is more committed to strengthen their new internal control system.
Entity’s risk assessment process - changes to an automated IT system (instead of manual) will
open the entity’s accounts to the risk of infiltration by unauthorised users.
Information system and related business processes relevant to financial reporting and
communication - timely recording of transactions and less labour needed due to less manual
checks, lesser chance of omission or missing out certain transactions
Control activities - authorization will be stringent as only certain users are allowed access to
the system; performance review would be easier as IT system is able to generate financial
reports; arithmetical and accounting would be more accurate as the system would tabulate all
the data
Monitoring of controls - must have knowledge about the IT System to monitor effectively.
There is easier monitoring of the client internal control and procedures.
 E.g. internal and external auditing

Q6-19
The following communication is the report on significant deficiencies for Houghton
Enterprises:

In planning and performing o ur audit of the financial statements of Houghton Enterprises as

of and for the year ended 31 December 2013, in accordance with International Standards on
Auditing (ISAs), we considered Houghton Enterprises’ internal control over financial reporting
(internal control) as a basis for designing our auditing procedures for the purpose of
expressing our opinion on the financial statements. The ISAs require the auditor to obtain an
understanding of internal control relevant to the audit of the financial statemen ts when
identifying and assessing the risks of material misstatement. In making those risk
assessments, the auditor considers internal control in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of express ing an opinion on the
effectiveness of internal control. The auditor may identify deficiencies in internal control not
only during this risk assessment process but also at any other stage of the audit.
Our consideration of internal control was for the limi ted purpose described in the preceding
paragraph and would not necessarily identify all deficiencies in internal control that might be
significant deficiencies. However, as discussed below, we identified certain deficiencies in
internal control that we con sider to be significant deficiencies.

A deficiency in internal control exists if (1) a control is designed, implemented or operated in

such a way that it is unable to prevent, or detect and correct, misstatements in the financial
statements on a timely ba sis; or if (2) a control necessary to prevent, or detect and correct,
misstatements in the financial statements on a timely basis is missing. A significant control
deficiency (individually or in combination with other deficiencies) occurs if, in the audit or’s
professional judgement, it is of sufficient importance to merit the attention of those charged
with governance.

We consider the following items are significant deficiencies:

1. Control activities for granting credit to new customers were inadequate. In particular, the
credit department did not perform an adequate check of the creditworthiness of the
customer with an outside credit agency.
2. There were not adequate physical safeguards over the company's inventory. There were
no safeguards to prevent employees from stealing high -value inventory parts.
This communication is intended solely for the information and use of management,
individuals charged with governance and others within the organization and is not intended
to be and should not be used by anyone other than these specified parties.

Q6-22
Key (b) Control procedures to address (c) Test of Controls
Assertions the assertion & audit approach

Existence Fishes are counted when they
transfer from freshwater to cages in
the sea.
Adult fish are counted and weighed .
Dead fish is removed from the cages
and counted.
Observe the counting and weighing
process. Inquiry with client
personnel to see if they are
competent to perform the control
procedure. Inspect the count report
for signs of approval and review.
Reperformance by recalculating
production cost
 Accuracy, The weight of the fish is estimated To inspect the costing report for
valuation & based on the relationship between evidence of approval .
allocation expected growth rate and feed
consumption (a ffect valuation)
Value is determined by multiplying
production costs (70%) and weight of
fish. Use review cost accounting
system (ABC/Cost) to track. Auditors
have to test the system. Daily prices
are used to calculate inventory NRV .

Q6-23

Strengths in controls environment

• Company has a code of conduct
• Management has high integrity (C -suite)
• Hire competent people
• Management is fairly conservative in terms of accounting policies and practices
• External auditor to review controls (once a year) to check whether controls have
been followed.

(b) Weaknesses in control environment

• There is little intervention by upper management (encourages fraud by employees)
• Board of directors is not very active
• No internal audit department
• Employee compensation is dependent on performance may motivate employees to
create false impression to meet target.
• Limited monitoring of employee compliance with the corporate code of conduct

(c) Fraud risk factors (fraud triangle)

1. Motivation:
Salary and bonus depend on division’s performance
As a general manager, Harris has a high incentive to "look good." His division has had 7
years of increasing profits, and his salary and bonus depend on the division's performance .

2. Pressure: Competition in the industry is fierce, and sales prices are declining. Pressure
to “look good”, difficult to meet the performance.

3. Opportunity:
→ Inventory represents a large portion of the balance sheet and controls over inventory
are weak.
→ There is limited monitoring by corporate management, and there is no internal audit
department

Rationalization
It is temporary, the situation will improve when competitor goes bankrupt.

