- 30 Marks
AA – L2 – Q29 – Auditing in a Computerized Environment
Question
Thompson Tools
Mr. Thompson, a client of your firm, is the managing director of Thompson Tools, which buys tools from large manufacturers and sells them to small retailers.
As the firm has been expanding, Mr. Thompson has recently purchased a computer. He has asked your advice about the controls which should be exercised over the computer when processing accounting data. Initially, Mr. Thompson is proposing to use the computer for producing sales invoices and maintaining the sales ledger.
The sales system data files will comprise:
- a standing data file containing customer names, addresses, and credit limits and a price file containing the part numbers, descriptions, and selling prices of the company’s products
- transaction files containing the outstanding transactions for each customer’s account, the values of individual invoices, credit notes, cash, discounts, and adjustments posted to the sales ledger in the month and the ageing and the total balance on each customer’s account.
The system will operate as follows:
The customer details, and the part numbers and quantities of the goods dispatched are input into the computer, which calculates the invoice value by accessing the standing data file. When the operator confirms that the invoice details have been input correctly, the computer prints the invoice and posts it to the sales ledger.
Cash received and discounts are input into the system from the cash book, and they are matched to the invoices which are being paid.
Credit notes and adjustments can be input directly into the sales ledger.
At the end of the month, the computer prints: - a summary of the invoices, credit notes, adjustments, cash, and discounts posted to the sales ledger in the month;
- an aged list of receivables; and
- customer statements, which show the outstanding transactions at the end of the month.
The computer has the facility to print out during the month the summaries as described above, and the details of any customer account.
Required
(a) List and describe the procedures which should be carried out in setting up the files containing:
(i) the customer names, addresses, and credit limits;
(ii) the price list of the products the company sells; and
(iii) sales ledger balances which are to be transferred from the manual system to the new computer system.
(b) List and describe the controls which should be exercised over:
(i) the input of transaction data, to ensure the risk of misstatements is minimised and that there is no unauthorised input of transactions;
(ii) the amendment of standing data files containing customer names, addresses, and credit limits; AND
(iii) the amendment of the prices of the products the company sells.
(c) List and describe the procedures which should be carried out to ensure the accuracy of the transaction file data, which contains balances on customers’ accounts and the outstanding transactions making up those balances.
Answer
(a) Procedures for setting up
(i) Customer files
The computer system should be checked, and the method of storing customer files on the system ascertained. This will enable the key field for the customer file to be determined.
A manual list of customers should be produced, showing for each customer, the address, credit limit, and key field. The key field could be the customer name, or a reference number, or a combination of both of these.
The list of customers should be approved as being correct, possibly by Mr. Thompson before it is input to the computer.
Hash totals (e.g., the total of all credit limits and key fields (if numeric)) may be calculated to check the completeness and accuracy of input.
Customer details should be input to the computer. The data on the computer should be saved regularly during this process, and a printout obtained.
The printout should be agreed back to the manual listing of customers, preferably by a person who is not responsible for the input of data. Any misstatements found should be marked and amendments made to the computer files.
When all the customer details have been entered, the computer can generate the hash totals of credit limits and account references. These should be agreed back to the manual totals. If there are differences, then the reason for the difference should be ascertained by checking the computer files to the manual listing in detail.
Full back-up copies of the complete customer file should be taken, and one copy always kept in a secure location, away from the computer.
(ii) Price list
The input of price list details is very similar to that of customer details.
A manual list of products and prices is prepared.
A key field is determined and hash totals calculated.
A list of products is approved by Mr. Thompson.
Products are input to the computer with frequent back-ups and printouts produced of the items input.
Printouts agreed to the manual list, and hash totals agreed to manually calculated hash totals.
Independent person agrees accuracy of transfer of product details.
(iii) Sales ledger balances
The date of the transfer of balances must be decided in advance.
On this date, a manual list of the sales ledger balances should be taken and reconciled to the sales ledger control account.
Any differences in the above reconciliation should be investigated, and the final listing produced.
