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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 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. 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 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 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 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 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 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 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: 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''. 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. 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. The recording in the cash receipts journal should be checked by an independent person and compared with the daily summary of invoices. 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. 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. 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. 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/ 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 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. 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 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. 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. 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/ 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. 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 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 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 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. 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 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 (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). 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. 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: 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: 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: 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 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 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 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: 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 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 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? 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.