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Topic 5
Do 2
Formulate internal control measures which are applied to credit sales where the
accounting system makes provision for credit control, delivery of goods and the
proper documentation and recording of transactions.
1. Internal control measures for credit sales based on the control activities
Segregation of duties
Please note: This internal control activity incorporates both the division of duties and the
authorisation of various transactions.
Internal control measures for credit control function and initiating credit sales
 New client
-Credit application, stating accounts references, bankers, current earnings and
other information, should be completed by the prospective client.
-On the basis of the information supplied by the client and enquiries from
accounts references and bankers, the credit manager should fix a credit limit in
the master file for every client.
 Appropriate approvals for manual override of credit limit extensions.
 Customer code numbers on orders are agreed to accounts receivable master file
record code numbers.
 The client's current outstanding balances plus the sales value of the current order
are compared with the credit limit as stipulated in the master file programme.
 Delivery notes are only generated if the above two matters are in order.
 There should be segregation of duties between the persons responsible for the
 functions of authorisation, execution, recording and safekeeping, for example:
-The person responsible for authorising the order may not be responsible for
executing and recording the transaction as well.
- The person responsible for the reconciliation of receivables may not also be
responsible for recording the order and for the receivables statements of account.
 Sales staff follow up on short deliveries and unfilled orders to expedite delivery to
the customer.
 Managerial supervision of critical functions within the enterprise should be
introduced, especially where adequate segregation of duties is impossible.
Physical control
Dispatch function
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Prior to goods being boxed or parcelled, an independent check is made of goods
according to the delivery note details. Delivery notes are signed as evidence of the
above checks.
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The security staff should check all the goods which are delivered against a delivery
note before the goods are allowed to leave the premises (and they must ensure that
the delivery note accompanies the goods to be delivered).
 The signatures of clients that serve as evidence that the goods have been delivered
should be inspected when the delivery notes are received back from the clients.
Delivery notes that have not been signed should be checked by a senior
independent person.
 Regular stock counts carried out, and any deviations from the theoretical inventory
records followed up.
Information processing control
Dispatch function
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Once the customer's sales order is approved, the system produces an order,
delivery note and invoice set, the invoice details being held in a temporary file until
the physical delivery has been effected and inputted.
The computer agrees all goods drawn for delivery against the items and quantities
on the sales order and then prints an exception report of unmatched items or
quantities for back order.
Invoicing function
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Regular printouts of invoices in the temporary file and completed deliveries
transferred to sales and accounts receivable.
The printouts of invoices in the temporary file should be reviewed and reasons for
non-release or non-delivery investigated and resolved.
Should invoices only be generated after delivery, they should be allocated the same
sequential number as delivery notes and the system should agree invoices to
delivery notes using these sequence numbers.
Printouts of delivery notes not yet invoiced are reviewed and resolved.
Unmatched delivery notes should be printed out on a report.
The system agrees invoices to delivery notes using the dedicated pre-numbering
system and unmatched items are printed out on an exception report.
Printouts of unmatched invoice number and delivery note numbers and sales orders
and/or duplicate invoices related to delivery notes are reviewed and resolved.
Pricing master file changes controlled through logical access controls. Controls
allowing only authorised individuals to effect such changes.
The listing of authorised price changes is compared to the computer procured
listing of prices after the changes have been effected and approved.
The system checks that the correct version of the pricing master file is uploaded.
This is done by using and checking master file version numbers.
If invoices are manually produced, or if there is no pricing master file, an
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independent check of prices charged on invoices is necessary.
The system could check the apparent appropriateness of product code numbers
inputted, i.e. alpha/numeric checks for code number digits and the use of check
digits and agreeing of the product code and description.
There are programmed controls over pricing, calculations, product codes, product
description and customer account codes for every invoice.
If manually produced, independent checks are performed on the accuracy of the
calculations on invoices, VAT and the total amount.
If computer produced, control of changes to invoicing programs should be
monitored, and operation controls should be in place to ensure that the current
version of the invoicing program is used when sales invoices are processed.
All program changes are to be reviewed and approved by senior staff.
The program code is to be password protected, allowing only authorised changes to
it. Regular printouts of all program changes should be made and reviewed.
Recording function
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Check digits to be incorporated in customer code numbers.
The system agrees customer codes and delivery address details on orders,
delivery notes and invoices with those in the accounts receivable master file.
Run-to-run control totals are calculated and agreed. This involves a reconciliation
of the opening balance of accounts receivable amounts plus all the credit sales
transaction amounts for the period being agreed with the master file closing
balance once sales invoices for the period have been processed.
Screen validation checks require fields to be corrected before allowing the
transaction input to be accepted.
Accounting staff inspect the printouts and reconciliation of all run-to-run master file
totals for the sales invoicing and accounts receivable processing run.
Monthly statements are sent to customers, and customer queries about
disagreement with balances reflected on month end statements are investigated
and resolved.
If invoices are only generated once delivery is made, the system produces a
printout of un-invoiced deliveries using the dedicated transaction numbers
allocated.
Manual sales cut-off procedures are performed on a regular basis.
The total of the sum of the individual balances in the accounts receivable master
file is agreed with the total of the accounts receivable control account.
If invoices are generated simultaneously with orders and delivery notes, the
printout of invoices in the temporary file is scrutinised for accuracy.
The printout of delivery notes not agreed with invoices is reviewed and
investigated to ensure that all un-invoiced sales are in respect of deliveries not yet
made.
Operating reviews
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Management continually monitors and studies the internal control measures which
have been laid down to ensure that they are being applied in the appropriate
manner.
 When errors and weaknesses are identified, corrective action is taken.
 Management reviews are continually carried out, that is, comparing actual
performance with key performance indicators for example:
 actual sales against budgeted sales
 gross profit percentage
 number of days' sales in accounts receivable.
Reporting
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Printouts of general ledger balances and other detailed reports (debtors list,
sales performance, etc), as well as all exception reports, are available at least
monthly.
These are distributed to the various departments for reconciliation.
Reconciliation has to be verified and signed by a senior person in the
department (department head).
The reports include comparisons of actual current financial year results to
budgets and forecasts and prior period amounts, with explanations provided for
differences identified.
Do 3
(1)
Give reasons why the control activities of ``segregation of duties, information
processing control and operating reviews'' in the table below are indicated as
being applicable to the order placed for credit sales.
Reasons why the control activities of segregation of duties (including
authorisation), information processing control and operating review are
applicable to orders:
An order is the key activity which initiates a sales transaction.
Segregation of duties is applicable to an order, since the person responsible for the
authorisation of the order may not also be responsible for its execution.
Authorisation (which forms part of the segregation of duties control activity) is
applicable to an order since upon receipt of the order it is necessary to ensure that the
person who placed the order is an authorised client and that the value of the order falls
within the client's credit limit. The order is then signed by the credit manager or the
sales clerk as evidence that a check has been carried out.
Information processing control is applicable to an order because an appointed
person has to compare the information on the order and the corresponding delivery note
and invoice before the entries are made in the accounting records.
Operating review is applicable to an order since management continually checks the
internal control system in relation to orders, and where weaknesses are found to exist,
management implements better controls.
2) Give reasons why the control activities of “segregation of duties, information
processing control and operating reviews'' are indicated as being applicable to
the receivables control account.
Reasons why the control activities of segregation of duties (including authorisation) information processing control and operating review are applicable to the
accounts receivable control:
Segregation of duties is applicable to the accounts receivable control account since
the person who is responsible for keeping the accounts receivable control account up to
date may not also be responsible for checking the reconciliation of the control account
with the list of receivables.
Information processing control is applicable to a accounts receivable control account
since an authorised person would check such aspects as whether the postings from the
sales journal and the cash receipts journal to the control account have been carried out
correctly.
Operating reviews is applicable to the account receivable control since management
continually checks the internal controls applicable to the accounts receivable control
account and, where weaknesses are found to exist, implements better controls.
(3) Explain why the sales journal is not also related to the control activity of
``segregation of duties (authorisation)''.
The reason why segregation of duties (including authorisation) is not applicable
to the sales journal:
With regard to the authorisation of transactions, segregation of duties is not applicable
to the sales journal since the authorisation of a sales transaction is effected through the
approval of an order. The sales journal is merely the accounting recording of authorised
transactions.
Risk of misstatement of credit sales transactions
The auditor should assess the risk of misstatement (inherent and control risk) with
regard to completeness, occurrence and accuracy of credit sales transactions and the
existence and valuation of the accounts receivable balance.
Do 4
Describe the internal controls that can be implemented to minimise the following
risks, and then formulate tests of control that can be performed to determine
whether reliance can be placed on those controls:
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Goods ordered may not be delivered.
Goods may be dispatched without approved delivery notes.
Goods dispatched may not correspond to the description and quantity of goods
recorded on the delivery note.
Customers may dispute that goods ordered and delivered were received.
Risks
1. Goods ordered may
not be delivered.
2. Goods may be dis
patched without
approved delivery
notes.
3. Goods dispatched
may not correspond
to the description
and quantity of
goods recorded on
the delivery note.
4. Customers may
dispute that goods
ordered and
delivered were
received.
Do 5
Controls
The computer agrees all
goods drawn for delivery
against the items and
quantities on the sales
order, and prints an exception report of
unmatched items or
quantities for back order.
Sales staff follow up on
short deliveries and unfilled orders to expedite
delivery to the customer.
Security staff checks that
goods only leave the
premises if accompanied
by delivery notes.
Prior to goods being boxed
or parcelled, an independ
ent check is made of goods
according to the delivery
note details.
Delivery notes should be
signed as evidence of
check performed.
Customers should sign
delivery notes as evidence of having received
goods and that goods
were in good order.
Tests of Control
Inspect evidence of review by client staff of the
exception report of unmatched items and back
orders.
Observe the performance
of this inspection by
security staff.
Observe the performance
of these checks.
Inspect delivery note for
authorised signature.
Inspect the signatures of
the relevant customers on
the delivery notes as
evidence of delivery.
Formulate tests of control that should be carried out by an auditor to evaluate the
effective operation of the following internal control measures for credit control:
(1) New customer:
(a) A credit application should be completed by the prospective customer, in
which accounts references, bankers, present earnings and other information are
supplied.
(b) On the basis of the information supplied by the customer and enquiries from
accounts references and bankers, the credit manager should fix a credit limit
in the master file for every customer.
(2) Appropriate approvals for manual override of credit limit extensions.
(3) Customer code numbers on orders are matched to accounts receivable master
file record code numbers.
(4) The customers current outstanding balance plus the sales value of the current
order are compared to the credit limit.
(5) The credit manager should authorise all orders by entering his or her password
into the system before the orders can be executed by the system.
Tests of control to evaluate the effective operation of the internal control
measures for credit control
(1) Inspect the following on the credit applications of a sample of new clients:
(a) The signature of the authorised person who approved the terms of the credit
(b) The credit limit granted, and make sure that this corresponds with the
company's credit policy and the credit limit reflected in the master file.
(2) Obtain a copy of the exception report detailing all cases where manual override of
the system has taken place. Inspect these exception reports for evidence of review
and follow up by an authorised person.
(3) Obtain a copy of the exception report in respect of unmatched code numbers.
Inspect these exception reports for evidence of review and follow up by an authorised
person.
(4) Select a random sample of credit sales and perform recalculations to ensure that
sales orders plus the outstanding balance of the customer do not exceed the credit
limit. Obtain and inspect exception reports generated in respect of credit sales to
customers whose credit limit has been exceeded, for evidence of review and follow
up by an authorised person.
(5) Inspect printouts for evidence of authorisation by means of passwords.
Do 6
Identify the key aspects of the accounting systems where cash registers are used
for the recording of cash sales.
1. Key aspects of the accounting systems where cash registers are used for
recording of cash sales
 Each sales clerk is supplied with a cash register on which all sales transactions
have to be accounted for.
 At the end of each day the sales clerk counts the money in the cash register and
deducts the float from the total.
 The chief cashier or his or her assistant collects the money at the end of each
day by unlocking the cash register.
 The sales as indicated on the cash register roll are recorded in the cash sales
register.
 The money is counted by the chief cashier or the assistant chief cashier, the
money received is recorded and the sales clerk signs next to the amount handed
over.
 The chief cashier or assistant chief cashier resets the cash register mechanism
to zero.
 When cash register rolls are used, the cash register roll is printed and signed by
both the chief cashier and the cashier and then filed with the chief cashier.
 All the cash that has been received is banked the following day.
Do 7
Describe the internal control measures which are normally incorporated in the
use of cash registers for handling cash sales.
1. Internal control measures that normally exist when cash registers are used in the
handling of cash sales
(1) Cash registers must display the amount of the cash sales on a screen which is
visible to the client and/or print out an invoice (slip) showing the sales which can
then be checked by the customer (information processing control).
(2) Cash registers should show a cumulative cash register reading according to which
individual amounts and total sales can be checked, and they should print out a slip
bearing this information (information processing control).
(3) Only the accountant should have a key to the cash registers to gain access to the
cash register reading (physical control).
(4) When the cash register reading is taken at the end of each day, the accountant
should reset the mechanism to zero so that each day's total sales can easily be
compared with the cash on hand (physical control).
(5) The accountant should make certain that the cash registers are locked after the
reading has been taken to prevent unauthorised persons from gaining access to the
cash registers (physical control).
(6) Each cashier should be responsible only for a specific cash register and should not
be permitted to work on another cashier's cash register (segregation of duties).
(7) There should be a float for each cash register, and the cashiers and accountant
respectively should sign for the receipt and return thereof in a float register
(segregation of duties).
(8) The cash registers' drawers containing the money must be lockable and should be
locked and unlocked by the accountant every day in the presence of the cashier in
charge of the cash register (operating reviews/segregation of duties).
Do 8
When an enterprise uses the system of issuing cash sale invoices and receiving
payment for sales at a central cashier, certain internal controls are implemented
to ensure that all cash sales are completely accounted for in the accounting
records.
(1) Identify internal controls that could be introduced to make certain that all cash
sales are completely accounted for.
(2) For each of the internal controls that ensure the completeness of cash sales,
formulate a test of control for assessing the effective operation of the internal
control.
Internal controls that could be introduced to ensure that all cash sales are
completely accounted for and tests of control used to assess the effectiveness of
each internal control
Internal control
 Computerised invoices have to be
numbered sequentially.
 There should be adequate
segregation of duties between the
person who issues the invoices and
the person who receives the
payment.
 No goods may be handed over to
customers by the sales staff unless
they have been shown a copy of an
invoice stamped ``paid''.
 No goods may leave the premises
without a valid copy of an invoice
stamped ``paid''.
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A summary of all the invoices
should be reconciled daily with the
cash receipts. This reconciliation
should be checked by a senior
person and any deviations should
be followed up.
Tests of control
 Test check the numerical sequence
of the invoices. (CAATs)
 Observe that the person
responsible for issuing the invoices
does not receive cash as well.
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Observe whether goods are only
handed to a person if he or she is
able to show a cash sale invoice
stamped ``paid''.
Observe whether the security
person agrees the items leaving the
premises with the cash sales
invoice and that the invoice bears
the ``paid'' stamp.
Compare the reconciliation of the
summary of cash receipts with the
actual cash received and make
certain that it has been signed by
the authorised senior person as
evidence that it has been checked.
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The recording in the cash receipts
journal should be checked by an
independent person and compared
with the daily summary of invoices.
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Inspect the signature of the
independent person on the cash
receipts journal which serves as
evidence that the summary of the
daily sales has been compared with
the entry in the cash receipts
journal.
Do 9
(a) Audit programme containing the substantive procedures to audit
transactions in the cash receipts journal
(10)
1. Agree the batch total receipt amount for the day’s total deposit as well as the date, to
the date and amount on the deposit slip for that day. (Accuracy)
2. Follow the deposit slip total through to the cash receipts journal and bank statement
to confirm that the amount per the deposit slip agrees with the amount recorded and
actually deposited. (Accuracy, cut-off)
3. Compare the entry in the cash receipts journal with the date and amount on the
receipt. and deposit slip. Ensure that the allocation in the cash receipts journal is
correct. (Classification, cut-off)
4. Inspect that the dates on receipts fall within the financial period under audit review.
(Cut-off)
5. Recalculate the arithmetical accuracy of the cash receipts journal. (Accuracy)
6. Select a test number of transactions from the cash receipts journal and follow them
back to the receipts. Compare the amounts, date, and other relevant information.
(Occurrence/accuracy)
7. Examine the postings from the receipts journal to the general ledger and trade
debtors’ ledger. (Classification, accuracy)
8. By using computer assisted audit techniques (CAATs), confirm the numerical
sequence of all the receipts in the receipts journal for completeness and obtain
explanations for any missing receipt numbers. (Completeness)
(a) Audit programme containing the substantive procedures to audit
transactions in the cash receipts journal
10 marks
1. Agree the batch total receipt amount for the day’s total deposit as well as the date, to
the date and amount on the deposit slip for that day. (Accuracy)
2. Follow the deposit slip total through to the cash receipts journal and bank statement
to confirm that the amount per the deposit slip agrees with the amount recorded and
actually deposited. (Accuracy, cut-off)
3. Compare the entry in the cash receipts journal with the date and amount on the
receipt. and deposit slip. Ensure that the allocation in the cash receipts journal is
correct. (Classification, cut-off)
4. Inspect that the dates on receipts fall within the financial period under audit review.
(Cut-off)
5. Recalculate the arithmetical accuracy of the cash receipts journal. (Accuracy)
6. Select a test number of transactions from the cash receipts journal and follow them
back to the receipts. Compare the amounts, date, and other relevant information.
(Occurrence/accuracy)
7. Examine the postings from the receipts journal to the general ledger and trade
debtors’ ledger. (Classification, accuracy)
8. By using computer assisted audit techniques (CAATs), confirm the numerical
sequence of all the receipts in the receipts journal for completeness and obtain
explanations for any missing receipt numbers. (Completeness)
Detection risk and substantive procedures
Do 1
(1) On the basis of the activities/procedures that can normally be distinguished in
the accounting system for credit sales, formulate appropriate audit procedures
for the audit of credit sales. Also link each of the formulated substantive procedures
to the assertion to which it relates.
Formulation of appropriate substantive procedures for the audit of credit sales
Activity
 Authorisation of orders.
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Audit procedure
 Inspect the signature of the credit
manager on a number of orders that
serves as evidence that the orders
were authorised (occurrence).
Source documents (delivery notes
 Examine a sample of delivery notes
and credit invoices) should be preand sales invoices to ensure that all
numbered.
the numbers in the sales journal
have been accounted for
(completeness).
Compare the information contained
 Inspect the particulars on
in related orders, sales invoices and
authorised orders and compare the
delivery notes.
particulars with the delivery note
and the sales invoice
(occurrence/completeness
accuracy/cut- off/ classification).
Information is transferred from the
 Agree the particulars of the sales
sales invoice to the sales journal.
invoice with the information in the
sales journal to ensure that it has
been correctly recorded
(occurrence/accuracy/cut-off/
classification).
Posting to the general and accounts
 Make certain that postings from the
receivable ledgers.
sales journal to the general ledger
and the accounts receivable ledger
have been correctly carried out
(Presentation & disclosure)
(2) Identify the activities/procedures according to which substantive procedures can
be formulated to ensure that credit sales are completely accounted for in the
accounting records and financial statements.
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Use of preprinted sequentially numbered sales invoices and delivery note
Numerical accounting for sales invoices in the sales journal
Comparison of corresponding orders, credit invoices and delivery notes
Accounting for credit invoices in the sales journal up to and including the date of
the financial year-end
Application of the correct cut-offs in the sales journal and inventory records at
year-end
Correct postings of transactions from the sales journal to the ledger(s)
Reconciliation of the list of accounts receivable with the accounts receivable
control account
Keeping of a stationery register for the issue of documents
Reconciliation of the total turnover in the financial statements with the trial balance
and ledger account
(3) Formulate the appropriate audit procedures for obtaining evidence that the
credit sales have been completely accounted for in the accounting records and
financial statements.
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Draw a sample of credit sales invoices and compare each with the corresponding
order and delivery note in respect of the name of the client, the description and
the quantity of goods dispatched (occurrence).
Inspect the orders selected for approval by a responsible person (occurrence).
Select documented inventory issues in a case where reliable, continuous
(perpetual) inventory records have been kept, and follow them up by examining
the corresponding delivery notes and sales invoices (completeness).
Trace the sales invoices that you have checked to the credit sales journal and
confirm that the particulars agree and that the transaction was correctly allocated
(completeness/accuracy/cut-off/classification).
Recalculate the totals of the sales records for selected periods to make certain
that the postings totals are accurate (completeness/accuracy/cutoff/classification).
Check the postings of total sales to the credit side of the sales account and
individual sales transactions to the debit side of the accounts receivable account
(Accuracy/ cut-off/ classification).
Perform cut-off tests on sales invoices and delivery notes to ensure that the
transactions were accounted for in the correct accounting period (completeness/
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Accuracy/ cut-off/ classification).
Calculate the gross profit percentage and compare with prior periods/industry
averages/budgets (all assertions).
Reconcile the list of accounts receivables with the accounts receivable control
account and confirm the correctness of reconciling items (completeness).
Compare the amount of the turnover in the income statement with the total of the
trial balance and the general ledger (presentation and disclosure/
completeness).
Do 2
(1) Identify the activities/procedures that should normally be investigated for the
audit of accounts receivables.
Ledger balances
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The calculation of the balances of the accounts receivable control account in the
general ledger and individual accounts receivables in the accounts receivable
ledger.
The list of accounts receivables drawn up from the accounts receivable ledger.
The account receivable age analysis drawn up.
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Documentation
Accounts receivable monthly statements issued at the end of the month.
Reconciliations
General ledger, accounts receivable ledger, list of accounts receivables and statements
issued
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The reconciliation of the accounts receivable accounts in the accounts receivable
ledger and the accounts receivable statement at month-end.
The reconciliation of the total per list of accounts receivables and the balance per
accounts receivable control account.
Differences between the list of accounts receivable and the control account by
means of adjustments are investigated.
Cut-off procedures
The application of correct cut-off procedures on credit sales, receipts from
accounts receivable, returns, stock records, etcetera.
Accounting for information according to established accounting policy
Bad debts written off according to age analysis and other relevant information.
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Provision for bad debts in accordance with management policy.
Disclosure
Disclosure of accounts receivable in the balance sheet as part of the current
assets:
Balance sheet of ...................... at .................... XXx1
Note
XXx1
XXx0
R'000
R'000
ASSETS
Current assets
Accounts receivable
1 625
1 583
(2) Formulate the substantive procedures for the audit of accounts receivable and
the assertion(s) to which each relates.
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Check the opening balances of the accounts receivable ledger accounts by
comparing them with the closing balances of the preceding period
(completeness/valuation).
Check the totals of the list of accounts receivable and make certain that the total
of the list corresponds with the balance of the control account (completeness/
valuation).
Compare the list of accounts receivables with the ledger balances after the
balances of the accounts receivable accounts have been checked in the
accounts receivables ledger (completeness/valuation).
Compare the balances according to the list of accounts receivables with the
balances according to the accounts receivable statements and make certain that
there is a statement of account for each accounts receivable (completeness/
valuation/existence).
Follow up accounts receivables settlements of outstanding balances after yearend in the cash receipts journal (cash book) to make certain that outstanding
debts were collected by year-end (valuation/existence/rights).
Examine the composition of those balances that were not settled after year-end
to determine whether they consist mainly of recent invoices and credit notes
(completeness/existence/rights).
Examine all accounts receivable accounts with credit balances and obtain
acceptable reasons from management for this (valuation/ existence/
obligations).
Examine credit notes for a period after year-end with a view to the writing back
of possible fictitious transactions and the application of correct year-end cut-off
procedures (existence/valuation).
Examine the cut-off procedures with regard to sales and accounts receivable to
make certain that only relevant transactions have been included (completeness/
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valuation).
Carry out an accounts receivable circularisation, evaluate the results and follow
up all differences/queries (valuation/existence/rights).
Examine the age analysis of the accounts receivable and discuss the adequacy
of the provision made for bad debts with management (valuation).
Examine the attorneys' file in respect of the correspondence with accounts
receivable regarding collections, reminders and demands and other sources of
information as well as the official notices of insolvencies (valuations).
Examine the bad debts that were written off and discuss deviations from the
policy on credit and authorisation with management (valuation).
Calculate the relevant accounts receivable ratios and discuss material deviations
with management (completeness/valuation).
Obtain an accounts receivable certificate from management stating that
accounting for the accounts receivable has been completed, correctly valued and
does exist (completeness/valuation/existence/rights/disclosure).
Examine the proper disclosure of accounts receivable in the financial statements.
(Accounts receivable less the provision for doubtful debts should be disclosed as
an current asset.) (disclosure)
(3) Explain the importance of carrying out an accounts receivables external confirmation
as part of the audit of accounts receivable.
All documentation concerning accounts receivables (delivery notes, sales invoices,
credit notes, monthly statements, accounts receivables lists, etc) is prepared internally
by the organisation.
When an accounts receivables external confirmation is carried out, external audit