EMGPQ19-17

Tutorial 7
Question 1
a) State FOUR objectives of the internal control which should be exercised over a sales and
trade receivables systems
 With internal controls, Bad Debt are minimised. Only genuine orders received from
customers are executed. Genuine orders received from customers are executed promptly
/timely manner. All goods despatched or services provided are properly invoiced. All
goods despatched or services provided are promptly invoiced. All debts due are collected
in accordance with credit ter ms. Credit terms are made to customer accounts only when
properly due (credit checks) sales invoice and sales credit documentation are correctly
and promptly recorded in the books of account . The books of account accurately reflect
sales and trade receivab les information.

b) Premier Equipment Pte Ltd is a wholesale supplier of industrial equipment. Its board has
expressed concern at some aspects of the company’s internal control relating to sales and
trade receivables system. The following policies and proc edures form part of the control
activities exercised over that system (I) Identify SIX weaknesses in the system;(ii)
Describe the implication of each weakness identified;(iii) Recommend improvements to
address the weakness.

1. Premier Equipment Pte Ltd uses a fully integrated sales and general ledger accounts
system. The company’s accountant and assistant accountant, together with Tommy Tan,
the sales director, and the sales department clerks (sales clerks) have full access to all
receivable ledger files incl uding the master file.
The first weakness is lack of segregation of duties . The director performs director duties
which is approval function of sales and have access to master file which is recording
duties and the sales clerk has recording and admin duties. The risk implication is the
director may create fictitious sales transactions , create fictitious customer account and
post fictitious sales transaction, or make unauthorised changes to the credit term to
increase sales. The recommendation is to only grant full access only to relevant staff in
charge of accounts receivable ledgers such as accounts receivable team. The sales
directors, accounts receivable team, accountants, sales clerk should have read -only
access to AR ledger. Th ere should be segregation of duties.

2. Upon receiving a request from a potential customer to open a credit account, the
request is forwarded to Tommy Tan, who carries out full credit checks before deciding
whether to grant a credit facility. Once credit fa cilities are granted, a sales clerk
updates the sales ledger master file with the new customer details. Slow or late paying
customers are pursued for payment by Tommy Tan and the salesmen.
The second weakness is t he sales director is responsible for granti ng credit facilities to
new customers. The risk implication is the sales director will be motivated to increase
sales. As a result, credit checks will not be objectively performed as the sale director will
be more inclined to give higher credit limit in order to increase sales. Overall to the
company, there will be an increase in bad debt risk. The recommendation t o prevent such
misstatement, credit checks should be performed by staff independent of sales function,
cash collection and recording duction [Seg regation of duties] such as the credit
controller.

The third weakness is s ales director are more motivated to chase for sales. The risk
implication is sales director may not be willing to put pressure on customer to chase for
payment and instead seek favour to make more sales instead of collection of payment.
Therefore, it may not be effective. Company may still face bad debt risk, objective not
met. The recommendation should be t here should be segregation of duties, sales director
should not be the one pu rsuing the late paying customers. Assign an employee from the
credit department to pursue the late paying customers.

3. Customer orders received, in writing or by telephone, are directed to a sales clerk. The
clerk uses a sales invoicing programme to genera te a pre-numbered sales invoice after
checking that there is a customer’s account in the sales ledger Masterfile. The
 programme prices sales invoices automatically using authorised prices stored in a
standing data file. Full access to this file is restrict ed to Tommy Tan and the sales clerk.
The fourth weakness is t elephone orders are accepted for the despatch of the company’s
products. The risk implication is revenue may be overstated from fictitious orders hence
affecting occurrence of revenue assertion . Sales clerks may fabricate sales orders and
claim that it is genuine sales since there are no physical evidence of order. Customers
may place fictitious orders with no intention to pay up therefore affecting bad debt
expense of AVA assertion . The recommendation is they should only accept written
approved purchase order from customers or email confirmation for retail customers.

The fifth weakness is sales clerks have full access to product price data contained in the
standing data file of the sales invoicin g programme therefore she can do amendments .
The risk implication is sales clerk could make unauthorized changes to the prices to the
advantage of certain customers in order to get some benefits in return. The
recommendation is to r emove authority of sales clerk’s access to amend product prices so
that, sales clerk should only have read access to the pricing data.

4. Sales clerks post invoices to Premier Equipment Pte Ltd.’s trade receivables ledger, and
the relevant general ledger accounts will be automatically updated. On a daily basis all
invoices are mailed by the sales clerks to customers and the accompanying delivery
orders are forwarded to the stores department to accompany goods as and when
delivered to customers.
The sixth weakness is invoices are raised before the despatch of goods. The risk
implication that sales revenue may be recognised without any delivery of goods affect ing
occurrence, and that the reported profits will be overstated when the goods have not
been despatched to customers yet. The company may therefore record sales revenue
without any delivery of goods which affects occurrence assertion. Another risk that the
customer may be billed at a different month from the delivery of the goods affecting cut-
off. The recommendation is to raise sales invoices only after matching details with
despatch documents and customer sales orders. This is to make sure that customers are
invoiced only when goods have been despatched.

