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1 Sales system: Control objectives, controls and tests of controls

1 Sales system: Control objectives, controls and tests of controls

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Assertion

Control objectives

Controls

Tests of controls

Occurrence
and existence





Authorisation of
credit terms to
customers (senior
staff authorisation,
references/credit
checks for new
customers, regular
review of credit
limits).

 Review entity's
procedures for granting
credit to customers.



Authorisation by
senior staff required
for changes in other
customer data such
as address etc.

 Examine a sample of
sales orders for
evidence of proper
credit approval by the
appropriate senior staff
member.



Orders not accepted
unless credit limits
reviewed first.

 Examine application
controls for credit
limits.

To ensure that goods and
services are only
supplied to customers
with good credit ratings.

 Review all new
customer files to ensure
satisfactory credit
references have been
obtained.

Completeness

196



To ensure that goods and
services are provided at
authorised prices and on
authorised terms.



To ensure that customers
are encouraged to pay
promptly.



Authorised price
lists and specified
terms of trade in
place.

 Verify that price lists
and terms of trade are
properly documented,
authorised and
communicated.
 Examine application
controls for authorised
prices and terms.



To ensure that all
revenue relating to goods
despatched is recorded.



Accounting for
numerical
sequences of
invoices.

 Review and test entity's
procedures for
accounting for
numerical sequences of
invoices, and inspect
invoices to confirm
whether they are
sequentially numbered.



To ensure that all goods
and services sold are
correctly invoiced.



Shipping/despatch
documentation is
matched to sales
invoices.

 For a sample of
shipping/despatch
documents, ensure
each has been matched
to a related sales
invoice that was
subsequently recorded.

10: Tests of controls  Part C Internal control

Assertion

Control objectives

Completeness

Controls

Tests of controls



Sales invoices are
reconciled to the
daily sales report.

 Review a sample of
reconciliations
performed. Reperform a
sample of
reconciliations.



An open-order file is
maintained and
reviewed regularly.

 Inspect the open-order
file for unfilled orders.

Accuracy



To ensure that all sales
and adjustments are
correctly journalised,
summarised and posted
to the correct accounts.



Sales invoices and
matching
documents required
for all entries and
the date and
reference of the
entry are written on
each document.

 Review supporting
documents for a sample
of sales entries to
ensure they contain the
written details that
indicate they were
referred to when
entered.

Cut-off



To ensure that
transactions have been
recorded in the correct
period.



All shipping
documentation is
forwarded to the
invoicing section on
a daily basis.

 Compare dates on sales
invoices with dates of
corresponding shipping
documentation.



Daily invoicing of
goods shipped.

 Compare dates on sales
invoices with dates
recorded in the sales
ledger.



Chart of accounts
(COA) in place and
is regularly reviewed
for appropriateness
and updated where
necessary.

 Inspect any
documentary evidence
of review (such as
emails requesting
update to COA as a
result of review).



Codes in place for
different types of
products or
services.

 Test application
controls for proper
codes.

Classification

Question



To ensure that all
transactions are properly
classified in accounts.

Sales system

You are the auditor of Arcidiacono Stationery, and you have been asked to suggest how audit work should
be carried out on the sales system.
Arcidiacono Stationery Ltd sells stationery to shops. Most sales are to small customers who do not have a
sales ledger account. They can collect their purchases and pay by cash. For cash sales:
(i)

The customer orders the stationery from the sales department, which raises a pre-numbered multicopy order form.

(ii)

The despatch department make up the order and give it to the customer with a copy of the order
form.

(iii)

The customer gives the order form to the cashier who prepares a handwritten sales invoice.
Part C Internal control  10: Tests of controls

197

(iv)

The customer pays the cashier for the goods by cheque or in cash.

(v)

The cashier records and banks the cash.

Required
(a)
(b)

State the deficiencies in the cash sales system.
Describe the systems-based tests you would carry out to audit the controls over the system.

Answer
(a)

Deficiencies in the cash sales system
(i)

The physical location of the despatch department and the cashier are not mentioned here,
but there is a risk of the customer taking the goods without paying. The customer should
pay the cashier on the advice note and return for the goods, which should only be released
on sight of the paid invoice.

(ii)

There is a failure in segregation of duties in allowing the cashier to both complete the sales
invoice and receive the cash, as they could perpetrate a fraud by replacing the original
invoice with one of lower value and keeping the difference.

(iii)

No one checks the invoices to make sure that the cashier has completed them correctly, for
example by using the correct prices and performing calculations correctly.