evidence is obtained about the actual existence and value of an individual accounts
receivables account balance at the end of the year.
(4) Explain the effect of using a computer on the processing of accounts receivable
where the system of auditing ``around the computer'' is used.
There would be no difference in the audit approach since an audit ``around the
computer'' means that the internal auditor uses the visible output (printouts) produced
by the computer.
The internal auditor focuses on the source documents (orders, delivery
notes, sales invoices and payments of accounts receivables) which are the basis of the
input on the computer, and computer printouts (the accounts receivables list in this
case) as the output produced by the computer.
Do 3
Describe the substantive procedures that you would include in a condensed audit
programme for the audit of cash sales where cash registers are used in the handling
and recording of cash sales. Then link each of the substantive procedures to the
assertion(s) to which they relate.
Condensed audit programme for the audit of cash sales where cash registers are
used
(1) Test check the tally rolls of cash register readings against the entries in the cash
sales register (completeness, occurrence and measurement).
(2) Test check the casting of entries in the cash sales register (measurement).
(3) Test check the total of the cash sales as recorded in the cash sales register against
the corresponding entry in the cash receipts journal and on the bank deposit slip
(Completeness and measurement).
(4) Test check total sales in the cash receipts journal against the deposits shown in the
bank statements (completeness, occurrence and measurement).
(5) Scrutinise the cash sales register for cash shortfalls and surpluses and discuss
material amounts with management (measurement).
(6) Test check postings to the appropriate sales accounts in the general ledger
(Measurement).
(7) Compare the monthly cash sales with those of previous months and previous
periods and ask management for an explanation of any material fluctuations
(Completeness, occurrence and measurement).
(8) Calculate the gross profit percentage on sales and compare it with previous periods.
Ask management to explain any material deviations (completeness, occurrence
and measurement).
Audit working papers
Also describe the audit working papers normally compiled for the audit of cash sales.
The following working papers are normally compiled for the audit of cash sales:
 A working paper setting out the audit plan
 A complete audit programme which outlines the audit procedures to be followed
 A working paper which serves as evidence that the audit procedures as
described in the audit programme have been carried out, and which shows the
corresponding results
 A working paper in which conclusions are drawn about all the audit procedures
carried out and which contains recommendations on cash sales.
Do 4
Accounts receivable (trade debtors) external confirmation
18 marks
1. Take control of all debtors statements at a particular month-end.
2. Follow the statements through to the debtors ledger at that month end, and vice
versa, to ensure that a statement exists for each debtor
3. Agree the total of the debtor’s ledger with the month-end balance in the debtors
control account.
4. Compare the debtor’s name, date and amount on the debtors statements with the
name, date and month end balance in the debtors’ ledger.
5. Examine some of the trade debtors’ information, for example name and address of
recent correspondence from the customer or, alternatively, to the information in a
telephone directory or a website address.
6. Reach an agreement with management concerning those trade debtors that should
not be confirmed, for example trade debtors handed over to attorneys for collection.
7. Use computer assisted audit techniques (CAAT’s) to select the sample of trade
debtors from the debtors ledger required for positive confirmation and negative
confirmation and agree the trade debtors’ details, including the name and address
appearing on the monthly statement, with the customer master file details.
8. Make a selection between the debtors that will be confirmed with a positive
confirmation and the debtors that will be confirmed with a negative confirmation.
9. For a positive confirmation, attach the audit stickers which bear the request to contact
the auditor directly in order to confirm the debtors balance (whether the balance is
correct or not), to the statements.
10. For a negative confirmation, attach the audit stickers which bear the request to
contact the auditor directly only if the balance on the statement is not correct.
11. Place all the statements in envelopes that have the auditor's name and address on
the reverse side of the envelope, to ensure the return of all undelivered mail to the
auditor's office, as well as returned/reply envelopes in the case of positive
confirmation.
12. The auditor's office must mail the envelopes, so that there is no opportunity for an
employee of the auditee to remove any statements and substitute others.
13. Use computer assisted audit techniques (CAAT’s) to prepare a working paper
detailing the confirmed trade debtors’ names and extend the month-end balance
confirmed or provided by the debtor into the relevant column signifying the type of
confirmation.
Leave sufficient space to subsequently record agreements, complaints, further audit
procedures and conclusions.
14. Follow up on all queries and complaints raised by customers relating to their
monthly statements, and ensure that all the necessary steps have been taken to
rectify any errors revealed in this way.
15. Follow up on trade debtors’ statements returned by the post office as undelivered.
Obtain the proper addresses by phoning the debtors, from website addresses or
form the telephone directory and repost them. If no other address is known, report
the matter to management and ascertain whether provision should possibly be
made for such debts as irrecoverable. Consider the possibility of a fictitious account.
16. In the case of a positive confirmation, where no reply has been received re-confirm
and, should there still be no reply, examine the relevant trade debtors’ account. If it
has been subsequently paid vouch the receipt, and if it is still unpaid ascertain
whether the debt was in fact correctly recorded by examining the relevant order
forms, delivery notes and invoices.
Substantive procedures to audit cash sales
(21 marks)
1. Based on judgements of the materiality level and the relevant audit risk, select a
representative sample of cash sales transactions (tally roll totals) to be tested.
2. Compare the selected cash register tally roll totals with entries in the cash sales
register. (Accuracy, completeness)
3. Test check the additions of entries in the cash sales register by re-performing
calculations. (Accuracy)
4. For the selected cash sales compare the total of cash sales in the cash sales register
with the corresponding entry in the cash receipts journal (cashbook) and with the
bank deposit slip. (Completeness)
5. On a test basis, follow total sales in the cash receipts journal through to deposits on
the bank statement. (Completeness, accuracy)
6. Scrutinise the bank reconciliation for outstanding deposits at year-end. Follow these
outstanding deposits through to bank statements subsequent to year-end. Obtain
explanations for deposits not cleared. (Cut-off, completeness)
7. Scrutinise the cash sales register for surpluses and shortages, and discuss material
amounts with management. (Completeness, occurrence, accuracy)
8. Test check postings of cash sales from the cash receipts journal to the appropriate
sales account in the general ledger. (Classification)
9. Compare the totals of the cash count performed at year-end to the tally roll totals on
year end, taking the cash float of each cash register into account. (Accuracy)
10. Discuss with management any surpluses or shortages found during the cash count.
( Accuracy)
11. Compare the monthly total of cash sales on a month to month basis and to prior
years, and obtain explanations from management for material deviations.
(Accuracy)
12. Compute the gross profit percentage on cash sales and compare it with that of prior
periods. Obtain explanations from management for material deviations. (Accuracy)
13. Trace the the balance for cash sales per the general ledger to the trial balance, and
to the amount included in the statement of comprehensive income for the year.
(Completeness, accuracy)
14. Inspect that revenue is correctly disclosed in the income statement and notes
thereto. (Presentation and disclosure)
Topic 6
EXPENDITURE
Do 1
Formulate the appropriate audit objectives for credit purchases which relate to the
following assertions:
Management Assertion
Completeness
Occurrence
Accuracy/ Cut-off/ Classification
Audit Objective
- to obtain satisfaction that all credit
purchases made during the period
have been recorded
-to obtain satisfaction that recorded
credit purchases have been properly
authorised
-to obtain satisfaction that recorded
credit purchases represent goods,
services and assets actually received
during the period
-to obtain satisfaction that all credit
purchases have been correctly calculated,
allocated and recorded in the
correct accounts in the general
ledger in accordance with the GAAP
policies applied by the organisation
Do 2
Jack Daniels is an employee in the financial department of a large corporation. He is
in charge of the petty cash, which is used in emergencies to buy small quantities of
Out-of-stock items, stationery, etc. The Imprest system is used, where there is always
a float of R1 000 in the petty cash, and whatever amount of money was used during
the month, is replaced.
You are required to identify the risks that can be associated with the petty cash.
Identify the risks that can be associated with the petty cash
 Cash payments may occur that are not for the company's use (misappropriation)
 Cash can be stolen or lost (if not locked in a safe)
 Petty cash vouchers may be lost or unavailable
 Stock may be bought that is unnecessary or inappropriate (i.e. the wrong size,
etc)
Do 3
Planning and the audit of accounts payable (trade creditors)
8 marks
(a) Audit objectives for trade payables (balances)
1. To obtain satisfaction that all trade payable transactions which should have been
recorded, have been recorded. (Completeness)
2. To obtain satisfaction that the trade creditors exist at a given date (existence).
3. To obtain satisfaction that the trade creditors are the obligations of the entity
(obligations).
4. To obtain satisfaction that trade creditors are included in the financial statements at
appropriate amounts and any valuation or allocation adjustments are appropriately
recorded (valuation).
(b) Implication of a high assessment of inherent and control risk
The higher the auditor’s assessment of inherent and control risk, the more substantive
procedures must be performed in order to reduce the detection risk for the relevant
assertions to an acceptable level.
(a) Internal controls over credit purchases
1. The authority to purchase should be vested only in certain specified employees or a
purchasing department. (Isolation of responsibility)
2. Only competent and trustworthy personnel should be appointed to the purchasing
department. (Competent and trustworthy personnel)
3. Orders should be pre-numbered and control should be exercised so that all orders
are duly accounted for. (Source document design)
4. A stationery register should be maintained by an independent person to exercise
control over the issue of unused order books and goods received books. (Custody
control)
5. Segregation of duties should exists between personnel responsible for (segregation
of duties):
• Ordering of goods.
• Inspection and storage of goods received.
• Checking of invoices against orders, delivery notes and goods received notes.
6. A record of goods received should be maintained and pre-numbered goods received
notes must be completed when goods are received. (Source document design,
comparison and reconciliation)
7. Invoices should be checked against appropriate delivery notes, goods received notes
and orders, and must be stamped and initialled as having been checked by the
responsible person before the transaction is entered in the purchases journal.
(Comparison and reconciliation, isolation of responsibility)
8. Proper record must be kept of invoices in dispute and of goods returned to suppliers.
(comparison and reconciliation)
9. Management should set the tone to promote control awareness in order to create a
good control environment. (Control environment)
(b) Substantive procedures to audit the settlement of accounts payable (trade
creditors)
12 marks
1. Select a random sample of entries in the cash payments journal (cash book) and
compare with the name, amount and date on the paid cheque and other relevant
documentation for example orders, delivery notes, goods received notes, invoices and
the trade payable’s statement. (Accuracy)
2. Compare the amounts of the discounts received as shown in the cash payments
journal (cash book) with those shown on the trade creditors’ statements and relevant
receipts. (Accuracy)
3. Test check the calculations of discount as shown on the supplier statements and
determine if they agree with the discount terms negotiated with the supplier.
(Accuracy)
4. Inspect that there is sufficient authority for the payment, namely the signature of an
authorised person or two signatures of authorised cheque signatories on the “paid
cheque”. (Occurrence)
5. Compare the following information on the cheque requisition with the information on
the supporting documentation for accuracy: (Accuracy)
• The beneficiary.
• The amount payable.
• The nature of the payment (for example creditor).
6. Inspect the calculation on the cheque requisition and supporting documents
(orders, delivery notes, goods received notes, invoices and the trade payable’s
statement) for accuracy. (Accuracy)
7. Inspect that the relevant documentation relating to each recorded payment has
been cancelled by the cheque signatory with a “paid” stamp. (Occurrence)
8. Inspect that the amount in the cash payments journal (cash book) is correctly
allocated to the trade creditors column. (Accuracy, classification)
9. Examine the accuracy of the postings to the relevant trade creditors accounts in the
trade creditors ledger, and in total to the trade creditors’ control account in the
general ledger. (Accuracy, completeness, cut-off)
10. Ascertain the last cheque number drawn at the year-end and examine that no
later cheques have been recorded as current period transactions. Trace the
payments to subsequent bank statements to ascertain that they have been paid
within a reasonable period after year-end. (Cut-off)
Internal controls over cheques
18 marks
1. A register of cheque books received and issued should be kept and control of
unissued cheque books should be in the hands of a senior official.
2. All cancelled cheques should be clearly marked as such and attached to the relevant
cheque counterfoil, or separately filed.
3. All paid cheques returned by the bank should be filed in numerical order.
4. Cheque forms can be printed with the crossing 'Not Transferable’ and made out “to
order”.
5. No changes or alterations on cheque forms are allowed.
6. Drawn cheques should be presented to the person(s) authorised to sign, together
with the appropriate supporting documents.
7. Persons responsible for the signing of cheques should examine the supporting
documents to ensure:
• that amounts shown on the cheques are indeed due to be paid, and that any
discount due has been taken.
• that the correct names of the payees appear on the cheques.
8. Supporting documentation should be initialled or cancelled in some way as having
been paid.
9. All cheques above a certain amount should require the signatures of two senior
officials.
10. Cheques needing only one signature for authorisation can be overprinted with the
maximum amount of the clerk’s authority - for example R200.
11. Where computer equipment is used for generating and signing of cheques, the
cheques should still be signed electronically or otherwise by the authorised
signatory.
12. A separate bank account for payments of specific recurring expenses could be
used, for example wages.
Control Activities and Test of Controls
Do 1
The documents associated with purchases of goods, information which is normally
recorded on source documents, the subsidiary books, the ledgers used for recording
and the accounting entries in the ledgers for purchases of goods
(a) Source documents
D1: Order: A pre-numbered order is issued by the enterprise.
D2: Invoice: A purchase invoice is received from the supplier.
D3: Goods received note: A pre-numbered goods received note is issued by the
enterprise when the goods are received.
(b) Information on the source documents
I1: The preprinted document numbers on the documents
I2: The supplier's particulars
I3: The description of the goods purchased
I4: The unit price of the goods
I5: The total owed on the goods per item and the sum total owed on the invoice
(c) Subsidiary book
H1: The credit purchase transactions are recorded in the purchases journal
(d) Ledgers
G1: General ledger
G2: Accounts payable ledger
(e) Accounting entries in the ledgers
T1: General ledger:
 Debit: purchases account (total)
 Debit: VAT input account (total)
 Credit: account payables control account (total)
T2: Account payables ledger:
 Credit: individual accounts payable account (invoice total)
Do 2
(1) The actions/activities relating to accounts payable balances
(a) Handling of the ledger balances
 The accounts payable control account in the general ledger is cast and so are
the individual accounts payable accounts in the accounts payable ledger.
 A list of the individual accounts payable balances is compiled from the
accounts payable ledger.
(b) Reconciliation of records and documents
 An accounts payable reconciliation is carried out and compiled by
comparing the individual accounts payable ledger account balances
according to the accounts payable ledger, the monthly statement received
from the supplier and the relevant purchases invoices for the period.
 The individual accounts payable balances according to the account
payables ledger are compared with the list of accounts payable.
 The balance of the accounts payable control account and the total of the list
of accounts payable are reconciled.
(c) Disclosure
 Accounts payable are disclosed as a current liability in the balance sheet, for
example
BALANCE SHEET OF....................... AS AT................................................ XXx1
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables
XXx1
1 120
XXx0
976
(2) The actions/activities associated with purchases
(a) Handling of the ledger balance
 Totals are calculated on the purchases account in the general ledger.
 The purchases balance is compared with the balance in the trial balance.
(b) Disclosure in the financial statements
 Purchases are disclosed as part of the cost of sales in the income statement,
for example
DETAILED INCOME STATEMENT FOR THE YEAR ENDED
........ XXx1
Note
XXx1
XXx0
16 130
15 187
R'000 R'000
Revenue
Cost of sales
Opening stock
Purchases
Closing stock
Do 3
Internal controls to ensure that all purchases are made ONLY from approved suppliers
 After negotiating prices and payment terms, management should approve a list
of suppliers from which goods may be purchased and services requested.
 These suppliers should be listed in the Approved Supplier Master File.
 Additions or alterations to this file should only be done on the authority of senior
management. Appropriate password levels could control such a function.
 Each approved supplier should be allocated a unique supplier number, which
should be used on all purchase orders.
 If this number is not used, the computer system should not allow the purchase
order to be processed.
 An override function could be included in the computerised system, but with
appropriate controls, such as dual passwords, or the authorisation (password) of
the senior buyer.
 Exception reports should be printed of all unallocated supplier numbers,
amendments to the supplier master file, and overrides. These reports should be
followed up and signed as proof thereof.
Do 4
Internal controls for a good internal control system in respect of credit purchases
Segregation of duties
Please note: This internal control activity incorporates both the division of duties and
the authorisation of various transactions.
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The same person may not be responsible for completing the order, authorising
the order, purchasing goods and recording the transaction.
Orders may only be completed by the storekeeper.
The credit manager is responsible for authorising all orders by appending a
signature to the orders.
The purchaser may only use approved suppliers.
Physical controls
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There should be only one exit/entrance through which goods that have been
purchased can be received.
The gatekeeper/receipts department receives the goods, inspects them and then
issues a goods received note.
Physical access to the store should be restricted to the storekeeper and his or
her assistants.
The storekeeper should be in control of the key so as to restrict access to the
store to authorised persons.
Information processing controls
Ordering goods and services
 Logical access controls should allow only authorised persons to effect changes
to the approved suppliers master file.
 Only senior buying department staff are authorised to add new customer details
to the customer master file.
 The computer system should automatically match every purchase order to the
supplier master file before processing. Non-matches are printed in an exception
report.
 Exception reports should be reviewed and the discrepancies resolved. Manual
overrides should be approved in the appropriate manner.
 Access controls should be implemented, granting only authorised staff the
authority to process purchase orders. Appropriate menu levels should control
authorization limits for individuals.
 Formal authorisation levels should be reviewed and amended periodically,
according to which buyers are entitled to purchase up to specified amounts or to
process certain types of expenditures. Manual overrides to accept orders should
require approval by the chief buyer or senior management.
 The computing system should automatically prenumber all purchase orders
issued for later matching to goods received note and supplier invoice.
Unmatched orders are reflected on a printout.
 Long-outstanding orders reflected on the printout should be followed up.
 The computer should match product descriptions and inventory codes on orders
to inventory master file details.
 Exception reports of orders should be produced when the reorder quantities
exceed those recorded in the inventory master file, or when the quantity of
inventory items on hand exceed reorder levels.
 Exception reports should be reviewed by the buying department, and orders
should either be cancelled or appropriate authority should be given to proceed.
Receiving goods and services
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The computer should generate a pre-numbered goods received note when the
goods receiving store calls up the purchase order for checking against goods
received.
A report of unfilled orders should be reviewed and followed up by the buying
office.
Outstanding orders should be printed out regularly, and reconciliations of
statement balances with accounts payable records should be done.
Goods receiving staff should capture product description and actual quantities
received into goods received report, which should match details with purchase
order, and produce an exception report of any non-matching of product
description and quantities.
Goods received from suppliers should be counted and product description and
quantities received checked against purchase orders. The condition of goods
should be checked.
Exception reports should be reviewed and any discrepancies resolved.
Recording purchases and accounts payable
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The computer should print out a list of all outstanding goods received notes
issued for which no matching invoice has been recorded. Accounts department
should follow up on missing invoices.
The computer should match purchase orders. Goods received notes and
invoices, and purchases are only processed if they match. An exception report of
unmatched documents or duplicated invoices is produced. Accounts department
should follow up.
The computer should match the date when purchases are recorded with the date
on goods receiving notes and produce a printout when these dates are in
different accounting periods.
The accounting staff should process the necessary entries to ensure appropriate
accounting for liabilities in the current accounting period.
The computer should match unit prices on a supplier's invoice with those
recorded on purchase orders and produce exception reports which should be
reviewed and problems resolved.
The computer should match the account numbers on the purchase orders and
the goods received notes with the supplier's name and account number on the
invoice, and match the particulars with the accounts payable details.
Accounts department employees should follow up on exception reports of
mismatched suppliers' names and account numbers.
The computer should match the opening balance of accounts payable total plus
purchases and payment transactions with the closing balances of accounts
payable and the general ledger control account after an update run.
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A reconciliation of run to run totals should be performed by appropriate
accounting staff.
An exception report of unallocated purchase invoices should be reviewed and
resubmitted.
The accounts payable master file should be dated or given a sequence number
after each update run, and the computer should check the date or version
number before each update run.
External file labels and a librarian function should be used for indicating which
version of the master file is being used.
The mathematical accuracy of invoices should be checked during the processing
run: inventory stock number, quantities times unit prices and invoice total, plus
calculation of discounts receivable.
Monthly reconciliations of accounts payable amounts with suppliers' statements
and remittance advices should be prepared and mailed to suppliers with
payment.
Enquiries should be made of suppliers dealt with by persons other than those
recording the purchase invoices.
The total of the accounts payable ledger listing should be reconciled with the
general ledger accounts payable control account.
The computer should match the account code number on the order, goods
received note and invoice with the account code number in the general ledger.
There should be weekly or monthly purchase transaction printouts of expense
and asset allocations.
An independent (senior) person should review the transaction printouts for
reasonableness.
Operating reviews
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Management should monitor the above internal controls regularly to determine
whether they are being applied.
Management should regularly compare the actual figures with the budgeted
figures and forecasts to expose possible weaknesses.
Reporting
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Printouts of general ledger balances and other detailed reports (accounts
payable ledger listing, transaction listing, etc), as well as all exception reports,
should be available at least monthly. This should be distributed to the various
departments for reconciliation.
Reconciliation has to be verified and signed by a senior person in the department
(department head).
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The reports may include comparisons of actual current financial year results with
budgets and forecasts and prior period amounts, and should provide
explanations for differences identified.
Risk of misstatement for purchases of goods and services.
The auditor should assess the risk of misstatement (inherent and control risk) with
regard to completeness, occurrence and accuracy/cut-off/classification of purchase
transactions and the existence and valuation of the accounts payable balance.
Do 5
The formulation of tests of control in order to evaluate the internal controls
governing credit purchases
Internal Control
1. Access control is only granted to
authorised staff to process purchase
orders, and menu levels control
authorisation limits for individuals.
2. The gatekeeper/receipts departments
receives the goods, inspects them and
issues a goods received note.
3. Computer automatically pre-numbers
all purchase orders issued for later
matching to goods received note and
supplier invoice. Unmatched orders
are reflected on a printout.
4 The accuracy of analyses and postings
from the subsidiary books must be
checked by an independent (senior)
person.
Test of Control
Enquiry and inspection of documentation
of delegated authority for over-rides.
Inspect orders and confirm that
they are within the delegated authority
limits.
Observe whether the gatekeeper/receipts department inspects the goods
that have been delivered and issues a
goods received note.
Enquiry and inspection of the printout
and other documentation for proof of
follow up of undelivered orders.
Inspect the subsidiary books for the
signature of the responsible person
who checked the accuracy of the
analyses and postings.
Do 6
The documents associated with payments to account payables, information which is
normally recorded on source documents, the subsidiary books, the ledgers used for
recording and the accounting entries in the ledgers for the payments to account
payables
(a) Source documents:
D1: A cheque requisition is completed by the organisation.
D2: The account payables reconciliation with supporting documents, such as
monthly statements and invoices, is used as supporting documentation for the
cheque requisition.
D3: A prenumbered cheque is issued by the organisation.
(b) Information on the documents:
I1: The name and address of the supplier
I2: The amount owed to the supplier
(c) Subsidiary book
H1: The transactions in respect of payments to account payables are recorded in
the payments journal (cheque payment)
(d) Ledgers
G1: General ledger
G2: Accounts payable ledger
(e) Accounting entries in ledgers
T1: General ledger:
 Debit: accounts payable control accounts (total)
 Credit: payments journal (cheque amount)
T2: Accounts payable ledger:
 Debit: individual accounts payable accounts (cheque amount)
 Internal controls for disbursements
The management of an organisation implements internal controls, based on the control
activities, to control the disbursement transactions and to ensure that all transactions
processed by the accounting system are valid, accurate and complete.
Do 7
Internal controls that would ensure that all the cash purchase transactions are valid
and have been accurately and completely accounted for
Segregation of duties
Please note: This internal control activity incorporates both the division of duties and
the authorisation of various transactions.
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The purchases manager is responsible for authorising all cash purchase orders
by means of a signature.
The purchaser may only use a previously authorised supplier in the supplier's
master file.
The cheque/electronic funds transfer requisition must be approved for payment
by a senior accountant who has to sign the cheque/electronic funds transfer
requisition as evidence of authorisation.
The physical cheque should be signed by two authorised signatories.
Electronic funds transfers may only be done by authorised personnel who have
received the signed electronic funds transfer requisition.
Only the storekeeper is permitted to fill orders for the cash purchase of goods.
The payments clerk in the accounting section then records the transaction in the
accounting records.
Physical control
 The gatekeeper/receipts department receives the goods that have been
purchased and makes out a goods receipts voucher after checking the goods
against the order (blank copy, i.e. no quantities) and the invoice.
 There should be only one entrance through which goods that have been
purchased can be received.
 Physical access to the store must be restricted to the storekeeper and his or her
assistants.
 The storekeeper must be in control of the key so as to restrict access to the
store to authorised persons.
Information processing controls
Ordering goods and services
 Logical access controls should allow only authorised persons to effect changes
to the approved suppliers master file.
 Only senior buying department staff are authorised to add new supplier details
to the supplier master file.
 The computer system should automatically match every purchase order to the
supplier master file before processing. Non-matches are printed in an exception
report.
 Exception reports should be reviewed and the discrepancies resolved. Manual
overrides should be approved in the appropriate manner.
 Access controls should be implemented, granting only authorised staff authority
to process purchase orders. Appropriate menu levels should control
authorization limits for individuals.
 Formal authorisation levels should be reviewed and amended periodically,
according to which buyers are entitled to purchase up to specified amounts or to
process certain types of expenditures. Manual overrides to accept orders should
require approval by the chief buyer or senior management.
 The computing system should automatically prenumber all purchase orders
issued for later matching to goods received note and supplier invoice.
Unmatched orders are reflected on a printout.
 Long-outstanding orders reflected on the printout should be followed up.
 The computer should match product descriptions and inventory codes on orders
with inventory master file details.
 Exception reports of orders should be produced when the reorder quantities
exceed those recorded in the inventory master file, or when the quantity of
inventory items on hand exceed reorder levels.
 Exception reports should be reviewed by the buying department, and orders
should be cancelled or appropriate authority should be given to proceed.
Receiving goods and services