If only the balances are to be input to the computer system, then the list can be input, and the total generated by the computer of all balances agreed to the manual list. Any differences should be investigated, and the totals finally agreed.
Thompson may wish to input details of the invoices making up the individual sales ledger balances. In this case, each balance will have a sub-listing of invoices. Input will be the total as above, and then the supporting invoices for each ledger account. A printout of all balances and totals should be agreed to the manual listing, and any errors corrected.
During the input of balances, frequent back-ups should be taken to ensure that data is not lost.
After the input, security copies of the data should be taken. At least one copy should always be kept in a secure location away from the computer.
Manual update of the sales ledger may continue until the computer system is shown to be reliable. Processing will then only continue on the computer system.
(b) Controls over
(i) Input of transaction data
Transaction data being input will include:
- despatch notes
- credit notes
- cash received
- discount allowed.
It is likely that the input system is batch based, because of the good controls that can be built around this on a small computer.
A batch book will be used to record the batches of documents being input to the system.
A batch will be created by getting a number of like documents, and generating batch and hash totals for them. Totals of cash received can be a batch total for money coming into the company, although batches of despatch notes will only give the hash totals of despatch note number and goods reference, etc. (the computer calculates the sales value).
The batch will be given a unique reference number from the batch book, where a record of the batch will also be maintained.
This reference number will assist in stopping unauthorised input; if unauthorised input occurs, the batch book’s next batch number will not agree to the computer. Basic passwords should also be used to protect the system.
The transaction documents should be input to the computer. After input, the batch and hash totals should be agreed to those manually calculated prior to input. Any differences should be investigated and reconciled.
The person inputting the batch should sign the batch book as evidence that input was complete and accurate.
After input has been reconciled, back-up copies of the master and transaction files should be taken.
(ii) Amendments to standing data (customer files)
Only authorised personnel (perhaps Mr. Thompson only) should be allowed to change the standing data.
Special passwords should be used to protect the standing data files, and only authorised users given these passwords. The passwords themselves could be changed regularly.
New customers should pass an initial credit vetting and be authorised as a customer by a responsible official, who will also determine their credit limit. Any other changes, such as increased credit limits, should be authorised in the same way.
Customer details should be entered into the computer master file, and a printout immediately obtained of the amendment made.
The new record should be checked for accuracy and initialled by an authorised official as being correct. A record of the amendment should be entered in the control book, which should log all changes to the master file.
A printout of the entire master file details should be obtained periodically and be reviewed by Mr. Thompson for any unauthorised changes that may have taken place.
Old accounts that are no longer used should be deleted from the ledger.
(iii) Amendments to the prices of products
Controls here will be similar to (ii) above.
Passwords should be used to prevent unauthorised access to the prices master file.
Changes should only be made by a responsible official.
A printout of all changes made should be obtained and agreed by this official as being correct.
A log book should be kept showing all changes made.
The complete list of inventory prices should be printed out and checked by Mr. Thompson regularly to ensure that they are correct.
Products which are no longer held should be deleted from the computer.
(c) Procedures to ensure accuracy of transaction file data
The following assumes that a sales ledger control account is kept:
The list of sales ledger balances should be obtained and agreed to the control account (the control account should be maintained by a person who is not responsible for the computerised sales ledger).
The total of cash and discounts on the control account should be agreed to the cash book.
Copies should be kept of all invoices produced by the computer. These copies should be reviewed by a responsible official to ensure that the invoices are reasonable, and that the numeric sequence is complete. Any abnormally large or small invoices should be investigated as should any breaks in the numeric sequence.
Low volume transactions, such as bad debt write-offs and credit notes, should be authorised by Mr. Thompson. Similarly, any abnormally large discounts should be investigated.
The aged receivables listing produced at each month end should be reviewed by Mr. Thompson. Any old balances should be investigated, not only to ascertain when payment can be expected and to stop sales turning to bad debts, but also to identify possible incorrect postings in the ledger.
- Tags: Computerized Systems, Customer Files, Data Setup, Internal controls, Price Lists, Sales Ledger
- Level: Level 2
- Uploader: Samuel Duah