Question 2 Identify the weaknesses in the cash sales system and recommend
procedures which could be implemented to remedy these weaknesses.
You are planning the audit of the financial statements for the year ended 31 December 2018
for an audit client, SKApparels Pte Ltd. You are currently reviewing the cash sales system.
Most of SK’s sales are on credit but some small and infrequent customers pay cash on
collection. The following are the details relating to the cash sales system:
The customer places an order with a sales representative who then informs the s ales ledger
staff. The sales representative prepares a serially -numbered order confirmation and hand
it to the customer. With the order confirmation, the customer passes it to the goods
despatch department and a staff there puts together the ordered goods . The customer then
submits the order confirmation to the cashier who prepares a manual cash sales invoice.
The cashier receives payment from the customer by cheque or cash. The collected cheques
and cash are kept in the locked box placed in the filing c abinet. The cashier records the
monies received and banks in the monies a week later.

The first weakness is lack of segregation of duties. The risk implication is t he cashier receives
payment from customers , records the monies received and banks in the m onies one week
later hence the cashier is performing custodian and recording duties. This means that the
cashier is able to commit teeming and lading fraud and misappropriate funds by stealing the
cash by creating fictitious recipients of cheque and editin g recipients name to own self.
Hence, will affect the occurrence of sales assertion. The recommendation is to have at least 2
people to collect the money and maintain the list of cheques . One person will collect and one
person will record. This ensures pro per segregation of duties. There should also be
independent reconciliation between the list of cheques received and the cashier’s record to
identify any stolen cash.

The second weakness is lack of approval. The risk implication is goods are prepared and
despatched by the goods despatch department based on the sales order without any approval
by the store supervisor. T he storemen can intercept the goods and claim that they are being
despatched to customers. This will affect the occurrence of sales. The recommendation is to
have a warehouse/store supervisor to approve the order confirmation prepared for the
customers prior to despatching the goods by raising a delivery order and signing on it.

The third weakness is lack of adequate documents. The risk i mplication is without a delivery
order, goods despatched from the store may not be accounted for accurately, transaction not
properly supported. There could be fictitious transaction and goods that are lost cannot be
properly accounted for. On the other ha nd, genuine transaction may not be recorded, as
there are no documents to support the sale. The recommendation is Goods despatch
department should issue a delivery order and attach it to the order confirmation after
releasing goods to the customer.

The fourth weakness is there is no independent reconciliation of inventory, sales and

receipts. The risk implication is t he sales representative might go through with selling the
inventory which might be out of stock. In addition, if there are no reconciliation of inventory,
company might not be able to detect missing stock. Purpose of reconciliation is to match
sales invoice with receipts and the decrease in stock. (If you don’t do these, missing stocks
and stolen receipts may not be identified). The recommendat ion is there should be
independent reconciliation on inventory record and receipts at the end of the day after each
shift.

The fifth weakness is no physical safeguarding of monies received. The risk implication is
collected cheques and cash are kept in t he locked box and placed in the filing cabinet which
is not secure, any staff can steal cash with or without key therefore increase the risk of theft.
The recommendation is to keep in a secured location that is not accessible by all employees .

The sixth weakness is no proper identification check when cheques are received.
The risk implication is the cheques may not be cleared by the bank and there will be bad
debt. The recommendation is to o btain the ID of the customer and bank in the cheque first
before releasing the goods.

The last weakness is manual cash sales invoice is used . The risk implication is human error in
the raising of the invoice/recording of details . The loss of sales invoice cannot be noticed as
it is not prenumbered. The ecommendation for cash invoice to be system generated and
prenumbered sequentially.

Question 3 For each of the above internal controls, describe ONE objective of the
control to the company and the respective assertions addressed. Also describe ONE
Test of Controls that can be performed to confirm that the control is operating
effectively
1. Creative sells only to authorised customers. After appropriate credit checks, each
customer is given a Creative identification card to confirm their status.
Control objective is to en sure that all customers have the ability to pay and to prevent
any sale to fictitious customers. Appropriate approval of customers’ orders for
creditworthiness. The assertion address is existence and AVA in accounts receivables and
occurrence of sales. The test of control is to c ompare the list of ID cards issued with the
new AR accounts created in the master file.
2. The card must be used to obtain goods from the warehouse. Customers visit Creative’s
warehouse and load the goods they require into their vans after showing their Creative
identification card to the despatch staff.
The control objective is t o ensure that goods are despatched only to authorized
customers that are approved by credit department that has the card. The assertions
addressed is existence in AR and occurrence of sales. The test of control is to observe the
employee conducting the checks on customer’s card to verify that only approved
customer can obtain goods from the person in charged.