The computer should generate a pre-numbered goods received note when the
goods receiving store calls up the purchase order for checking against goods
received.
 A report of unfilled orders should be reviewed and followed up by the buying
office.
 Outstanding orders should be printed out regularly, and reconciliations of
statement balances with accounts payable records should be done.
 Goods receiving staff should capture product description and actual quantities
received into goods receiving report, which should match details with purchase
order, and produce an exception report of any non-matching of product
descriptions and quantities.
 Goods received from suppliers should be counted and product description and
quantities received checked against purchase orders. The condition of goods
should be checked.
 Exception reports should be reviewed, and any discrepancies resolved.
Recording purchases

The computer should print out a list of all outstanding goods received notes
issued for which no matching cash invoice has been recorded. Accounts
department should follow up on missing invoices.
 The computer should match purchase orders. Goods received notes and
invoices, and purchases are only processed if they match. An exception report
of unmatched documents or duplicated invoices is produced. Accounts
department should follow up.
 The computer should match the date when purchases are recorded with the
date on goods received notes, and produce a printout when these dates are in
different accounting periods.
 The computer should match unit prices on suppliers' invoice with those recorded
on purchase orders and produce exception reports which should be reviewed
and problems resolved.
 The mathematical accuracy of invoices should be checked during the
processing run: inventory stock number, quantities times unit prices and invoice
total, plus calculation of discounts receivable.
 There should be weekly or monthly purchase transaction printouts of expense
and asset allocations.
 An independent (senior) person should review the transaction printouts for
reasonableness.
 Regular bank reconciliations with the bank statements received from the bank
should be carried out and checked by a senior person.
Operating reviews


