Extra Practice Flashcards
(27 cards)
RISK AND TEST
Many different warehouse locations. This may lead to inventory being incorrectly accounted for. There can be potential fraud as inventory may be transferred from one place to another during the count. This affect the existence assertion of inventory account
Many different warehouse locations. This may lead to inventory being incorrectly accounted for. There can be potential fraud as inventory may be transferred from one place to another during the count. This affect the existence assertion of inventory account
The auditor need to focus on verifying the existence of inventory. For example, they may need to send staff to all the warehouse to be there for the whole three days of counting (including night) to make sure no stock is transferred among the warehouses. Also, they may need to increase the sample counts.
RISK AND TEST
Risk of inflating performance due to the pressure of dropping sales volumes. May affect sales (being overstated – risk of non-existing sales) or expenses accounts (being understated – risk of non-complete expenses recorded. Assets and liabilities can also be affected.
Risk of inflating performance due to the pressure of dropping sales volumes. May affect sales (being overstated – risk of non-existing sales) or expenses accounts (being understated – risk of non-complete expenses recorded. Assets and liabilities can also be affected. More focus on verifying the existence of sales and completeness of expenses. The auditor may need to be very careful at testing sales cut-off and revising capitalisation of expenses etc.
RISK AND TEST
Risks of increased bad and doubtful debt that may not be fully recognised. This affect the accounts receivable balance (existence assertion)
Focus on testing valuation of accounts receivable, by increasing the sample sizes, more careful review of customers’ credit etc.
RISK AND TEST
Risk of inflating sales (selling to bad – credit customers, or creating fictitious sales) due the incentive of sales commission given (existence of sales)
More focus on cut-off test of sales and verifying underlying documents (larger samples) to ensure sales exist.
CONTROL WEAKNESS AND ADDRESSING ISSUE
Telephone orders are not recorded immediately in the paper print form but recorded later
Telephone orders should be recorded immediately, double checked by the staff with the customer over the phone at the time of taking order to make sure the details are recorded correctly.
CONTROL WEAKNESS AND ADDRESSING ISSUE
Manual checking of inventory availability after taking the phone order, and informing the customer if the inventory is not sufficiently available.
The staff should check the inventory availability while on the phone, and inform the customers instantly if the inventory is not available. The staff may forget the customer later.
CONTROL WEAKNESS AND ADDRESSING ISSUE
Risk of incorrect or insufficient details of customers which may result in incorrect orders being despatched.
Telephone orders should be recorded immediately, double checked by the staff with the customer over the phone at the time of taking order to make sure the details are recorded correctly.
CONTROL WEAKNESS AND ADDRESSING ISSUE
Risk of accepting customers order over and above their credit limit (10% over the limit)
Regular review of customer credit limits by a senior staff.
CONTROL WEAKNESS AND ADDRESSING ISSUE
Discounts are entered manually into the sales invoices by sales staff. There could be mistakes in the sales invoices thereby customers can be over or under charged.
Authorised discount levels should be updated to customers file, automatic appearance of discounts when sales invoices are created will help reduce these problems.
CONTROL WEAKNESS AND ADDRESSING ISSUE
There is no sequential ordering of telephone orders, so if orders are misplaced while in transit, those orders may not be processed on time.
The print forms should be sequentially numbered and the order of the numbers should be checked on a regular basis. Any gaps in the sequence should be investigated immediately.
DEFICIENCIES AND CONTROLS
Requisition forms are completed by production supervisors but are not authorised. This increases the risk of fraudulent purchases, or of goods being ordered which are not required, leading to unnecessary cash outflows.
Requisition forms should be authorised by the production manager or director prior to being sent to the purchase ordering department. This department should not process any unauthorised requisitions.
DEFICIENCIES AND CONTROLS
Orders are being placed for goods without the inventory levels being checked first. This could result in goods being ordered which are not required, leading to unnecessary cash outflows
The inventory system should be updated to record minimum/maximum required levels of raw materials. When completing the purchase order, the ordering clerk should check the current level of inventory on the system and only order if the quantity is within the set parameters.
DEFICIENCIES AND CONTROLS
In addition, as the company does not currently monitor inventory levels, it could experience stock-outs resulting in the company being unable to meet customer orders.
The company should set minimum authorised reorder levels for inventory items.