3. A pre-numbered delivery order (DO) is produced and signed by the customer and a
member of Creative’s despatch staff confirms the goods take n.
The control objective is t o ensure that the details in the delivery order agree with the
goods despatched. The assertion addressed is occurrence and accuracy of sales
transaction. The test of control is to review delivery order and inspect that the
documents are in running number and sorted accordingly and review for signature of
customer and despatch staff.

4. A copy of the DO is for warded to the accounts department and a second copy is retained
in the despatch department. The accounts staff enters the goods despatch information
onto the computerised sales system and signs on the DO.
The control objective is it ensure that the details in the sales invoice is correctly matched
to the details in the delivery order sales and customers are billed at the correct prices
and quantities of inventory sold . The assertion addressed is accuracy and o ccurrence of
Sales. The test of controls is to review a sample of sales invoices and agree t o details to
the delivery orders and look for signature by accounts staff.

5. The computer system produces the sales invoice by referencing to the inventory master
file for product details and prices and updates b oth the sales journal and accounts
receivable ledger. Multi -copy of each invoice is printed out and a copy is mailed to the
customer after they are compared to the DO and signed by the accounts staff.
The control objective is to ensure that the D/O details have been recorded in the
computerised system. The assertion addressed is completeness of sales transactions . The
test of controls is to match the signed D/O from accounts department to the D/O retained
by the despatch department to ensure accounts department have all the records of the
D/O and they have been computed into the system and to inspect a sample of D/Os for
account staff signatures .

6. Error reports are produced after each processing run, showing breaks in the DO
sequencing
The control objective is to ensure that there are no missing delivery orders and all
delivery orders are accounted for. The assertion addressed is completeness of sales . The
test of control is to review the error report to identify missing DO enquire with
management on the follow -up action.

Question 4 For the deficiencies already identified in the payroll system of Precise
Instruments Ltd:(i) explain the possible implications of these; and(ii) suggest a
recommendation to address each deficiency
You are the audit senior of Lee & Lee LLP and your team has just completed the interim audit
of Precise Instruments Ltd, whose yearend is 31 January 20X1. You are in the process of
reviewing the systems testing completed on the payroll cycle. Precise Instruments Ltd
manufactures lights and the manufacturing process is predominantly automated; however,
there is a workforce of 90 employees, who monitor the machines, as well as approximately 40
employees who work in sales and administration. Below is a description of the payro ll system
along with deficiencies identified by the audit team .
Factory workforce
The factory manager interviews potential employees and forward details of the successful
candidates, the job title and the rate of pay to the company’s personnel manager for an
employment offer to be made. The personnel manager forwards written details of the
employees to the wages department who updates the wages master file with details of the
employees, including the rate of pay, standard hours of employment and the emplo yee’s
bank details. Employees are paid an hourly rate based on hours worked. They are required
to clock in and out using an employee swipe card, which identifies the employee number
and links into the hours worked report produced by the computerised payro ll system. There
is no monitoring or supervision of the clocking in/out processes most of the workers have
been working with the company for a long time and are familiar with the procedures. The
payroll department calculates on a weekly basis the cash wage s to be paid to the
workforce, which are not checked by anyone as they are generated by the payroll system.
During the year the hourly wage was increased by the Human Resources (HR) department
and this was notified to the payroll department verbally.

Sales and administration staff

The sales and administration staff are paid monthly by bank transfer. Employee numbers do
fluctuate and during July two administration staff joined; however, due to staff holidays in
the HR department, they delayed informing the payroll department, resulting in incorrect
salaries being paid out.

The first implication is the production manager has sole responsibility for recruiting
employees therefore they could create fictitious employees and use the fictitious acco unt to
credit the salaries to themselves. A recommendation is e mployees should be interviewed by
the production manager and an official from the Human Resource department such that
potential employees can be properly identified and vetted prior to employme nt.

The second implication is wages clerks, responsible for the processing of wages, have amend
access to the wages master file therefore a wages clerk could create fictitious employees’
accounts or increased the wage rate for a specified employee. A reco mmendation is Wages
clerks should have only read access to the master file data. Wages should be verified by the
manager of the team. This verifies the existence of the employee and the accuracy of the
working hours of the employees.