Management should monitor the above internal controls regularly to determine
whether they are being applied.
Management should regularly compare the actual figures with the budgeted
figures and forecasts to expose possible weaknesses.
Reporting

Printouts of general ledger balances and other detailed reports (cash payments
listing, printouts of transfers, etc), as well as all exception reports, should be
available at least monthly. This should be distributed to the various departments
for reconciliation.
 Reconciliation has to be verified and signed by a senior person in the
department (department head).
 The reports may include comparisons of actual current financial year results with
budgets and forecasts, and prior period amounts, and should provide
explanations for differences identified.
 Risk of misstatement for disbursements.
The auditor should assess the risk of misstatement (inherent and control risk)
with regard to completeness, occurrence and accuracy/cut-off/classification of
payment transactions and the existence and valuation of the accounts payable
balances.
Detection risk and substantive procedures
Do 1
(1) Actions/activities for investigating the validity/occurrence of credit purchases
and the applicable substantive procedure relating to each of the
actions/activities
Actions/activities
 The issue of an order for the
purchase of goods.

The authorisation of the
Audit procedures
 Inspect whether there are orders
for the selected credit purchase
transactions by comparing the
orders with the appropriate
invoices and goods received
notes.
 Inspect the order to see whether
transaction by the purchases
manager in the form of his/her
signature on the order.

The receipt of the credit
purchases invoice showing the
following:
 the date of execution of the
credit purchase
 the name of the supplier from
whom goods were purchased
 the invoice addressed to the
customer
 the description of the goods
purchased, the quantity, the
unit price and the total due
 the signature of the person
who
checked the invoice for
accuracy and compared it with
the order and goods received
note
- the issue of a goods received note
when goods are received by the
receiving department.






it
bears the signature of the
purchases
manager as evidence that the
transaction has been authorised.
Inspect the credit purchases
invoices to make certain whether:
the date falls within the period of
the current year
the supplier's name appears on
the list of approved suppliers
the name of the customer
appears on the credit purchases
invoice
the goods purchased are in fact
goods in which the enterprise
trades
the signature of the person
responsible for checking the
accuracy of the invoice appears
on the invoice
-
compare the information on
the
invoice with the information on
the order and the goods received
note.
(2) Substantive procedures for auditing the completeness of credit
purchases transactions
Assertion
- All transactions are
recorded at the time of
execution.
-
All transactions are
recorded in the accounting
records.
Completeness of recording
- Inspect the date on the
credit purchases invoice and
goods received note to
determine whether they
have been recorded at the
correct date.
- Determine the number of the last
goods received note at the cut-off date
and compare the information and date
thereof with the purchase invoice.
- Inspect the accounting records to
make certain that the transaction has
been accounted for in the correct
period.
- Inspect the goods received notes to
ensure that they have been prenumbered sequentially.
- Examine the file for outstanding
goods received notes which have not
yet been linked to an invoice within a
reasonable period of time.
-Examine the file with the outstanding
goods received notes where inventory
has been received but cannot be
compared with the invoices and can
therefore not yet be accounted for in
the accounting records.
-Compare the information on the goods
received notes with the information on
the invoices and compare this
information with the information
recorded in the purchases journal.
- Compare the inventory purchased on
the goods received notes with the
information recorded in the inventory
records.
- Inspect the monthly accounts
payable reconciliations drawn up to
ensure that all the purchases of goods
transactions have been fully accounted
for.
Do 2
Relating the substantive procedures for accounts payable to the relevant
assertion(s) and audit objectives
(a) Compare the opening
balances of the accounts
payable control accounts
and individual accounts
payable accounts with
the corresponding
closing balances of the
previous year.
(b) Compare the total of
the list of the individual
- completeness/
valuation
- To obtain satisfaction
that accounts payable
balances have been
completely accounted
for at an appropriate
carrying value (rand
value).
-
- To obtain satisfaction
that the accounts
completeness/
accounts payable
balances with the total of
the control account in the
general ledger.
(c) Inspect the financial
statements and ensure
that accounts payable
have been correctly
disclosed as current
liabilities in terms of
generally accepted
accounting practice and
the Companies Act.


valuation
- presentation and
disclosure
payable balances have
been completely
accounted for at an
appropriate carrying
value (rand value).
-To obtain satisfaction
that the accounts
payable have been
correctly disclosed and
classified in the financial
statements.
Note the connection between:
the assertions and the audit objectives
the audit objectives and the audit procedures
Do 3
Substantive procedures that should be included in the audit programme of selected
cheque payments
Audit programme




Check whether there are a cheque requisition and supporting documentation for
each of the selected cheque payments (e.g.: cheque 1517 -telephone account,
cheque 1685 - accounts payable reconciliation and cheque 2050 - cash
purchases invoice) (validity/occurrence).
Check whether the cheque requisition has been approved for payment by the
senior accountant by scrutinising his signature on the cheque requisition
(validity/ occurrence).
Compare the following information according to the cheque requisition with the
information on the supporting documentation for accuracy:
- the beneficiary
- the amount payable
- the nature of the disbursement (e.g. telephone, creditor or inventory)
(occurrence/measurement)
Check the calculations on the cheque requisition and supporting documents for
accuracy (measurement).










