You ,the auditor, attended the inventory count (stocktake ) of your client Smith Equipment and observed the following during the count :
1. Warehouse staff counted specific areas of the stock as determined by the warehouse supervisor ; staff members ,including the warehouse supervisor , were allocated their own area to count on their own.
2. Several blank sheets of paper were issued to each member of staff doing the counting.
3. Staff were instructed to write down the stock description and number counted .
4. Staff were told to write the stock quantities in pencil on the sheets to ensure errors can be corrected .
5. Any staff that completed a section early were allocated to another area to help out one of the other staff .
6.The supervisor collected all sheets at the end of the count to finalise the stock count .
Identify the weaknesses in the stocktake procedures above and identify how they could be improved.
You , the auditor , have spent 5 years as an auditor . In this time you have come across numerous errors in performing bank reconciliations . The following are some of these errors:
1. An unreconciled item of $340 was on the final bank reconciliation of the client and was deemed by the client to be immaterial.
2. Two deposits totalling $4070 relating to accounts receivable were collected on 3July ( 30 June year end) but recorded as cash receipts on 30 June.
3. An amount from an associate company of $40,000 was banked 2 days before the end of the year in the client’s bank account and then paid back 1 week after the end of the year .
4. A cheque for $6,000 was omitted from the outstanding cheque list on the bank reconciliation at 30 June . It cleared the bank on the 14 August .
5. A bank transfer of $20,000 was included as a deposit in transit at 30 June in the accounting records.
(a) What control should be implemented to reduce the likelihood of each of the above?
(b) What is an audit procedure to detect or prevent each of the above?
The following is an extract from a working paper containing the results of the tests of controls in the accounts payable area:
Selected a number of supplier invoices and checked that the pricing and discounts have been reviewed and authorised by the purchasing manager not highlight a pattern or specific reason
Six out of 50 invoices tested had not been authorised .Incorrect discounts were recorded for these invoices. A follow up of the four incorrect invoices did not for the errors.
Accepted as the errors in the discounts claimed were immaterial .
(a) Identify the key assertion addressed by the test procedure .
(b) Provide an explanation as to why the conclusion reached is appropriate or inappropriate.
(c) Outline the key control procedure that you believe needs to be performed.
1. The stock take performed at Smith equipments had some weaknesses:-
An unreconciled item of $340 was on the final bank reconciliation of the client and was deemed by the client to be immaterial.
Control: Bank reconciliation is a process/check to ensure that the bank balance as per books gets reconciled with the balances as per the bank statement. Necessary investigation needs to be done for the differences, if any and same should not be deemed as immaterial.
Audit procedure: The auditor should ask the management to provide relevant support for any unreconciled variances in the bank reconciliation.
Two deposits totalling $4070 relating to accounts receivable were collected on 3July (30 June year end) but recorded as cash receipts on 30 June.
Control: Any transaction in the bank statement in a particular period should be recorded in the same period in the books. For reconciliation purpose, it is to be ensured that all transaction in the bank statement should be recorded in the books.
Audit procedure: The auditor should ensure all transaction in the bank statement should be recorded in the books and entry in the bank statement pertaining to next period should not be taken into consideration considered at times of preparation of the reconciliation.
An amount from an associate company of $40,000 was banked 2 days before the end of the year in the client’s bank account and then paid back 1 week after the end of the year.
Control: All the transactions in the bank statement should get entered in the books and transactions in the bank statement pertaining to next period should not be taken into consideration at times of preparation of current month’s reconciliation.
Audit procedure: The client in order to match the reconciliation sometimes makes some fake entries and gets the same reversed in the next period. At times of reviewing the bank reconciliation, the auditor should focus on the open items and on the transactions of the next period’s initial 10 days bank statement and bank books available in the records. Through this check these kinds of errors can be mitigated.
A cheque for $6,000 was omitted from the outstanding cheque list on the bank reconciliation at 30 June. It cleared the bank on the 14 August.
Designed Controls: The list of outstanding cheques provided by the management should be checked
Audit procedure: In case a cheque of $6000 was missed from the list of outstanding cheques provided by the management, in this case the reconciliation of June month will not reconcile and there would be an unreconciled variance of $6000 standing. So, the auditor should ask the management to provide relevant support for the same.
A bank transfer of $20,000 was included as a deposit in transit at 30 June in the accounting records.
Controls: For the cheques in transit, the management should have all the necessary support available in records.
Audit procedure: So as to ensure that the cheque in transit on 30th June gets banked in the subsequent period, the auditor should check the bank statement of subsequent period.
Answer 3a: The key assertions addressed by the test procedure are as follows:
Answer 3b: During the test check, out of 50 samples tested, 6 invoices were not authorised and incorrect discount were recorded for these invoices. The management came to the conclusion that the invoicing procedure is accurate being the error committed in the discount claimed is immaterial.
The management for the 6 invoices has done the necessary investigation and out of 6 invoices, for 4 invoices there was no pattern and no specific reason for the error.
The management can however in order to have some confident over the process, could have increased the sample size from 50 to 70
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