The third implication is the clocking in process was not being supervised hence employees
can clock in multiple employees which will result in the company making payroll payments for
hours not worked. A recommendation is s upervised clocking in/out should be implemented
e.g. use of CCTV or biometric time recording system.

The fourth implication is here are no checks on the wages calculations generated by the
payroll system hence calculation for wages is based on the payroll system which could be
inaccurate as a result of incorr ectly number of working hours recorded or wrong wage rates
used. A recommendation is a senior member of the payroll team should check the
computation of the gross & net pay for a sample of employees and compare their results to
the output from the payroll system.

The fifth implication is the hourly wage has been increased by the Human Resources (HR)
department and notified to the payroll department verbally, without the Board’s approval
hence the hourly wages may be overstated as no approval from the Board was obtained.
Verbal notifications of pay increases as it could be an unauthorised increase or the verbal
notification can be forgotten and not acted upon. The recommendation is all increases of pay
should be proposed by the HR department and then form ally agreed by the board of
directors. The payroll department should not accept verbal notifications of pay increases but
only written notification.
The last implication is notification of joiners and leavers was not made on a timely basis to
the payroll department therefore there could be interception of wages/joiners may not
receive their wages on time. Terminated employees could still be receiving their wages. A
recommendation is joiners and leavers forms should be submitted to HR and payroll
department promptly. New employees accounts can be promptly created for joiners while
the employees accounts of the leavers are promptly deleted.

Tutorial 8
Textbook Question 1
11-6 The following controls and related tests are utilized to ensure that the occurrence ,
authorization and completeness assertions are met for purchase transactions:
Assertions Control Activities Tests of Controls
Occurrence • Segregation of duties • Observe and evaluate proper segregation
• Purchase not recorded of duties.
without approved • Test of a sample of vouchers for the
purchase order and presence of an authorized purchase order
receiving report and receiving report; if IT application,
• Accounting for examine applicati on controls.
numerical sequences of • Review and test entity’s procedures for
receiving reports and accounting for numerical sequence of
vouchers receiving reports and vouchers; if IT
application, examine application controls.
Authorization • Approval of • Review entity’s monetary limits
acquisitions consistent authorization for acquisitions.
with the entity’s • Examine purchase requisitions or
authorization monetary purchase orders for proper approval; if IT
limits is used for automatic ordering,
• Approved purchase examination of application controls.
requisitions and • Review entity’s competitive bidding
purchase orders procedures.
• Competitive bidding
procedures followed
Completeness • Accounting for • Review and test entity’s procedures for
numerical sequences of accounting for numerical sequence of
receiving reports and receiving reports and vouchers; if IT
vouchers application, examine application controls.
• Receiving report • Trace a sample of receiving reports to
matched to vendor their respective vendor invoices and
invoices and entered in vouchers.
purchases journal • Trace a sample of vouchers to the
purchases journal.

11-13 This is a relatively straightforward analytical procedures problem. Here are some of
the concerns the auditor might have about potential misstatements in both accounts:

Both inventory and accounts payable have increased significantly in absolute euro terms from
2012 to 2013. The inventory increase is 69 per cent while the accounts payable increase is 28
per cent. An auditor would have expected the increase in inventory to be a pproximately the
same as the increase in accounts payable. Based on the auditor’s expectations and the
entity’s data, the auditor might suspect that there are at least two possible misstatements:
(1) inventory is overstated because obsolete and/or slow -moving products have not been
written down to fair market value and (2) there are unrecorded accounts payable. Other
misstatements are possible.
Question 2 a) Identify and explain the RMM identified at the planning stage of the
audit of LYN Ltd. (b) List and explain suitable controls that should operate over the
stock counting system, to ensure the completeness and accuracy of the existing stock
records at LYN Ltd
You are an audit senior in Low and Co and you are commencing the planning of the audit of
LYN Ltd for the year ending 31 August 20X0. LYN Ltd is a cosmetic manufacturer and has
been trading for over 50 years, it operates from one central site, which includes the
production facility, warehouse and administration offices. LYN sells all of its goods to large
retail stores, with 60% being to one large chain store Sasha. The company has a one -year
contract to be the sole supplier of cosmetic products to Sasha. It secured the contract
through significantly reducing prices and offering a four -month credit p eriod, the company’s
normal credit period is one month. In recent years, LYN has reduced the level of goods
directly manufactured and instead started to import products from Asia. Purchase orders for
overseas products are made six months in advance and goo ds can be in transit for up to two
months. LYN accounts for the stock when it receives the goods. Within the warehouse facility
is a large amount of an old product line that is now discontinued and has minimal sale value.
You have received the inventory co unt instructions for this year’s year -end inventory count
which reveals the following information. Each counting team includes two members from
warehouse, with one performing a counter role and the other, a checker role. The following
procedures have been adopted:
1. The team prints the stock quantities and descriptions from the system and these records
are then compared to the stock physically present.
2. Any discrepancies in relation to quantities are noted on the stock sheets, including any
items not listed on the sheets but present in the warehouse area.
3. Any damaged or old items are noted and they are removed from the stock sheets.
4. The sheets are then passed to the finance department for adjustments to be made to the
records when the count has finished.
5. During the counts there will continue to be stock movements with goods arriving and
leaving the warehouse.