Check whether the supporting documentation has been cancelled by means of a
``paid'' stamp or indicating the corresponding cheque number (validity/
occurrence).
Compare the entry in the payments journal with the information on the cheque
requisition and supporting documentation, and make certain that the allocation is
accurate, taking into account the nature of the transaction (measurement).
Check whether the dates on the supporting documentation and the cashed
cheques fall within the financial period under review (completeness).
Check whether the signature of the responsible person appears in the payments
journal as evidence that the accuracy and completeness of the cheque payments
in the payments journal have been verified (occurrence/measurement).
Check the mathematical accuracy of the payments journal (measurement).
Compare the information according to the payments journal and cheque
requisition with the following information on the cashed cheque:
- beneficiary
- amount
- date
(occurrence/measurement)
Check whether the cashed cheques have been crossed, for example as ``not
transferable'' and note any endorsements on the cheques (occurrence/validity).
Verify that the cheques have been cashed and that they bear a bank stamp
(occurrence/validity).
Verify that the cheque has been signed by two authorised signatories
(occurrence/validity).
Examine the postings from the payments journal to the general and accounts
payable ledgers.
TOPIC 7 INVENTORY
Do 1
Uwear Inc. is a trading company that buys clothes from a factory and then sells the
clothes. They use a computerised inventory system where stock records are updated
with all purchases and sales.
Identify audit risks that can exist in such a system, and also formulate audit objectives
for the audit of inventory.
Audit risks






Stock received (bought) is not entered into the inventory master file.
Stock received (bought) is entered into the inventory master file at the incorrect
cost price.
Quantity of stock received (bought) is entered incorrectly into the inventory
master file.
Stock received (bought) is misappropriated before it can be entered into the
inventory master file.
When a sale is made, inventory records are not updated immediately.
Returns of stock are not updated in the inventory master file.
Audit objectives
Obtain satisfaction that:







Do 2
All stock received is entered into the inventory master file (completeness).
All stock received is entered into the inventory master file at the correct price
(accuracy).
All sales made during the period have been recorded in the system
(completeness).
All sales made during the period have been recorded in the inventory master file
(file updated correctly) (occurrence).
All returns were correctly recorded in the system and updated in the inventory
master file (classification).
All the stock in the inventory master file represents stock actually bought by the
company (rights).
All sales recorded in the system represent sales actually made to bona fide
customers of the company (occurrence).
Substantive procedures to audit the value of inventory
10 marks
1. Agree the prices on the final inventory sheets to those shown on the relevant invoices
towards the close of the financial year.
2. Re-perform the calculation of the value of a number of representative inventory items
as they appear on the inventory sheets.
3. Examine the basis used for the calculation of the inventory and ensure that it is
consistently applied in relation to previous years.
4. Inspect that obsolete, slow-moving and damaged inventory is valued at the lower of
cost or net realisable value.
5. Test a representative sample of items for the valuation of inventory at the lower of
cost price or net realisable value.
6. Compare the value of the main categories of inventory with the previous year,
investigate and obtain explanations for material differences.
7. Calculate the gross profit percentage and inventory turnover rate and compare them
with the previous years’ budgets and industrial averages. Obtain explanations and
examine material deviations.
8. Obtain a certificate from management regarding the value of inventory, basis of
valuation, main categories of inventory and encumbrance of inventory.
9. Compare the value of inventory according to the inventory count with the value of
inventory in the financial statements, taking into consideration possible alterations.
Substantive procedures to audit the existence of inventory
21 marks
(a) Procedures before the inventory count is performed
1. Evaluate the auditee’s inventory count plan prior to the date of the actual count.
2. Recommend improvements where necessary.
3. Determine the dates and venues of the actual count.
4. Identify the audit team needed during the count; make the necessary arrangements
with them.
5. Inform the audit team properly about the procedures.
b) Procedures during the performance of the inventory count
1. Observe that the inventory is neatly stacked, with similar items together.
2. Observe that the counting and recording procedures as set out in the auditee’s
inventory count plan are strictly followed by the auditee’s employees.
3. Inspect the sequence of the inventory sheets to ensure that all are accounted for after
the inventory count.
4. Obtain a rough plan of the premises and note on the plan where the high value items,
obsolete inventory and slow moving inventory are situated. Ensure that these items are
covered in test counts.
5. Conduct test counts to check the reliability of the inventory sheets.
6. Walk through the premises and observe that all inventory have been tagged.
7. Examine that cut-off procedures (control over inventory movements and
establishment of cut-off points for documents) are implemented and executed.
8. Obtain copies of the final inventory sheets to discourage later alterations.
9. Settle all queries arising from the inventory count with the appropriate executive in
charge.
10. Report to management any weaknesses.
11. Examine inventory in transit and inventory located at other premises.
Do 1
(1) Inventory valuation based on the various valuation methods
Method
Calculation
Answer
(a) FIFO valuation*
10 x6 R330
R3 300
(b) Average cost
10 x6 R355
R3 550
valuation
(c) Net realisable value
10 x6 (R400 - R50)
R3 500
* If items purchased first are the first to be sold (as in the First in First out method), then the items left in
inventory would be the items that were purchased LAST. That is why the last purchase price is used for
the calculation.
Do 2
Internal controls for trading inventory on the basis of the control activities if a continuous
(perpetual) inventory system is used
Segregation of duties
Please note: This internal control activity incorporates both the division of duties and the
authorisation of various transactions.

There should be segregation of duties between the people responsible for the
physical handling of inventory and those responsible for recording inventory


transactions.
Inventory issues should be authorised by the store manager.
All inventory write-offs should be authorised by the financial manager.
Physical control




Access to the store should be restricted to the storekeeper and the people under
his/her control.
Adequate physical security should be maintained at the store, and a single person,
the storekeeper, should be responsible.
No goods should be allowed to leave the store without a valid requisition.
The financial records and the physical inventory (inventory counts) should be
compared regularly by a person appointed for this purpose, and reasons for
shortfalls and deviations should be obtained.
Information processing controls






There should be computerised monitoring of inventory levels against sales demand
levels to indicate reorder levels and economic order quantities for particular
inventory items.
Pre-numbered inventory requisitions for inventory issued should be captured into
the system and printed.
There should be a daily printout of unfilled inventory requisitions and these should
be followed up regularly.
The recording of any deviations traced during inventory counts should be checked
by an independent person to make sure that the information has been correctly
transferred to the accounting records from the count sheets.
The financial manager should continually monitor the inventory write-off account to
ensure that only authorised write-offs are done.
Inventory requisitions should be agreed with invoices to ensure that all issues from
the store have resulted in actual sales transactions.
Operating reviews



The laid-down internal controls for inventory should be continuously observed and
studied by management to ensure that they are being applied in the way in which
they were designed.
Errors and weaknesses should be analysed by management, and corrective action
should be taken or the internal controls should be amended where necessary.
Surprise visits and comparison of the inventory and the accounting records should
be undertaken by management. Corrective action should be taken where
deficiencies and weaknesses are exposed.
Reporting

Printouts of general ledger balances and other detailed reports (inventory sales
activity printouts, reconciliations of inventory counts, etc), as well as all exception
reports, should be available at least monthly. This should be distributed to the
various departments for reconciliation.
Reconciliation has to be verified and signed by a senior person in the department
(department head).
The reports may include comparisons of actual current financial year results with
budgets and forecasts, and prior period amounts, with explanations provided for
differences identified.


Do 3
The tests of control which the auditor is normally able to carry out to obtain satisfaction
that there is adequate control over the stationery used during an inventory count



Observe whether there is adequate control over unissued count sheets.
Ensure that all inventory sheets for the count have been pre-numbered.
Inspect the schedule on which a summary of the count sheets have been made
and observe whether the persons who received the count sheets did in fact sign for
them.
Observe whether the count sheets have been recorded as having been returned
on the summary schedule when the count sheets are received back.
Ensure that all count sheets have been signed by the counters.
Observe whether there is adequate control over the count sheets that have been
returned to prevent unauthorised changes to them.



Do 4
20 marks
Substantive procedures to audit the company’s inventory balance at year-end
1. Attend the year-end inventory count and: (Existence)




Satisfy yourself regarding the efficiency of the inventory count plan.
Satisfy yourself that all the control measures were effectively applied in
carrying out the inventory count.
Make copies of all count sheets.
Compare the quantity counted per final count sheets with the perpetual
inventory records and follow up any differences. Adjusting journals should be
passed by management where differences are noted to be valid.
2. Compare the total value of inventory per final count sheets with the total of
inventory

according to the perpetual inventory records and investigate material
differences.(Valuation)
3. Select a random sample from the perpetual inventory records and compare the
prices

with relevant invoices towards the close of the financial year. (Valuation)
4. Test check the calculation of the value of a number of representative inventory
items as these appear on the inventory sheets. (Valuation)
5. Inspect the current year work papers in relation to the prior year to examine the
basis used for the calculation of the inventory and ensure that it is consistently applied.
(Valuation)
6. Inspect that obsolete, slow-moving and damaged inventory that was identified and
flagged during the inventory count is valued at the lower of cost or net realisable value.
(Valuation)
7. Enquire from management and test a representative sample of items for the valuation
of inventory at the lower of cost price or net realisable value for reasonableness.
(Valuation)
8. Compare the value of the main categories of inventory with the previous year and
investigate and obtain explanations for material differences. (Valuation)
9. Select five purchases and sales invoices prior to year end and after year end and
compare to goods received and issued to verify that they were accounted for in the
correct accounting period to ensure the correct cut-off procedures. (Cutoff,completeness, occurrence)
10. Calculate the gross profit percentage and inventory turnover rate and compare
these with the previous year’s, the current year budgets and industrial averages.
Examine material fluctuations and obtain explanations from management.
(Completeness, valuation)
11. Obtain a certificate from management regarding the value of inventory, basis of
valuation, main categories of inventory and encumbrance of inventory. Obtain external
confirmation for any inventory that is encumbered. (Valuation, existence, rights,
completeness)
12. Compare the value of inventory according to the inventory count and the perpetual
inventory records with the value of inventory in the general ledger, the trial balance and
the financial statements, taking into consideration possible alterations.
For example any inventory that is obsolete, slow-moving or damaged that was identified
and flagged during the inventory count, should be written down as such in both the
inventory records, the general ledger, the trial balance as well as the financial
statements. (Valuation)
13. Examine the disclosure of inventory in the financial statements:


Classification of inventory according to the main categories of inventory.
Disclosure of the accounting policy concerning:
- the basis of valuation according to the lower of cost price or the net
realizable value,
- the method of the inventory valuation,
- its consistency with the previous year
Detection Risk and Substantive Procedures for Inventory
Do 1
Inventory turnover rate and the period inventory on hand
Ratio
Inventory
turnover rate
Period's
inventory
on hand
XXx3
R'000
500/[(80 + 120)/2]
= 5 times
[(80 120)/2]/5006365
= 73 days
XXx2
R'000
300/[(70 + 80)/2]
= 4 times
[(70 + 80)/2]/3006365
= 91,25 days
XXx1
R'000
320/[(80 + 90)/2]
= 3,76 times
[(80 + 90)/2]3206365
= 96,95 days
(2) Possible reasons for the results obtained above


The inventory turnover rate is increasing and the period's inventory on hand is
decreasing. Therefore the period for which goods lie in the store before being
sold is decreasing.
The above tendency of inventory may be ascribed to such factors as the
following:
(1) A reduction in selling prices, which would typically take the form of a “sale''. The fact
that the gross profit percentage has decreased considerably from the year XXx2 to the
year XXx3 points to this.
(2) Better inventory control by means of planned purchases.
(3) The write-off of obsolete or slowly moving items in inventory.
(4) Errors during the inventory count or in the calculations.
(5) Inventory theft.
(6) Change in the valuation methods.
Do 2
Substantive procedures which the auditor normally carries out to ensure that the
trading inventory is shown at a reasonable value in the financial statements




Examine prior years' working papers to determine whether the valuation method
(FIFO) used is consistent with that of previous years.
Using computer assisted audit techniques, recalculate additions and total
inventory amounts.
Agree the balance in the continuous (perpetual) inventory master file with the
inventory general ledger control account and the trial balance. Follow up any
reconciling items.
Select a sample of purchased inventory items and perform the following tests:
(1) Inspect most recent supplier invoices to determine that the correct cost price has
been used for the valuation of inventory.
(2) Inspect sales invoices subsequent to year end to ensure prices exceed inventory
cost.
(3) Inspect the inventory list in respect of the sample items chosen and ensure that
inventory has been accounted for at either the cost price or the net realizable value
(selling price), whichever is the lower.


