Audit week 2 Flashcards
What are some inherent risk factors affecting trade receivables and sales?
Risks include:
Large number of new customers
Changes in collectability of trade receivables
Introduction of new products
Competitors introducing new product lines
Sales on a ‘sale or return’ basis
High return rates of goods sold
New staff in sales, sales accounting, or credit control
Complicated computerized accounting system
Erroneous cut-offs and unnecessary doubtful debt provisions
What controls help mitigate risks in sales and trade receivables?
- Rapid billing of customers
- Regular preparation of statements and reminder letters
- Offering cash discounts for early payments
- Approval of entries reducing receivables’ balances
- Use of aging statements
- Setting credit limits
What key relationships should auditors consider in sales and trade receivables?
Sales to trade receivables (days)
Gross profit to sales (GP%)
Sales expenses to sales
Sales to related support expenditure
What are some inherent risks affecting inventory?
Changes in product demand
Variability in production levels
Defects in product lines
Inventories being easily transportable and attractive
Complex production processes
Joint product issues
Large variances from standard costs
Competitive pressures
Complex overhead calculations
What are key controls in inventory management?
Regular inventory counts
Safeguarding inventory through controlled acquisitions and disposals
Verifying ownership and condition of inventory at period-end
Proper valuation of inventory
How do companies ensure accurate inventory cut-offs?
Assign responsibility for cut-offs
Restrict movement of goods during counts
Make decisions on unavoidable movements
Document the last movement transactions
What analytical procedures are relevant to inventory auditing?
Inventory to sales or cost of sales ratio
Raw material inventory to purchases ratio
Impact on gross profit %
Impact on current ratio
What are some inherent risks in trade payables?
New or material transactions
Variances from standard costs
Supplier financial difficulties
Changes in trade terms
Aging of trade payables
Major changes in purchasing patterns
High return rates of purchased goods
What controls should auditors look for in trade payables?
Proper creation and recording of trade payables
Verification of recorded payables at year-end
Controls over the payment process
What relationships help auditors assess trade payables?
Cost of goods sold to trade payables (days)
Purchases’ impact on cost of goods sold and GP%
Purchases affecting other expense headings
Impact of trade payables on the acid-test ratio
Detection of unrecorded purchases or payables
