Supplier Invoice Pricing And Discount Review: Test Results And Conclusion

Background

Questions:

Question 1

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 .

Required :

Identify the weaknesses in the stocktake procedures above and identify how they could be improved.

Question 2

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.

Required :

(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?  
    
Question 3

The following is an extract from a working paper containing the results of the tests of controls in the accounts payable area:

Required:

(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. While audit of the balance sheet of the company there are few items those needs to be looked and audited with better applied analytical and substantive procedures of the same. The responsibility of Inventory control lies with the manager of the warehouse of the location. The Manager must ensure that the staff members who are involved in stocktaking must aware of the established procedure which needs to be followed in stock taking.  He is responsible for proper co-ordination between the staff member and also have the responsibility to complete the stock audit. However, it is duty of the auditor to visit the stocktaking site to determine the effectiveness of the stock taking.

The slow moving inventory in a company. There are many cash dealings which get interrupted due to delay in stock being converted back into cash.

The main intension and objective of Stocktaking is as follows:

a) To verify the accuracy of stock

b) The Stock valuation as stated in the financial statement must be supported by the physical verification of stock.

c) To verify the weakness in the control and custody of stock.

d) To disclose the possibility of Stock, theft or loss. (Smith 2013)

In the given case auditor has attended the stock taking of Smith Equipment and certain discrepancies has been found by them which is described as follows:

Test Results

However, there is certain more recommendation which helps smith Equipment in better stock undertaking. This is as follows:

1) Before starting Stock date all the possible area and the product must be identified.

2) Meeting must be held with the staff member who will help in stock taking to ensure that they should know exactly what they have to do and how to do.

3) Any Question or confusion of the Staff member must be resolved and any suggestion which helps in better stock taking must be implemented.

4) Whenever any discrepancies noticed the same product must be recount for reconfirming the said discrepancies.

5) All the staff member engaged in the stock take must be properly guided by the stores manager during stock taking.

6) Stock Scanner must be provided to every staff member for better and more accurate stock taking.

7) Any obsolete , damaged or expired product which has been noticed during the physical verification must be reported.

8) Stores Manager must ensure that the obsolete material must be removed from the store and proper recording has been done.

9) Physical verification report should be made and it need to be submitted to the external auditor.

10) Before submitting the report to the External Auditor report must be discussed internally with the management so that there will be less changes of error. (Jacob october, 2012)
 
2. Control over the bank reconciliation ensures that all the cash transaction has been properly recorded in the books of accounts for a given period of time. Bank reconciliation also ensures the accuracy of the Financial Statement.  With the help of bank reconciliation any omission of transaction in the books of accounts can b easily detected irrespective of the reason that where omission is due to fraud or error.

However to ensure less changes of error in the Bank reconciliation one should implement the following procedure to reduce the chance of Error. This are described as follows:

There must be segregation of duties between the bank reconciliation between the two departments i.e. between accounts department and payment department. If same person are engaged in same activity then there is more chances of fraud. Bank reconciliation must be done by the person other than clerk who are in charge of transaction such as receipt, billings and account payable. The reconciliation clerk who is engaged in bank reconciliation must ensure that he has collected all the cancelled cheque and it has been properly dealt in accounts.

1) Even a small amount of un reconciled items create a doubt in the mind of the auditor regarding the accuracy of accounts and existence of fraud in the company. In the given situation Item of $340 remain un reconciled which are treated by the as immaterial. The client must ensure that from now onwards all the accounting entry should be don on daily basis and all the vouchers should be signed by the Manager for proper control.

2) To reduce the chances of incorrect recording of account receivable, client should ensures that the entire credit voucher must be signed along with the supporting and then entry will be done in accounting system.

3) The Company may adopt the policy not to deposit the associate company money in own account in order to reduce complexity.

4) The omission of certain items from Bank reconciliation is serious issues. This even creates doubt about the correctness of bank reconciliation. In order to reduce such type of situation, the client may increase the frequency of reconciliation in order to ensure correct reconciliation process.

5) Recording of bank transfer as deposit is also an serious issue, this shows that accounting clerk is completely irresponsible and he must be warned that if the same continue, then he may be fired from the company. (Team n.d.)

b) Audit procedure to detect and prevent each of the above case is as follows;
    
1) Auditor should compare the bank cancellation date with bank reconciliation.
    
2) Bank Confirmation should be taken from each bank with whom the client transit.

3) Balance of client bank reconciliation need to be confirmed with the balance of bank confirmation.

4) Minutes of the Board meeting and loan agreement should be reviewed in order to ensure that all the interest bearing deposit has been properly dealt with in the accounts.

3. a) Key Assertion Addressed by the Test Procedure is as follows:

The assertion of the management in the given case is to prove that whether the discount bills are being passed with proper authorization of the managers and whether the entries recorded are free of defaults. The prices charges by the supplier is being authorized by the orders as approved by the purchase manager and it helps in understanding the materiality of the issues if any that arise in the course of test.

The management wants to have a check on these areas to assure that all of these are correct.      

b) The Conclusion reached by the Client is not appropriate as it lacks control in the organization. Better policy is to identify the reasons for such mistake that why such error has been occurred whether the error is un-intentional or due to some fraud. With increase in volume of work in the organization, there is more chances that the error will also increase and more unnecessary discount will be given to the customer which results to financial loss of the company. However,  if the error is due to billing software used by the company then the company need to talk with the software company regarding up -gradation of the software so that these type of situation can be avoided and if required the company should need to change the current software and purchase billing software of another company. (James n.d.)

c) The Key Control procedure that need to be performed by the company is as follows:

1) If the company has manual billing system then that need to be computerized.

2) Discount for each and every item needs to be properly updated in the system and the same should be properly checked.

3) Dual checking of invoice should be done for some time once the invoice is generated from the system and second at the cash counter by the cash personnel.

4) Responsibility should be assigned to each personnel to periodically review the discount percentage which has been updated in the system (General 2015).

General, OOA 2015, Office of Auditor General, <https://audit.wa.gov.au/reports-and-publications/reports/across-government-benchmarking-audits/timely-payment-invoices/>.

Jacob, M october, 2012, 'Stocktake of Rgional Research', p. 30.

James, 'Substantive Tests of Transcation and balance', p. 60, <https://novellaqalive2.mhhe.com/sites/dl/free/0074711709/90089/sample_ch10.pdf>.

Smith, H 2013, myob.com.au, <https://myob.com.au/blog/7-steps-to-a-successful-stock-take/>.

Team, O, Opentution.com, <https://opentuition.com/wp-content/blogs.dir/1/files/group-documents/15/1289882056-E.AuditEvidence.pdf>.