Inspect whether obsolete, slow-moving and damaged inventory has been valued
at the lower of cost or net realisable value.
Perform analytical review procedures:
(1) Compare the value of the main categories of inventory with values for previous
years, investigate any material differences and obtain explanations from management
for the differences.
(2) Calculate the gross profit percentage and the inventory turnover rate and compare
them with the budgets/forecasts, previous years, the industrial average’s, etcetera.
Obtain explanations from management and investigate material deviations.

Obtain a signed management representation letter indicating the value of
inventory,the basis of valuation, the main categories of inventory, the
encumbrance of inventory, etcetera.
TOPIC 8
HUMAN RESOUCES/PAYROLL
Do 1
Internal controls over wages
17 marks
(a) Internal controls to achieve objectives
9 marks
1. There has been due attendance by the relevant employees


Time registers or clock cards must be used.
Entry and exit points to the work area should be limited; protected by a turnstile
type mechanism and supervised during clocking periods.
2. The wage rate used for each specific employee is correct



Personnel records should be properly maintained and kept up to date.
Wage rates should be checked by an independent person.
Clock cards should be prepared by the personnel department, strictly in terms of
the authorised employee list rate.
3. The amounts calculated as payable to each person are correct.


The section administration clerk should complete a batch control sheet by
entering batch identification, control totals and signature to acknowledge
responsibility.
The section head should check calculations, authorise overtime and check and
sign the batch control sheet.
4. The amount paid to a person, corresponds with the amount calculated

A payslip should be issued to enable an employee to check the amount being
paid to him.
5. Payments are made to the proper persons



Workers should be identified, for example by an official staff card, before
disbursing wages.
Disbursements should take place in the presence of an authorised official for
example an independent paymaster.
Disbursements should be done by persons who have taken no part in preparing
wage records, for example the paymaster.
6. There is evidence that payments are being made to the correct person



Employees should sign the record as evidence of having received their wages.
The disbursing clerk should mark the appropriate items in the wage record as
having been paid.
Regular independent reconciliations of unclaimed pay-packets on hand and the
unclaimed wages register should be performed.
(b) Internal controls over unclaimed wages
8 marks
1. Unclaimed wage envelopes should be returned to the cashier or paymaster, who
should record it in an unclaimed wages register and safeguard it. (access / custody
control)
2. The cashier or paymaster should sign the payroll record to acknowledge receipt of
the unclaimed wages identified. (Isolation of responsibility)
3. The pay-packets may not be released to other parties, for example a family member,
unless the employee has given written permission. (Access / custody control)
4. Wages still unclaimed at the close of the following week should be deposited in the
bank. (Access / custody control)
5. When unclaimed wages are subsequently paid, proper identification of the employee
should be established. Employees should sign the unclaimed wages record to
acknowledge receipt of their wages. (Access / custody control)
6. The unclaimed wages register should be scrutinised periodically by a senior
independent person and long outstanding unclaimed wages should be investigated and
re-deposited. (Comparison and reconciliation)
Documents, records and functions of payroll transactions
Do 1
Systems descriptions of wages and salaries, showing the most important differences
and similarities in their documentation and accounting procedures
Wages
Documentation
- Employee personnel file should
contain all communications relating to the
employee's employment, including the
letter of appointment, rates of pay and pay
increases, deductions authorised by the
employee, employee evaluations,
employee non-cash benefits. It is usual
practice for each employee to be
allocated an employee number for
identification in the computerized standing
data payroll records.
-In a manual system, wage-earning
workers must use a daily in- and
out-clocking system to record the
hours they have worked on a Clock
Card. In a computerised environment, the
clock card is usually replaced by an
Employee ID Smart Card that is used to
Salaries
Documentation
-Employee personnel file should
contain all communications relating
to the employee's employment,
including the letter of appointment,
rates of pay and pay increases, deductions
authorised by the employee, leave record,
employee evaluations, employee non-cash
benefits. It is usual practice for each
employee to be allocated an employee
number for identification in the
computerised standing data payroll
records.
-Salaried staff must sign an attendance
register for the number of days they have
worked in the course of a month.
Leave forms must be filed.
gain access to the premises by swiping it
through a card reader that activates the
opening of the barrier guarding access; at
the end of the day the card is swiped
through the card reader to record the time
of departure. The system automatically
records the time spent by the employee at
work and calculates the hours worked for
the payroll week.
-Employee pay slip reflects the information
contained on the payroll print out and is
each employee's record of remuneration.
Accounting treatment
-The clock cards are sent to the wages
and salary section of the enterprise every
week. (Manual System)
-In a computerised system the Employee
ID smart card reader will automatically
update the accounting system.
-The clock cards are used to calculate the
number of hours each employee has
worked.
-The permanent records are used to
determine the authorised rate per hour and
the authorised deductions per employee.
- A payroll is prepared for the total
wages:
 The gross wage is calculated by
multiplying the number of hours by
the approved hourly rate according o
the permanent records.
 The net wage per employee is
calculated by deducting the
authorised deductions, e.g. tax and
unemployment insurance.
 The total of all the net wages
payable is calculated. (payroll)
-A cheque is prepared by the financial
section for the total net amount according
to the payroll.
-The cash is placed in the wage envelopes
by the salary section.
-The cheque is recorded in the payments
journal and allocated to wages.
-Employee pay slip reflects the information
contained on the payroll print out and is
each employee's record of remuneration.
Accounting treatment
-The attendance registers are sent to
the wages and salaries section of the
enterprise at the end of the month.
-The attendance register is used to
calculate the number of days for which
workers should be paid.
-The permanent records are used to
determine the salary per month and the
authorised deductions per employee.
-A payroll is prepared for the total
amount of the salaries:
 The gross salary is calculated
according to the number of days
present.
 The net salary per employee is
calculated by deducting the
authorised deductions, e.g. tax and
unemployment insurance.
 The total of the net salaries payable
is calculated. (payroll)
-The financial section prepares a salary
cheque/EFT for each employee for the net
salary according to the salary payroll.
-The salary cheque is recorded in the
payments journal and allocated to the
salaries column.
-The wages are paid out to the employees
during a wage pay-out.
-The salary cheque is handed over to the
employees or paid into their bank accounts
by means of an electronic funds transfer
(magnetic tape).
Do 2
Internal controls for wages and salaries that would make it possible to
(a) obtain satisfaction that all staff appointments and resignations, changes to wage
rates and the weekly total net wages payable are authorised (occurrence/validity)
Internal controls
-
Logical access controls allow only authorised personnel to add new employees and
record terminations in the employee master file.
Printouts are produced of all changes to standing data on the employee
masterfile.
-
Logical access controls allow only authorised personnel to make changes to
standing data on the employee master files.
Printouts are produced of all changes to standing data on the employee master file.
-
The pay sheet for the total net wages payable must be authorised by the senior
salary and wages officer by means of his signature on the payroll.
(b) obtain satisfaction that the accounting accuracy of all wage transactions has been
checked and the information substantiated by supporting documentation and records
(measurement).
Internal controls
-
-
-
Programmed limit and reasonableness checks of hours worked, as well as input
validation checks of employee name and code numbers.
Programmed calculations of weekly and monthly payrolls from hours worked records
and standing data for gross pay rates and deductions and the analysis of cost
allocations, and automatic production of the payroll printouts and individual pay slips
for employees.
Exception reports printed of employees' names or code numbers duplicated or
omitted from the payroll; hours worked in excess of norms; and gross pay rates that
exceed parameters per category of employee and missing data such as unallocated
costs.
For each employee there should be a clock card showing the hours worked and a
permanent record showing the rate per hour and the authorised deductions.
The senior disbursement clerk should make certain that there is a clock card for
each employee and check that only authorised rates have been used for calculating
wages.
Do 3
Proposed internal controls for a wage payout








Arrangements should be made for the physical security of the cash that will be paid
as wages in order to restrict access to the cash.
Pay slips showing the amount payable to an employee should be handed to the
employee together with a sealed wage envelope.
Disbursement should take place in the presence of an authorised official who will
ensure that the handing over of the wage envelopes takes place in an orderly
manner.
Employees should be properly identified by the checking of their identity numbers or
identity cards before their wages are paid to them.
The disbursement clerk should mark off all the wages that are paid out on the wage
record or payroll.
Employees should sign the wage record or payroll as evidence that they have
received their wages.
Wage envelopes that have not been handed over should be marked as unclaimed,
and the disbursement clerk and a responsible person should compare unclaimed
wages with the wage record and sign the wage record as evidence that the check
has been carried out.
The unclaimed wages should be handed over to a responsible person, such as one
of the cashiers, who will record them in an unclaimed wages register.
After you have studied the above sections, you should be able to answer any questions
on the accounting and internal controls applicable to wages and salaries. If you are still
unsure of the transaction flow and internal controls for wages and salaries, you should
revise the relevant study material.
Do 4
Formulation of the tests of control for wages, salaries and wage disbursement
Internal control measures Tests of control
Internal control measures
(1) Wages:
-Authorisation of rate changes
(2) Salaries:
-Checking the arithmetical accuracy of the
payroll
(3) Wage payout:
- Identification of employees
Tests of control
- Scrutinise each employee's permanent
personnel file and make certain that the
rates of pay and any changes in the rates
of pay have been authorised in writing and
filed.
- Inspect whether the signature of the
responsible person who checked the
arithmetical accuracy of the payroll
appears on the payroll.
-Observe whether all the employees are
properly identified when wages are
disbursed through scrutiny of their identity
numbers or identity cards before their
wages are handed over.
Do 4 above illustrate the connection between the internal control in question and the
related tests of control that could be carried out. You should be able to formulate the
related tests of control in the same way for each internal control measure applicable to
wages, salaries and a wage payout.
Do 5
Tests of control for the occurrence of the salary transactions



Inspect evidence of the checking of the reconciliation of hiring and termination
for monthly-paid staff against total number of employees on the payroll.
Select a sample of standing data changes reflected on printouts and inspect the
relevant supporting documentation in the employees' personnel files for evidence
of the appropriate authority for changes in status, gross rates of pay and
deductions.
Select several monthly payroll printouts and inspect the signatures of the
persons responsible for checking the accuracy of preparation and their
authorisation for payment.
Internal controls over a wage payout
10 marks
1. Physical security must exist over cash for disbursement as wages.(access / custody
control)
2. The amount due to each employee should be recorded on a payslip, which should be
handed to the employee together with the sealed wage envelope. (Access / custody
control, source document design)
3. Each worker should be properly identified before the particular wage is paid
out,(official staff card). (Access / custody control)
4. Disbursement should proceed in the presence of an authorised official, who
supervises the proper distribution of wage envelopes. (Access / custody control,
control environment)
5. The disbursing clerk should mark off in the wage records all wages that are paid out.
(Isolation of responsibility)
6. Employees should sign the wage record as evidence of having received their wages.
(Control environment, comparison and reconciliation, isolation of responsibility)
7. Wage envelopes not disbursed should be marked as unclaimed, and the disbursing
clerk and an authorised official should check the unclaimed wages to the wage record
and should sign the wage record as evidence of having done so. (Comparison and
reconciliation, isolation of responsibility)
8. Management should set the tone to promote control awareness in order to create a
good control environment. (Control environment)
Focus is placed on access / custody controls as this is the biggest risk associated with
unclaimed wages due to errors or theft of cash and the misappropriation of wages
Do 3
Substantive procedures when attending a wage payout
When attending a wages payout, the auditor should arrive after the cheque for the
week's wages has been drawn and/or the filled employee pay packets have been
received from the coin security company; the auditor should then:








Check the total number of pay packets into which wages has been placed
according to the week's payroll printout.
Count the money in a few packets and agree the amounts with the pay slips and
the payroll printout.
Assign members of the auditing staff to all pay-out points and travel to each
payout point with the client staff distributing wages and pay packets.
Observe identification of employees and payment of pay packets to them.
Observe the recording of unclaimed wages on the payroll printouts, delivery of
packets to the cashier and the recording of the details of such packets in the
unclaimed wages register.
Ascertain through enquiry whether the unclaimed wages are for genuine
employees who were unable to claim their wages. This enquiry is important, as it
may reveal wages drawn for fictitious employees.
Inspect the signatures on the payroll printout of the persons (usually two)
responsible for paying out the wages.
Substantive procedures for payroll balances
The substantive tests of the details of balances presented in topic 6 of this module apply
in equal measure to payroll-related balances, except that the auditor will normally not
obtain confirmation of the balances owing to accounts payable or have recourse to
statements of amounts due, as the information from which the accruals are raised are
generated by the organisation's internal payroll function and advised to the payroll
deduction accounts payable (e.g. South African Revenue Services).
Do 2
Substantive procedures to obtain satisfaction that the wage and salary balances have
been correctly disclosed in the financial statement