Traditionally LYN has maintained a stock provision based on 1% of the stock value, but
management feels that a stock is being reviewed more regular ly it no longer needs this
provision.

(a) Identification of risk

LYN supplies 60% of its goods to SaSha at a significantly reduced selling price, hence stock
may be overvalued. Selling large amount of goods at a significantly reduced selling price will
cause the stock’s NRV to drop below the manufacturing cost. Hence, there is a risk of cost of
stock being overstated.

Recoverability of debtor balances as credit period extended. With extended credit period,
money will be collected at a later date f rom the customers. The chances of collecting the
accounts receivable would be lower and therefore increases the risk of bad debt expense.
Hence, the completeness of bad debt expense should be incurred.
 Valuation of plant and machinery. LYN has significantly reduced their
manufacturing/production activities, choosing to purchase most of their inventory instead.
Thus, PPE held by the firm meant for production will not be utilized. For PPE to be recognised
as asset, it must generate future economic benefits t o the company. Therefore, when assessing
the true value of the plant and machinery, the lower of carrying amount or recoverable
amount - Higher of Value in Use and Fair Value less cost of Disposal will be used. Impairment
losses of PPE will be incurred sin ce the carrying amount of PPE exceeds the recoverable
amount, thereby reducing the value of the PPE. Since PPE is a balance sheet item, the
Accuracy, Valuation, and Allocation (AVA) assertion will be challenged as there is a risk of PPE
being overstated.

Cut-off of purchases and stock may not be accurate. The purchase orders for overseas
products are made six months in advance and goods can be in transit for up to two months and
LYN only accounts for stock when they receive them. There might be cut -off error due to the
long purchase cycle and may result in purchases and stock recording being made in different
accounting period. Long lead time of two months delivery . Purchases are recoded but goods
are not received. Wrong accounting period = cut -off

Stock may be overstated as LYN no longer has a slow-moving provision. As stock will be
overstated, the management will need to estimate an adequate and reasonable stock write
down and allowance for stock obsolescence which will affect inventory accuracy an d valuation
assertion (AVA).

(b) Controls over the stock system.

The stock count team should be independent of the warehouse team. Currently the team
includes warehouse staff member. There should be segregation of roles between those who
have day-to-day responsibility for stock and those who are checking it. If the same team are
responsible for maintaining and checking stock, then errors and fraud could be hidden.

Movements of stock should be stopped from the designated areas during the counts. Goods
will continue to move in and out of the warehouse during the counts. Stock records could be
under/over stated if product lines are missed or double counted due to movements in the
warehouse.

Stock counting sheets should be pre -printed with a description or i tem code of the goods, but
quantities per the records should not be pre -recorded. The stock sheets produced for the
count have the quantities pre -printed, therefore a risk arises that the counting team could
just agree with the record quantities, making un der counting more likely, rather than
counting the stock lines correctly.

Stock checks should be performed from stock physically present in the warehouse to the
records. Currently the team is comparing the records to the stock in the warehouse. If the
count is performed from the records to the warehouse then this will only ensure existence or
overstatement of the records. To ensure completeness is addressed the stock in the
warehouse must be compared to the records as this will identify any goods physically present
but not included in the records.

Any damaged or obsolete goods should be moved to a designated area, where a responsible
official inspects it, it should not b e removed from the sheets. Damaged or obsolete goods
should be written down or then provided against to ensure that they are stated at the lower
of cost and NRV. This may not involve fully writing off the stock item as is currently
occurring. This is an assessment that should only be performed by a suitably trained member
of the finance team , as opposed to the stock count team.
After the count, the stock count sheets should be compared to the stock rec ords, any
adjustments should be investigated and if appropriate the records updated in a prompt
manner by an authorised person . It is important that only individuals authorised to do so
can amend records. Senior members of the finance team should regular ly review the types
and levels of adjustments , as recurring stock adjustments could indicate possible fraud.