DEFICIENCIES AND CONTROLS
The purchase ordering department maintains an approved supplier list; however, this has not been updated for 24 months. As this list has not been recently updated, the suppliers being used may not be ideal with regards to price, quality and delivery times. This could result in Wodd paying increased costs for raw materials or receiving poorer quality goods.
The approved supplier list should be reviewed and updated as necessary. Going forward, it should be updated regularly, at least on an annual basis.
DEFICIENCIES AND CONTROLS
Goods are being received without any checks being made against purchase orders. This could result in Wodd receiving and subsequently paying for goods it did not order.
A copy of the authorised order form should be sent to the warehouse department. This should then be checked to the goods when received.
DEFICIENCIES AND CONTROLS
In addition, if no check is made against the purchase order, then the company may have significant purchase orders which are outstanding, leading to loss of sales.
Once checked, the order should be sent to the purchase ordering department and logged as completed. On a regular basis, an ordering clerk should review the order file for any outstanding items.
DEFICIENCIES AND CONTROLS
Purchase invoices are not being agreed to the relevant goods received notes (GRNs) prior to authorisation and payment by the finance director. This could result in invoices being paid for goods which were not received.
All purchase invoices should be matched to the related GRN; the details should be agreed prior to the invoice being logged in the purchase ledger.
DEFICIENCIES AND CONTROLS
Purchase invoices are not sequentially numbered. Failing to sequentially number them means that Wodd’s finance department are unable to monitor if all invoices have been completely recorded; this could result in a failure to make payment to a supplier on time. If the invoices are sequentially numbered, then a sequence check can be performed for any unrecorded invoices.
All purchase invoices should be sequentially numbered and on a regular basis a sequence check of unrecorded invoices should be performed.
DEFICIENCIES AND CONTROLS
Invoices are authorised by the finance director, but payment is only made 60 days after the invoice is input. There is the risk that Wodd is missing out on early settlement discounts. Also, failing to pay in accordance with the supplier’s payment terms can lead to a loss of supplier goodwill as well as the risk that suppliers may refuse to supply goods to Wodd.
The policy of making payment after 60 days should be reviewed. Consideration should be given to earlier payment if the settlement discounts are sufficient. If not, invoices should be paid in accordance with the supplier’s payment terms.
DEFICIENCIES AND CONTROLS
Purchase invoices are manually filed by the purchase ledger clerk and only updated to the ledger on a weekly basis. Until the invoices are input into the system, there is a risk that they may be misplaced and not entered. This would result in an understatement of trade payables and Wodd failing to make payment to the suppliers on time.
The purchase ledger clerk should record the invoices in the ledger on a daily rather than weekly basis.
If this is not practical, then upon receipt of the invoices, each should be attributed a sequential number and filed. When these are logged into the ledger, the clerk should check that there are no breaks in the sequence.
AUDIT RISK AND RESPONSE
Management were disappointed with 2017 results and hence undertook strategies to improve the 2018 trading results. There is a risk that management might feel under pressure to manipulate the results through the judgements taken or through the use of provisions.
Throughout the audit the team will need to be alert to this risk. They will need to carefully review judgemental decisions and compare treatment against prior years.
AUDIT RISK AND RESPONSE
A generous sales-related bonus scheme has been
introduced in the year, this may lead to sales cut-off errors with employees aiming to maximise their current year bonus.
Increased sales cut-off testing will be performed along with a review of post year-end sales returns as they may indicate cut-off errors.
AUDIT RISK AND RESPONSE
Revenue has grown by 28% in the year however, cost of sales has only increased by 10%. This increase in sales may be due to the bonus scheme and the advertising however, this does not explain the increase in gross margin. There is a risk that sales may be overstated.
During the audit a detailed breakdown of sales will be obtained, discussed with management and tested in order to understand the sales increase.
AUDIT RISK AND RESPONSE
Gross margin has increased from 44·4% to 52·2%.
Operating margin has decreased from 22·2% to 19·6%. This movement in gross margin is significant and there is a risk that costs may have been omitted or included in operating expenses rather than cost of sales.
There has been a significant increase in operating expenses which may be due to the bonus and the advertising campaign but could be related to the misclassification of costs.
The classification of costs between cost of sales and operating expenses will be compared with the prior year to ensure consistency.