Inspect the annual financial statements to check that salaries and wages are
shown as an expense in the income statement for the period under review, for
example:
INCOME STATEMENT OF STEELWORKS LTD FOR THE YEAR
ENDED 28 FEBRUARY XXx1
Note
XXx1
XXx0
R'000
R'000
...
...
Expenses
4 895
2 498
Advertisement
54
68
...
.....
.....
Wages and salaries
640
420
.....
.....
Etc
TOPIC 9
INVESTING AND FINANCING
Do 1
Audit objectives an auditor wishes to achieve by auditing the fixed assets
balances and transactions
Audit objectives for fixed
assets balances
Audit objectives for purchase and
sale transactions of fixed assets
To obtain satisfaction that
- fixed assets balances at
balance
sheet date include the effect of
all
investing transactions during
the
period (completeness)
- recorded fixed assets exist
and
represent productive assets in
use at
balance sheet date (existence)
- fixed assets are stated at
cost or
revaluation at balance sheet
date
(accuracy)
- fixed assets are stated at
cost or
revaluation less accumulated
depreciation and less any write
down for impairment of the
fixed assets to reduce them to
their carrying value at balance
sheet date (valuation)
- the organisation owns, or
has the rights to, all
recorded fixed assets at
balance sheet date (rights
and obligation)
- disclosures: cost or
revaluation, carrying
values, depreciation
methods, and useful lives
of major classes of fixed
assets are appropriately
disclosed (presentation and
To obtain satisfaction that
-recorded acquisitions and disposals of fixed assets
include all such transactions that occurred during the
period (completeness/cut-off)
- recorded acquisitions and disposals of fixed assets
actually occurred during the period, were properly
authorised and none were duplicated
(occurrence)
-acquisitions and disposals of fixed assets, proceeds
from disposals, and repairs and maintenance
expenditures have been recognised and measured in
accordance with the GAAP policies consistently
applied by the organisation (accuracy/classification)
Preliminary assessment of risk
disclosure)
Do 2
Audit of an interest bearing borrowing
(a) Particulars in the loan agreement
15 marks
6 marks
1. The name of the borrower, which should be the client’s name.
2. The name of the lender - ABC Bank.
3. The amount of the loan.
4. The rate of interest.
5. The basis of calculation of interest.
6. Terms of payment of interest and the repayment of capital.
(b) Substantive procedures to audit the interest bearing borrowing 9 marks
1. Obtain a certificate directly from ABC Bank for the amount outstanding in respect of
the capital amount, accrued interest and particulars of the security provided.
(Obligation, valuation, existence)
2. Agree the particulars of the certificate with the original contract, general ledger
account and financial statements. (Obligation, valuation, existence)
3. Re-perform interest calculations in conformity with the contract agreement and
ensure that accrued interest is accounted for in the appropriate accounting period.
(Accuracy)
4. Inspect the endorsement on the transfer deed at the Deeds Office for registration of
the mortgage bond. (Obligation, existence)
5. Examine that particulars pertaining to the mortgage bond on the certificate received
from ABC-Bank agree with the general ledger account, and with the note relating to
security on the statement of financial position. (Obligation, valuation, existence)
6. Ensure proper disclosure in the financial statements of:


Capital sum outstanding under non-current liabilities, accrued interest and
capital repayable within one year under current liabilities.
Rate of interest, respective dates of repayment and amounts of installments.
(Presentation and disclosure)
Audit objectives
Do 1
Audit objectives for the verification of interest-bearing borrowings
To obtain satisfaction on the following points:





The interest-bearing borrowing does exist (validity/existence).
The interest-bearing borrowing is shown in the balance sheet (completeness).
The interest-bearing borrowing is shown in the balance sheet at the correct
value (valuation).
The interest-bearing borrowing is a valid obligation of the company (occurrence/
obligation).
The interest-bearing borrowing has been properly disclosed in the financial
statements in accordance with statutory requirements (disclosure).
Do 2
Internal controls that could be introduced to ensure that a mortgage loan that is
negotiated to purchase property has been duly authorised and fully and accurately
accounted for in the accounting records




The effecting of the mortgage bond should be authorised at a general meeting.
The directors should obtain power of attorney at the meeting to sign the loan
contract on behalf of the company. This power of attorney should be minuted.
A copy of the registered mortgage deed should be filed in the loan agreements
file and recorded in the register of loans and mortgages.
An independent person should compare the accounting record of the transaction
with the mortgage deed for accuracy. The independent person should also check
whether the contract has been signed by the authorised agents.
Do 3
Audit of a vehicle sold
14 marks
(a) Profit/loss on sale of delivery vehicle
5 marks
R
Cost price
42 650
Accumulated depreciation
29 150
-----------
Book value 28/02/2009
Depreciation (13500x20%x10/12)
(1) 13 500
(1) 2 250
-----------
Book value 1/1/2010
(1) 11 250
Selling price
(1) 14 500
----------
Profit on sale
(1) 3 250
=====
(b) Substantive procedures to audit the sale of the delivery vehicle
9 marks
1. Inspect the directors’ minute authorising the sale of the particular delivery vehicle.
(Occurrence)
2. Inspect the contract entered into between the company and the scrap yard and
confirm the selling price of R14 500. (Accuracy)
3. Agree the amount of R14 500 recorded in the cash receipts journal to the relevant
receipt and bank deposit slip and confirm that the particular deposit appears on the
company’s bank statements. (Accuracy, completeness)
4. Examine the correctness of the journal entries for the correct recording of
depreciation and the profit on sale of the vehicle. The following journals should have
been effected: (Classification)
Depreciation
Dr 2 250
Accumulated Depreciation
Cr 2 250
Accumulated Depreciation
Dr 31 400
Realisation Account
Cr 31 400
Realisation Account
Dr 42 650
Vehicle
Cr 42 650
Bank
Dr 14 500
Realisation Account
Cr 14 500
Realisation Account
Dr 3 250
Profit and Loss Account
Cr 3 250
5. Inspect the posting of the entries in the cash receipts journal and general journal to
the appropriate general ledger accounts. (Classification)
6. Inspect the non-current assets register and ensure that the particular delivery vehicle
is indicated as having been sold. (Occurrence)
7. Recalculate the selling price as well as the depreciation and profit on sale.
(Accuracy)
Detection risk and substantive procedures for investing transactions
and balances
Do 1
(1) Substantive procedures to audit the purchase of land and buildings








Inspect the minutes of the directors' and/or shareholders' meeting at which the
purchase of the business premises was authorised.
Obtain a certificate from AXE Bank stating that the property has been registered
in the name of the company, or inspect the original deed of transfer.
Perform a deeds search at the Deeds Office and make certain that the property
is registered in the name of the company. Compare the cost price of the property
as shown on the deed of transfer with the accounting entries.
Inspect the municipal accounts received by the company to make certain that the
municipal accounts were in fact made out to the company and to determine what
the municipal valuation of the property is.
Perform a physical inspection of the land and buildings to make certain that they
do in fact exist, and compare the particulars of the premises with the particulars
shown on the deed of transfer.
Inspect the journal entry in which the cost price of the property was brought to
book, namely:
Fixed property
650 000 Dr
Mortgage loan AXE
Bank 650 000 Cr
Inspect the posting of the journal entry and the payment of the transfer and
registration costs to the fixed property account in the general ledger.
Inspect the ledger account to determine whether it contains the correct
description of the fixed property and whether the total cost price of the property,
namely R733 000, is shown in the account.
(2) Substantive procedures relating to the attorney's costs and the deed of transfer




Inspect the invoice (or other correspondence) from the attorney in connection
with the transfer and registration of the property and make certain that the
particulars of the property correspond.
Enquire from management whether the transaction was authorised for payment
by the designated person.
Trace the payment of the attorney's costs in the cash payments journal (cash
book) to the corresponding entry on the company's bank statement.
Inspect the bank stamped returned paid cheque and make certain that the
particulars agree with the cash payments journal and that the cheque was made
out to the attorney in question.

Trace the posting of the registration and transfer costs from the cash payments
journal to the land and buildings account in the general ledger.
Do 2
Substantive procedures to audit the purchase of a fixed asset item which was paid for
by cheque





Inspect the purchase requisition for the purchase of the fixed asset and make
certain that it was authorised by the responsible persons.
Scrutinise the particulars on the invoice and cashed cheque and compare them
with the information recorded in the cash payments journal.
Check that the particular cheque payment for the purchase of the fixed asset
appears on the bank statement.
Compare the information shown on the invoice with the entry in the fixed asset
register and make certain that it has been correctly recorded and classified and
recorded on the correct date.
Inspect the posting from the cash payments journal to the asset account in the
ledger for accuracy.
Do 3
Substantive procedures for the purchase of a new motor vehicle

Examine the minuted authorisation and make certain that the purchase of the
vehicles has been properly authorised.
 Confirm the particulars in the fixed asset register by inspecting the supplier's
invoices, trade-in credits, comprehensive insurance, hire registration
certificatesand current licensing certificates.
 Agree the accounting treatment of the transaction in the cash payments journal
(cash book) with the particulars in the fixed asset register.





Vehicles
Dr
Bank
Cr
Make certain that the vehicles were brought to book in the correct category and
on the correct date.
Examine the cashed cheque and make certain that the cheque was made out to
the supplier in question and that the amount agrees with the amount in the cash
payments journal (cash book).
Trace the payment of the cheque to the company's bank statement.
Inspect the registration certificates and make certain that the vehicles have been
registered in the name of UNET (Pty) Ltd.
Enquire about the company's depreciation policy with regard to vehicles, and
make certain that it is consistent with the policy applied during the previous year.

Recalculate the depreciation on the vehicles for the period in question and
check whether the amount agrees with the depreciation write-off in the general
ledger.
Depreciation

Dr
Accumulated depreciation:
Vehicles Cr
. Examine the postings of transactions to the relevant ledger account.
Do 4
Information that should be included in a fixed asset register















Description
Identity number (engraved or painted)
Estimated life and estimated scrap value
Rate of depreciation
Cost
Depreciation provided for annually
Accumulated depreciation, since date of purchase
The dates of purchase and disposal
Consideration received on disposal
Location of the unit/person responsible for unit
Floor area occupied by the unit
Initial and wear-and-tear allowances granted by the South African Revenue
Service for income tax purposes and the present tax value of the unit
Annual operating costs in respect of the unit
Repairs performed on the unit since purchase
Horsepower of the unit, where appropriate
Do 5
Formulate substantive procedures to achieve the following audit objectives to ensure
that:
(1) All recorded assets exist
(2) The depreciation on fixed assets is calculated correctly
Substantive procedures to achieve the following audit objectives:
Audit objective
(1) All recorded assets exist.
(2) The depreciation on fixed assets has
Substantive procedure
Observe that fixed assets accounted for
in the fixed asset register do, in fact, exist.
Recalculate the depreciation on fixed
been calculated correctly.
assets.
Do 6
Substantive procedures for the balance of vehicles at year-end







Examine the registration receipts and the current license receipts for the vehicles
to establish whether they were registered in the name of the company.
Carry out a physical inspection of the vehicles and check whether the description
in the fixed asset register is a true reflection of the physical vehicles.
Consider the reasonableness of the depreciation provided for on the vehicles in
the current year, taking into account their current physical condition. Make certain
that the basis on which the depreciation was calculated was the same as in the
previous year.
Inspect the comprehensive insurance documentation for the insured value of the
vehicles, and compare the insured value with the current replacement value.
Inspect the repairs and maintenance logbooks from the perspective of the
valuation of the vehicles.
Obtain a certificate from management regarding the physical condition and
ownership of the vehicles.
Ascertain whether there has been proper disclosure of the vehicles in the
balance sheet or notes to the financial statements, namely disclosure at cost
price less accumulated depreciation.
Do 7
Internal control enquiries regarding non-current assets
12 marks
1. Whether adequate authorisations for capital expenditure are properly recorded for
example minuted by the board of directors or capital expenditure committee.
2. Whether non-current assets registers are maintained and balanced regularly with the
respective accounts in the general ledger.
3. The frequency of the client’s physical inspections of fixed assets and agreement of
inventories with fixed asset register.
4. Whether sales, retirements and scrapings of non-current assets are properly
authorised and proceeds of sales are accounted for and recorded.
5. Whether equipment not in use is subject to adequate control.
6. Whether there is a properly formulated policy with regard to insurance of non-current
assets, including breakdown and loss of income insurance.
7. Whether the client has appropriate policies for maintenance and replacement.
8. Whether maintenance, replacement and depreciation programmes are applied in
such a way as to prevent, as far as possible, distortions of profit from year to year.
Detection risk and substantive procedures for financing transactions
and balances
Do 1
(1) Substantive procedures to be performed when auditing a mortgage loan










Inspect both the memorandum and the articles of association to determine the
existence of borrowing powers in respect of the mortgage loan.
Inspect the company's minutes for authorisation of the transaction.
Inspect the mortgage deed of hypothecation to make certain that it is a legally
valid document that bears the seal of the Registrar of Deeds.
Inspect the mortgage deed to confirm the interest rate and the repayment
conditions applicable to the mortgage loan.
Compare that the description of the encumbered property in the mortgage deed
corresponds with the description of the company's land and buildings in the
general ledger and annual financial statements.
Obtain direct confirmation from the Deeds Office that the mortgage has been
registered in the Deeds Office and that the registered mortgage appears as an
endorsement on the Deed of Transfer.
Obtain direct confirmation from the seller that the total purchase price of R650
000 has been received and that no amount is outstanding.
Enquire from AXE Bank or inspect correspondence from the conveyancing
attorneys to make certain that the full amount of R650 000 has been paid to the
seller.
Obtain and inspect a bank statement from AXE Bank giving the particulars of the
mortgage loan transactions and make certain that the total amount of R650 000
appears as a disbursement on the correct date.
Inspect the journal entry in which the mortgage loan is accounted for to check for
accuracy, and agree the particulars with the general ledger.
(2) The auditing of unsecured loans with regard to the transfer, registration and
attorney costs payable





Inspect both the memorandum and the articles of association to determine the
existence of borrowing powers in respect of the unsecured loan.
Inspect the authorisation for the transaction in the minutes of meetings held.
Inspect the loan agreement to make certain that it has been signed by the
authorised persons.
Inspect the loan agreement to establish the details of the interest rate and the
repayment conditions applicable to the unsecured loan.
Inspect the attorney's invoice for the transfer, registration and attorneys' costs,
and agree these costs with the loan amount.