Question 3 Identify and explain FOUR deficiencies in that system;(ii) Explain the
possible implication of each deficiency;(iii) Provide a recommendation to address each
deficiency
Trendy Fashions Ltd is a retailer of ladies clothing and accessories that operates in many
countries around the world and has expanded steadily from its base in Asia. Its main market
is aimed at 15 to 35-year olds and its p rices are mid to low range. The company has
recently introduced a just in time ordering system. The fashion buyers make an assessment
nine months in advance as to what the key trends are likely to be, these goods are sourced
from their suppliers but only limited numbers are initially ordered. The purchasing
department consists of the purchasing director and a team of twenty buyers. Each buyer is
given a purchasing budget which needs to be adhered to. However, as the purchasing
director travels frequently, he is often not able to ensure that this is done. When placing
orders with suppliers, the suppliers are instructed to deliver the goods directly to the
individual retail stores. On receipt of goods the quantities received are checked by a sales
assistant against the supplier’s delivery note, and then the assistant produces a goods
received note (GRN). This is done at quiet times of the day so as to maximize sales. The
checked GRNs are sent to head office for matching with purchase invoices. As purchase
invoices are received, they are manually matched to GRNs from the stores, this can be a
very time-consuming process as some suppliers may have delivered to over 500 stores. Once
the invoice has been agreed then it is sent to the purchasing director for author isation. It is
at this stage that the invoice is entered onto the purchase ledger.

The first deficiency is t here is no monitoring of the purchasing budget so the budget may not
adhere to. The possible implication is without monitoring the budget, there w ill be a risk of
overspending. A recommendation is to have budgetary control to prevent excessive spending,
match the total purchase order to date with the budget limit. The second implication is
unauthorised purchases. A recommendation is to have periodical review on purchases made.

The second deficiency is deliveries from suppliers are accepted without being checked first.
In addition, they are then checked by sales assistants to the supplier’s delivery note to agree
quantities but not quality. Sales as sistants are producing the goods received note (GRN) on
receipt of a supplier’s delivery note. The possible implication is if quantity received is more
than they have ordered, they may be billed and subsequently unable to get a refund as they
have accepted the goods. The recommendation is to have a list. The second implication is
without checking for the quality of goods, the company might have issues in returning any
defective goods, which may affect the amount of goods available for sale, and the valuatio n
of inventory as the inventory may become obsolete. The recommendation is to get employees
to check and inspect conditions of goods to prevent receiving damaged goods and incorrect
quantities before they accept the deliveries so that they can still verify that the goods
delivered are not in good condition, so that they are able to get a refund or exchange with
supplier. The possible implication is sales assistants are in charge of two roles which are
checking of quantity and producing GRN, there is a possi bility that the sales assistant would
record a fictitious amount to cover up pilferage E.g. when they receive excess stocks, they
will record that they received a lesser amount, and keep the difference for themselves. A
recommendation is job segregation by having other employees from another department
check the amount and quality of goods, while the sales assistant produces the GRN on receipt
of supplier’s delivery note to prevent theft of goods by employees .
The third deficiency is g oods are being received without any checks being made against
purchase orders. The possible implication is quantity of the goods received are only matched
with the supplier’s D/O hence affecting accuracy assertion . Thus, if an inaccurate quantity is
being delivered, the store employees would not know of this inaccuracy and proceed to
accept the goods.

A recommendation is to agree purchase order details with goods received, Supplier should
deliver goods to a common wareh ouse instead and at the warehouse, employees will have
access to the quantity that they are supposed to receive, thus upon receipt of goods, they
have to match the physical goods being received to the quantity order on the PO.

The fourth deficiency is t he purchase invoices are manually matched to a high volume of
GRNs from the individual stores. The possible implication is potential problem of human error
due to the high volume of manual matching such as the head office might accept or reject
purchase invo ices wrongly. A recommendation is to use an IT software. When purchase orders
are initially entered into the system, there will be a PO number. This PO number should be
used as a reference point when checking supplier deliver orders and generating GRNs.

The fifth deficiency is the purchase invoice is only logged onto the system as it is being
authorised by the purchasing director. The possible implication is staff might not able to
track the purchase invoices that have been sent out hence affecting complet eness assertion.
A recommendation is to create a list of supplier’s invoices received to record the movement
of the invoices. Every suppliers’ invoices received to be numbered and have the status of the
document.