(iv)

The completeness of the sequence of sales invoices cannot be checked unless they are prenumbered sequentially and the presence of all the invoices is checked by another person.
The order forms should also be pre-numbered sequentially.

(v)

There is no check that the cashier banks all cash received, and this is a further failure of
segregation of duties.
If the sales department prepared and posted the invoices and also posted the cash for cash
sales to a sundry sales account, this would solve some of the internal control problems
mentioned above. In addition, the sales department could run a weekly check on the
account to look for invoices for which no cash had been received. These could then be
investigated.
All of these deficiencies, and possible remedies, should be reported to management.

(b)

Tests
(i)

Select a sample of order forms issued to customers during the year. Trace the related sales
invoice and check that the details correlate (date, unit amounts etc). The customer should
have signed for the goods and this copy should be retained by the despatch department.

(ii)

For the sales invoices discovered in the above test, I would check that the correct order
form number is recorded on the invoice and that the prices used are correct (by reference to
the prevailing price list).

(iii)

I would then trace the value of the sales invoices to the cash book and confirm from the
cash book that the total receipts for the day have been banked and appear promptly on the
bank statement.

(iv)

I would check that the sales invoices have been correctly posted to a cash or sundry sales
account. For any sales invoices missing from this account (assuming they are sequentially
numbered), I would trace the cancelled invoice and check that the cancelled invoice was
initialled by the customer and replaced by the next invoice in sequence.

(v)

Because of the weaknesses in the system I would carry out the following sequence checks
on large blocks of order forms/invoices, eg four blocks of 100 order forms/invoices.
(1)
(2)
(3)
(4)

198

Inspect all order forms to ensure all present; investigate those missing
Match sales invoices to order forms
Check all sales invoices in a sequence have been used; investigate any missing
Cash for each sales invoice has been entered into the cash book

10: Tests of controls  Part C Internal control

Using the results of the above tests I would decide whether the system for cash sales has operated
without material fraud or error. If I am not satisfied that it has then this may impact on the audit
report.

2 The purchases system
Dec 10, June 13, June 14,Specimen Exam
FAST FORWARD

The tests of controls in the purchases system will be based around:




Buying (authorisation)
Goods inwards (custody)
Accounting (recording)
Raise
requisition
Purchasing
department raises order
and sends copy to accounts
department

Supplier will
extend credit in
the future

Send payment
Receive goods

Raise goods
received note (GRN)

Record and
account for invoice

Carry on
production

Accounts
department match
GRN to invoice

2.1 Control objectives, controls and tests of controls
Assertion

Control objectives

Controls

Tests of controls

Occurrence and
existence

 To ensure that
recorded purchases
represent goods
and services
received.

 Authorisation
procedures and policies
in place for ordering
goods and services.

 Inspect policies and
procedures and
enquire about them.
 Observe the
processing of
purchase orders
throughout the
purchasing cycle and
evaluate whether
proper segregation of
duties is operating.

Part C Internal control  10: Tests of controls

199

Assertion

Control objectives

Occurrence and
existence

Controls

Tests of controls

 The responsibility for
placing the orders,
recording the purchase
order and making the
payment is carried out
by three different staff
members.
 Purchase orders raised
for each purchase and
authorised by
appropriate senior
personnel.

 Examine a sample of
purchase orders to
ensure they have been
appropriately
authorised.
 Review the delegated
list of authority for
purchases.

 Approved purchase
order for each receipt of
goods.

 For a sample of goods
received notes
(GRNs), ensure there
is a related purchase
order that has been
properly approved.

 Staff receiving goods
check them to the
purchase order.

 Observe receipt of
goods by staff to
confirm whether the
check is done.
 Inspect a sample to
confirm whether
stores staff undertake
this check.

 Stores clerks sign for
goods received.

Completeness

200

 To ensure that all
purchase
transactions that
occurred have been
recorded.

10: Tests of controls  Part C Internal control

 Purchase orders and
GRNs are matched with
the suppliers' invoices.

 Examine supporting
documentation to
ensure it has been
matched for a sample
of invoices.

 Supplier statements
independently reviewed
and reconciled to trade
payable records.

 Review procedures for
reconciling supplier
statements and
reperform a sample of
reconciliations.

 Purchase orders and
GRNs are matched with
the suppliers' invoices.

 For a sample of
purchase orders in the
year ensure each has
been matched to a
related invoice that
was subsequently
recorded.