Tag (SQ): Control Questionnaires

Introduction – audit firm
You are an audit senior in Heston & Co, a firm providing audit and assurance services. At the request of an audit partner, you are preparing the audit programme for the revenue and receivables systems of Lara Co.
Audit documentation is available from the previous year’s audit, including internal control questionnaires and audit programmes for the despatch and revenue system. The audit approach last year did not involve the use of computer assisted audit techniques (CAATs); the same approach will be taken this year. As far as you are aware, Lara’s system of internal control has not changed in the last year.

Client background – revenue system
Lara Co is a wholesaler of electrical goods such as kettles, televisions, rice cookers, fans etc. The company maintains one large warehouse in a major city. The customers of Lara are always owners of small retail shops, where electrical goods are sold to members of the public. Lara only sells to authorised customers; following appropriate credit checks, each customer is given a Lara identification card to confirm their status. The card must be used to obtain goods from the warehouse.

Despatch and revenue system
The despatch and revenue system operates as follows:

• Customers visit Lara’s warehouse and load the goods they require into their vans after showing their Lara identification card to the despatch staff.
• A pre-numbered goods despatch note (GDN) is produced and signed by the customer and a member of Lara’s despatch staff confirmingGOODStaken.
• One copy of the GDN is sent to the accounts department, the second copy is retained in the despatch department.
• Accounts staff enter goods despatch information onto the computerised revenue system. The GDN is signed.
• The computer system produces the sales invoice, with reference to the inventory master file for product details and prices, maintains the sales day book and also the receivables ledger. The receivables control account is balanced by the computer.
• Invoices are printed out and sent to each customer in the post with paper copies maintained in the accounts department. Invoices are compared to GDNs by accounts staff and signed.
• Paper copies of the receivables ledger control account and list of aged receivables are also available.
• Error reports are produced showing breaks in the GDN sequence.

Information on receivables
The chief accountant has informed you that receivables days have increased from 45 to 60 days over the last year.
The aged receivables report produced by the computer is shown below:

In view of the deteriorating receivables situation, a direct confirmation of receivables will be performed this year.

Required:

(a) Explain the steps necessary to check the accuracy of the previous year’s internal control questionnaires.

(b) Using information from the scenario, list SIX tests of control that an auditor would normally carry out on the despatch and revenue system at Lara Co and explain the reason for each test.

(c) State and explain the meaning of FOUR assertions that relate to the direct confirmation of receivables.

(d) (i) Describe the procedures up to despatch of letters to individual receivables in relation to a direct confirmation of receivables.