If the loan amount was paid over directly to the attorneys by Mr Eiffel, obtain
direct confirmation from Mr Eiffel that the full amount of R83 000 was paid over to
the attorney.
Or
If the loan amount was paid into Eiffel (Pty) Ltd's bank account first, inspect the
deposit slip and bank statement reflecting the deposit to make certain that the full
R83 000 has been deposited in the bank account.
Inspect the journal entry in which the unsecured loan is accounted for to check
for accuracy, and agree the particulars with the general ledger.
Do 2
Substantive procedures to audit land
15 marks
1. Obtain a certificate from XYZ Bank Limited in which all important particulars
pertaining to the title deed to the land and encumbrances thereon are certified. (Rights,
existence)
2. In addition a certificate may be obtained from the Registrar of Deeds, setting out
details of the registration of the land and of any encumbrances registered against the
title. (Rights, existence)
3. Examine the certificates obtained in 1 and 2 above, or where it is possible to do so,
inspect the title deed documents, and satisfy yourself that – (max 3 marks)
• the land is registered in the name of Magic Carpets (Proprietary) Limited;
• the description of the land is in accordance with the information recorded in the
auditee’s records;
• the details of the mortgage registered in favour of XYZ Bank Limited agree with the
information in the books and the financial statements of the client; and
• the details of any servitudes or other encumbrances registered in respect of the land
agree with the information in the books and financial statements of the auditee. (Rights,
existence)
4. Agree the rand value of the land in the financial statements to the balances of the
relevant non-current asset accounts in the general ledger. (Valuation)
5. Visit the auditee’s business premises, in order to physically inspect the land to verify
its existence. (Existence)
6. Agree the total value of land in the fixed asset register to the land account in the
general ledger. (Valuation, completeness)
7. Obtain amongst other things, the municipal valuation certificate for the land, inspect
the details thereon and compare with the valuation reports (if applicable), the general
ledger, trial balance and financial statements, to confirm the reasonableness of the
current valuation. (Valuation)
8. Examine that the land is properly disclosed in the financial statements and in the
notes thereto, in accordance with IFRS and with the requirements of the companies act.
(Presentation and disclosure)
9. Through inspection of the notes to the current and prior year financial statements,
confirm that the accounting policy according to which land is disclosed in the current
year is consistent with the prior years’. (Presentation and disclosure)
10. Obtain a certificate from management to the effect that land exists, is reasonably
valued, is the property of the company and is not in any way encumbered. (Valuation,
existence, rights, completeness)
Do 3
Audit of machinery
33 marks
(a) Substantive procedures to audit the acquisition of the new bulldozer 15 marks
1. Inspect minutes of meetings where the acquisition was authorised. (Occurrence)
2. Review current year budget to ascertain that the capital expenditure was budgeted
for and as such was authorised. (Occurrence)
3. Inspect the acquired bulldozer and cross reference description, registration number,
make and model to the purchase documentation. (Occurrence)
4. With physical inspection of the acquired bulldozer, also cross reference description,
registration number, make and model to the fixed asset register to confirm that the
acquired asset was added. (Completeness)
5. By inspection of the purchase contract, and invoice, confirm that the cost of the
bulldozer includes: (Accuracy)
• The correct cost price
• Correct shipping charges, import duties and insurance.
6. Through inspection of purchase documentation (purchase contract, invoice) and the
general ledger, ensure that VAT has not been included in the cost price. (Accuracy)
7. Reperform the calculations of the cost price per the invoice and agree the amount to
the cash payments journal. (Accuracy)
8. Confirm through inspection of the cash payments journal that the bulldozer was paid
for. (Occurrence)
9. Inspect the dates on all documentation (contracts, invoices) to confirm that the
transaction has been recorded in the correct accounting period (Cut-off).
10. Inspect insurance documents or correspondence with insurance companies to
confirm that the bulldozer has been added to the list of insured items. (Occurrence)
11. Trace posting of transactions from the cash payments journal to the general ledger
to confirm that the transaction was recorded in the proper accounts (classification).
(b) Substantive procedures to audit the balance of machinery at year-end 18marks
1. Compare the opening balance of the machinery asset register and asset account in
the general ledger to the previous year's closing balance. (Completeness, accuracy)
2. Re-perform calculations to test the additions and calculations of the (Valuation,
accuracy)
• machinery asset register
• machinery account in the general ledger
• accumulated depreciation of machinery account in the general ledger.
3. Recalculate current year depreciation and compare it to the amount recorded in the
general ledger. Differences should be followed up with management. (Accuracy)
4. Compare entries of new machinery acquired in the current year in the asset register
with supporting documentation such as invoices, lease and hire purchase agreements.
Confirm that the particulars of the new bulldozer purchased during the year are correctly
recorded in the machinery asset register. (Existence), rights)
5. Inspect the current year and prior year schedule of depreciation calculation and
confirm that the rate used to calculate depreciation for machinery is consistent with
previous years, and that depreciation is calculated on the new bulldozer from the date of
acquisition. (Accuracy)
6. Agree the totals of the machinery asset register for cost price and accumulated
depreciation to the machinery account and the account for accumulated depreciation of
machinery in the general ledger. (Valuation, allocation)
7. Select a random sample of machinery from the asset register and perform a physical
inspection of the machinery. Confirm that the items do in fact exist by comparing the
asset, engine and chassis numbers per the physical machine to the machinery asset
register. (Existence)
8. Examine insurance policies in terms of which machinery is insured, and also the
repairs and maintenance records for machinery to ensure that all bulldozers are
accounted for and that their values are reasonable. (Existence, rights)
9. Obtain valuation certificate from an independent valuation specialist for each
bulldozer, and compare this value to the book value of each bulldozer in the machinery
asset register. Material differences should be followed up with management and
adjustments made. (Valuation)
10. Obtain a certificate from management to the effect that all machinery, as disclosed
in the accounting records, exists, are reasonably valued, are the property of the
companyand are not in any way encumbered. (Valuation, existence, rights,
completeness)
11. Through inspection of the notes of the current year financial statements, examine
that the machinery is disclosed as a separate component under non-current assets with
reference to:
• Total cost price of machinery
• Value of assets purchased or disposed of
• Depreciation for the year
• Total accumulated depreciation provided or written off since the date of acquisition.
• The amount should be compared to the amount disclosed in the statement of
financial position to confirm that they agree.
12. Through inspection of the financial statements, confirm that machinery is presented
and disclosed according to IFRS and companies act requirements (Presentation and
disclosure).
TOPIC 10
INVESTMENT AND CASH
Do 1
Management assertion
Completeness
Existence
Accuracy/cut-off/classification
Valuation
Rights and obligations
Presentation and disclosure
Do 2
Audit objectives
to obtain satisfaction that recorded cash
balances include the effects of all cash
and bank transactions that have occurred
during the period
to obtain satisfaction that all interbank
transfers have been recorded in the
correct accounting period
to obtain satisfaction that recorded cash
and bank balances exist at the balance
sheet date
to obtain satisfaction that the aggregate
cash and bank balances are reported on
the balance sheet at cost determined in
accordance with GAAP and the
organization’s accounting policies applied
on a consistent basis
to obtain satisfaction that the aggregate
cash and bank balances are reported on
the balance sheet at cost determined in
accordance with GAAP and the organisation's accounting policies, applied on
a consistent basis, and are realisable at
the amounts stated there
to obtain satisfaction that the organisation has legal rights to all cash and bank
balances reflected in the balance sheet at
balance sheet date
to obtain satisfaction that security
provided over assets of the entity to
secure loans granted to the entity by its
bankers has been identified
to obtain satisfaction that cash and bank
balances are properly identified and
classified in the financial statements and,
where offset is permitted, this has been
done in accordance with GAAP
Substantive procedures to audit the savings account
15 marks
1. Obtain the savings book or bank statements and check entries, including interest
received, to the relevant savings general ledger accounts. (Completeness, valuation,
allocation)
2. Obtain a certificate directly from the bank, confirming the following:
- Interest received during the year.
- Accrued interest.
- Balance of the savings account as at year end.
- Any encumbrances on the savings account. (Rights, valuation, existence)
3. Agree the above-mentioned details with the recordings in the general ledger savings
account. (Rights, valuation, completeness)
4. Follow a test sample of recordings from the general ledger savings account back to
the bank statements to confirm that it did take place. (Existence)
5. Inspect the dates on the bank statements received from the bank to confirm that the
correct interest was recorded in the correct accounting period. (Cutoff)
6. Recalculate the accrued interest on the savings account based on the information per
the bank confirmation and confirm that it is provided for in the general ledger savings
account. (Accuracy)
7. Re-perform all casts and calculation of the savings account and agree the amounts to
the amounts recorded on the general gedger savings account. (Accuracy)
8. Perform analytical procedures: (Valuation)
- Compare current year savings account balance to the prior year
- Compare interest received in the current year to the prior year
- Obtain explanations from management for any material and significant fluctuations.
9. Examine that the savings account is properly disclosed in the financial statements per
the companies act and IFRS requirements. (Presentation and disclosure)
10. Obtain a management representation letter regarding the existence and proper
valuation of the savings account. (Existence, valuation)
Detection risk and substantive procedures
Do 1
Step by step description of a cash count
(1) Obtain possession of the following:
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the cash
the cash records
all documents pertaining to the receipt of cash (e.g. forms of cash sale slips,
receipts and daily cash summaries) in current use by the cashier
vouchers for cash payments for the day of the cash count and a few days
preceding it
(2) Retain possession of the items listed above until the following has been done:
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Cash has been counted and listed
the last sequence numbers of the cash sale slips, receipts and other relevant
documents, the originals of which have been issued, have been noted
the cash payments recorded for the day of the cash count and a few preceding
days have been vouched or, if the payments have not yet been recorded, the
relevant vouchers have been listed
the cash on hand has been counted and the amounts made up of notes and of
coins, respectively, have been recorded
(3) Make a list of the particulars and amounts of the following:
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all the cheques on hand
postal orders and other forms of money
IOUs (evidence of loans made from the petty cash)
Do 2
Substantive procedures to ensure that the banking transactions have been
completely and accurately accounted for in the accounting records
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Do 3
Check the addition in the cash receipts and cash payments journals.
Check the postings from the cash receipts and cash payments journals to the
general ledger for accuracy.
Check the numerical sequence of cheques in the cash payments journal for
completeness.
Agree cheque payments/electronic funds transfers with supporting
documentation.
Inspect the numerical sequence of receipts in the cash receipts journal for
completeness.
Compare the amounts deposited with the deposit slips stamped by the bank.
Examine the bank reconciliation thoroughly.
Scrutinise the bank account in the ledger and investigate any unusual items.
(1) The accounting records, documentation and other information required to carry out a
bank reconciliation
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previous bank reconciliation
cash receipts journal
cash payments journal
deposit book
bank statements for the full financial period
(2) The types of reconciling items that normally form part of bank reconciliation
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outstanding cheques
outstanding deposits
errors by the bank that have not yet been corrected
errors in the cash receipts and cash payments journal that have not yet been
rectified
bank charges that are reflected on the bank statement, but have not been
entered into the journals
Do 4
The following working papers are important when an audit of cash and bank balances is
carried out:
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a planning working paper
an audit programme based on the planning working paper
a working paper which serves as evidence that audit procedures as described in
the audit programme have been carried out and which shows the relative results
a working paper showing the conclusions drawn from the audit procedures that
have been carried out
Do 5
Substantive procedures to audit a bank reconciliation
18 marks
1. Agree the opening balances per the cash receipts journal, and cash payments journal
and the bank statement with the closing balances per the previous bank reconciliation.
(Accuracy, completeness, occurrence)
2. Inspect the sequence of the page numbers of the bank statements and the totals
carried forward from one bank statement to the next to confirm that all bank statements
are accounted for. (Completeness)
3. Agree the bank balance according to the bank reconciliation with the balance per the
general ledger bank control account and the bank statement as at 28 February 2010.
(Accuracy)
4. Agree the totals of receipts and payments per the bank reconciliation with the cash
receipts and cash payments journals, respectively, as at 28 February 2010. (Accuracy)
5. Tick off all cheques, deposits and sundry debits, (bank charges, bank interest and
“refer to drawer” cheques) that appear in the cash receipts and cash payments journals
against the details on the bank statements. Confirm that items not ticked off are
included as reconciling items on the bank reconciliation. (Completeness, accuracy,
occurrence)
6. Scrutinise the bank reconciliation for any abnormal reconciliation items that may have
been included but were not ticked off. (Occurrence)
7. Inspect the bank reconciliation for outstanding cheques and follow the outstanding
cheques through to the bank statements subsequent to year end. (Occurrence)
8. Follow the outstanding deposits on the bank reconciliation through to the bank
statements subsequent to year end.(Occurrence)
9. Enquire about outstanding cheque 3456, the number of which is out of sequence or
may indicate a stale cheque. (Occurrence)
10. Recalculate the arithmetical accuracy of the bank reconciliation, the cash receipts
and cash payments journals. (Accuracy)
11. Inspect the sequence of cheques in the cash payments journal and follow up on
cancelled cheques. Furthermore, scrutinise the bank statements subsequent to year
end for cheque numbers preceding cheque number 7691 that may be deliberately
omitted from the bank reconciliation. (Completeness, cut-off)
12. Obtain directly from the bank a certificate for the balance as at 28 February 2010
and agree the balance on the bank certificate with the balance on the bank statement
and the bank reconciliation. (Accuracy)
Topic 11 OVERALL REVIEW
Do 1
(1) Factors the auditor should consider during an overall review of the audit working
papers completed by assistants
The auditor should determine whether
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sufficient audit work has been carried out in accordance with the audit
programme and the audit assistants have done the work with the necessary care
and competence
the work carried out and the results obtained have been adequately documented
with regard to the overall audit plan and the audit programme, the assessments
of inherent and control risk, the audit evidence collected and proposed audit
adjustments
all material audit matters have either been resolved or reflected in the audit
conclusions
the objectives of the audit procedures have been achieved
the conclusions drawn are in line with the results of the work done and support
the audit opinion
(2) Working paper according to which the audit evidence collected can be documented
and which clearly reflects any misstatements found (see next page)
Do 2
Questions and remarks regarding the overall review of the audit of issued capital as
indicated in the draft balance sheet
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Have the disclosure requirements for issued capital been complied with?
(Comparative figures in respect of the previous period should be shown in order
to comply with the provisions of the Companies Act, and in the case of issued
capital both the authorised and the issued share capital should be indicated, with
an of the kind of shares, e.g. par value shares.)
Were any shares issued during the current financial period?
Do the particulars of issued capital in the balance sheet agree with the balance of
the issued capital account in the general ledger?
Has the planning of the audit of issued capital been properly documented in the
working papers?
Have the audit working papers for issued capital been completed in full and
signed by the clerk who compiled them?
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Has sufficient audit evidence been obtained during the performance of the audit
procedures in substantiation of all the ``assertions'' as applicable to issued
capital?
Were remarks made regarding the audit of issued capital to which further
attention should be given?
What conclusion was reached after the audit of issued capital?
Do 3
Overall review of financial statements
6 marks
Aspects pertaining to accounting policies
Determine whether the financial information has been prepared using accounting
policies which are:
1. in accordance with International Financial Reporting Standards (IFRS).
2. consistent with those applied previously or changes disclosed.
3. Appropriate for the entity’s business.
4. Adequately disclosed in the financial statements.