Question 4 a) Using the information provided, identify and explain THREE internal
controls in the purchasing and payment system. b) For each internal control
identified, describe a test of controls that can be performed. c) Using the information
provided, identify and explain THREE internal control deficiencies that should be
communicated to management, with reference to SSAE 265 Communicating
Deficiencies in Internal Control to those Charged with Governance and Management.
d) In relation to the control deficiencies identified in (c) above, recommend one
improvement to each control deficiency

You are the audit senior of Orange Instruments Pte Ltd (Orange), a company dealing with
re-selling and distribution of medical instruments. Orange buys instru ments from both
local and overseas suppliers. You are in the process of planning your audit over the
inventory purchase and supplier payment business cycle and have gathered the following
information: The finance department is headed by Susan, the finance manager and assisting
her are Frank, the accounts assistant and Julia, the secretary. Julia opens all incoming mails
and if there are supplier invoices in the mail, she passes them to Frank. Frank will then
input the invoices ‘details into the computer s ystem on the same day, mark the supplier
invoices as “Posted”, and indicate on each invoice, the unique sequential number generated
by the computer system. All “posted” supplier invoices are filed by their payment due
dates. Once inventories ordered are received by the warehouse, the warehouse supervisor
will check them against his order records for quantity and specifications, issue Goods
Receipt Notes (GRN) and sign off on the GRNs. Copies of the GRNs are forwarded to Frank,
who will only make payment f or inventories received by matching suppliers’ invoices with
GRNs that are being signed off by the warehouse supervisor. When supplier invoices are
due for payment, Frank will manually prepare the cheques for payment. All cheques require
dual signatories, one of whom must be Jeff, the CEO with the other signatory being either
Franker Susan. Frank routes all cheques for signing to Jeff, who will sign the cheques and
return the signed cheques to Frank. Frank will then attach the cheques with remittance
advice before having Julia to mail them out. Once the supplier invoices are paid, they would
be marked as “paid” with the date and cheque number recorded. All payments made are
recorded onto a standard cash payment voucher and entered into the computer system by
Frank. The cash payment vouchers will be stampedes ’posted’ after the accounting records
are updated. At the end of each month, Frank prepares a bank reconciliation for Jeff’s
review at the end of each quarter.

The first internal control is a uthorisation of cheques require dual signatories, this will reduce
the risk of own payment or fictitious payment. One signature from the CEO/ Financial
Controller and the other from the Accounts Assistant. This will help to prevent unauthorized
payments being made using company’s money. The test of control is inspecting a sample of
cheque payments records to see if there are two signatures of relevant personnel on it.

The second internal control is authorisation - copies of GRNs that are check and signed are
matched with the supplier invoices before payment is made to ensure that company pays only
what is received. The test of control is to inspect the sample of supplier’s invoices and attest
whether they are attached with copies of signed GRNs and are arithmetically accurate with
the supplier’s invoice. Reperforming the matching of invoices with GRN.

The third internal control is s upplier invoices that are paid would be marked as “paid”.
Supplier invoices that are paid are marked as “Paid”, with date a nd cheque number recorded.
Cash payment vouchers stamped as “Posted”, after payment made and recorded in Cash
Payment Journal. This would ensure that invoices are not paid or recorded twice. The test of
control is to select a sample of paid supplier’s invo ices to ensure that there is evidence (paid
stamp) that payment has been made.

The fourth internal control is unique sequential number generated by computer system to
ensure that if there are any missing invoices as different suppliers use their own refer ence
numbers which can be confusing (address completeness assertion) . The test of control is to
inspect a sample of supplier invoices to ensure that they have the firm’s unique sequential
number written on top.

The first control deficiency is o nce inventories ordered are received by the warehouse, the
warehouse supervisor will check them against his order records for quantity and
specifications, issue Goods Receipt Notes (GRN) and sign off on the GRNs . The possible
implication is there could be theft by th e warehouse supervisor as he performs the checking
and issuing of G RN, furthermore, he acknowledges the checks that were conducted by him. A
recommendation is segregation of duties for employees who check and issue GRN to ensure
that the physical goods rec eived is recorded accurately in the GRN. Warehouse supervisor
should also check against delivery order to ensure physical goods received matches the
purchase ordered.

The second deficiency is Frank posted the invoices into the system on the same day it w as
received. The possible implication is there could be fictitious invoices being received that
Frank would not know about and he would proceed to record the invoice even though there
was no purchase nor receipt of goods. A recommendation is to match the invoices received
from the supplier to P/O and GRN to ensure that the numbers are correct before recording
into the system.

The third deficiency is Julia is posting the cheques for the supplier alone. The possible
implication is Julia can steal the chequ e. The recommendation is Frank and Julia should mail
the cheques together. Or Frank can appoint someone else to go with Julia.

The last deficiency is Jeff receives just the cheques for signing/approval, without relevant
source documents attached. The implication is there is n o purchase orders, Goods Receipt
Note, Delivery Order, Sales Invoice, to prove that that this is a payment request for a
legitimate authorized purchase, and goods were indeed received by the firm. The
recommendation is c heques must be supported with suppliers’ invoice. When Jeff signs the
cheque payment, make sure the invoices are marked with ‘paid’ stamp.