- 20 Marks
AA – L2 – Q65 – Audit of Financial Statements
Question
The Accra Sports Club owns 12 tennis courts. The club uses ‘all weather’ tarmac tennis courts, which have floodlights for night-time use. The club’s year end is 30 September.
Members pay an annual fee to use the courts and participate in club championships. The club had 430 members as at 1 October 20X7.
Income is derived from two main sources:
Membership fees. Each member pays a fee of ₵2,000 per annum. Fees for the new financial year are payable within one month of the club year end.
Approximately 10% of members do not renew their membership. New members joining during the year pay 50% of the total fees that would have been payable had they been members for a full year. During 20X8, 50 new members joined the club. No members pay their fees before they are due.
Court hire fees: Non-members pay ₵50 per hour to hire a court. Non-members have to sign a list in the clubhouse showing courts hired. Money is placed in a cash box in the clubhouse for collection by the club secretary.
All fees (membership and court hire) are paid in cash. They are collected by the club secretary and banked on a regular basis. The paying-in slip shows the analysis between fees and court hire income.
The secretary provides the treasurer with a list of bankings showing member’s names (for membership fees) and the amount banked. Details of all bankings are entered into the cash book by the treasurer.
Main items of expenditure are:
Court maintenance including re-painting lines on a regular basis.
Power costs for floodlights.
Tennis balls for club championships. Each match in the championship uses 12 tennis balls.
The treasurer pays for all expenditure using the club’s debit card. Receipts are obtained for all expenses and these are maintained in date order in an expenses file. The treasurer also prepares the annual financial statements.
Under the rules of the club, the annual financial statements must be audited by an independent auditor. The date is now 13 December 20X8 and the treasurer has just prepared the financial statements for audit.
Required:
(a) Describe the audit work that should be performed to determine the completeness of income for the Accra Sports Club.
(b) Describe the audit procedures that should be performed to check the completeness and accuracy of expenditure for the Accra Sports Club.
(c) Discuss why internal control testing has limited value when auditing not-for-profit entities such as the Accra Sports Club.
Answer
(a) All revenue
For a sample of paying-in slips during the year, trace amount banked to the bank statements agreeing the total banked.
Agree the total per the paying-in slip to the cash book to confirm that the total has been correctly recorded in the cash book.
Confirm that the analysis on the bank paying-in slips is correctly recorded between membership fees and court hire in the cash book.
Cast the cash book to confirm total revenue for the year.
Agree total revenue received and the analysis of membership fees and court hire to the financial statements.
Membership fees
Compare the list of members as at 1 October 20X7 to 1 October 20X8 to determine how many members did not renew their membership during the year. This is normally approximately 10%.
Confirm total membership fees are correct by analytical review. Membership revenue should be:
430 members less 10% = 387
387 × ₵2,000 = ₵774,000
50 new members at 50% fee = 50 × ₵1,000 = ₵50,000
Total fee revenue ₵824,000
Agree the membership fee revenue to the financial statements. If the amount is materially different enquire of the treasurer why this is the case.
Court hire fees
Obtain the list of court hires from the clubhouse.
For a number of weeks, determine how many hours courts were hired for. Agree this time to the bank paying-in slip (hours × ₵50 should equal the amount banked).
Ask the secretary to explain any differences in amounts banked.
(b) Perform analytical review on expenditure this year compared to last year. Obtain reasons for any unusual amounts e.g. increased expenditure on tennis balls due to increased number of matches.
For a sample of purchase invoices, ensure recorded in the cash book and that the amount and analysis of expenditure (e.g. lighting, tennis balls etc.) is correct.
Obtain the statements from the debit card used by the club official – trace items from the statements to the cash book to ensure all expenditure has been recorded.
For a sample of entries in the cash book, agree to the bank statements to ensure they represent actual expenditure.
Cast and cross cast the cash book to ensure the book is arithmetically correct.
For totals in the cash book, agree to the trial balance and financial statements, ensuring that the presentation in the financial statements is correct (e.g. stated as tennis balls, line painting etc.).
(c) Internal control testing is limited in relatively small audits such as Accra Sports Club for the following reasons:
There is a lack of segregation of duties. The club has only a limited number staff in responsible positions. This means segregation of duties between example, authorising of purchase invoices and paying them, is not possible
Lack of authorisation controls. In small organisations, the senior officials tend to be the people ‘authorising’ transactions and also carrying them out. For example, the treasurer effectively authorises purchases by paying them rather than a senior official signing the invoice and a more junior clerk paying the invoice.
Cost. Establishing a system of internal control can be expensive. It may therefore not be cost effective for a small entity to establish a detailed system of internal control.
Management override. Even if there was a system of internal control in place, senior officials are in a position to override that system. For example, the club treasurer could pay for his own expenses using the club debit card.
- Tags: Analytical Review, Cash Transactions, Court Hire, Income Completeness, Membership Fees
- Level: Level 2
- Uploader: Samuel Duah