- 12 Marks
Question
Animo Company Ltd has been operating in the manufacturing sector for over a decade. The company achieved significant growth but had weak internal controls in its early stages. To meet increasing demand, Animo acquired a large manufacturing plant and six warehouses for final product storage. Sales ordering, goods despatch, and invoicing customers are organized using unique reference numbers, and a price list is updated quarterly. Customers also receive discounts for bulk purchases. Sales orders are managed electronically, with despatch lists and goods delivery notes generated automatically for each order.
Required:
i) Tabulate four tests of controls the auditor would normally carry out on the sales system of Animo Company Limited and state the objective for each test.
ii) Describe two substantive procedures the auditor should perform to confirm Animo Company Limited’s year-end receivables balance.
Answer
| Test of Control | Objective |
|---|---|
| Observe the goods despatch process and ensure all goods are double-checked. | To ensure goods despatched are accurate and of the correct quality. |
| Inspect a sample of GDNs (Goods Despatch Notes) and verify a sales invoice. | To confirm that all goods despatched are invoiced correctly. |
| Review the last sequence check of sales invoices for missing numbers. | To ensure completeness of income for goods despatched. |
| Attempt to process an order with a fictitious customer account number. | To confirm that orders are accepted only for valid customers. |
(4 tests @ 2 marks each for tests + 4 marks for objectives = 8 marks)
ii)
- Review post-year-end cash receipts: Inspect cash receipts after the year-end and trace them to the respective year-end receivable balances. This helps confirm the existence and recoverability of receivables.
- Send confirmation requests: Perform a positive receivables circularisation by sending confirmation requests to a sample of debtors and reconciling any discrepancies between the customer’s records and Animo’s accounting records.
(2 procedures @ 2 marks each = 4 marks)
- Tags: Audit evidence, Internal Controls, Risk Management, Sales Cycle, Tests of Controls
- Level: Level 2
- Topic: Audit and Assurance Evidence
- Series: NOV 2017
- Uploader: Dotse