1 Introduction – audit firm
You are an audit senior in Brennon & Co, a firm providing audit and assurance services. At the request of an audit
partner, you are preparing the audit programme for the income and receivables systems of Seeley Co.
Audit documentation is available from the previous year’s audit, including internal control questionnaires and audit
programmes for the despatch and sales system. The audit approach last year did not involve the use of computerassisted
audit techniques (CAATs); the same approach will be taken this year. As far as you are aware, Seeley’s system
of internal control has not changed in the last year.
Client background – sales system
Seeley Co is a wholesaler of electrical goods such as kettles, televisions, MP3 players, etc. The company maintains
one large warehouse in a major city. The customers of Seeley are always owners of small retail shops, where electrical
goods are sold to members of the public. Seeley only sells to authorised customers; following appropriate credit
checks, each customer is given a Seeley identification card to confirm their status. The card must be used to obtain
goods from the warehouse.
Despatch and sales system
The despatch and sales system operates as follows:
1. Customers visit Seeley’s warehouse and load the goods they require into their vans after showing their Seeley
identification card to the despatch staff.
2. A pre-numbered goods despatch note (GDN) is produced and signed by the customer and a member of Seeley’s
despatch staff confirming goods taken.
3. One copy of the GDN is sent to the accounts department, the second copy is retained in the despatch
department.
4. Accounts staff enter goods despatch information onto the computerised sales system. The GDN is signed.
5. 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.
6. 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.
7. Paper copies of the receivables ledger control account and list of aged receivables are also available.
8. 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:
Number of Range of debt Total debt $ Current $ 1 to 2 More than 2
receivables months old $ months old $
15 Less than $0 (87,253) (87,253)
197 $0 to $20,000 2,167,762 548,894 643,523 975,345
153 $20,001 to 50,000 5,508,077 2,044,253 2,735,073 728,751
23 $50,001 or more 1,495,498 750,235 672,750 72,513
–––– –––––––––– –––––––––– –––––––––– ––––––––––
388 9,084,084 3,256,129 4,051,346 1,776,609
–––– –––––––––– –––– –––––––––– –––––––––––––––––––– –––––––––––––––––––– ––––––––––––––––––––
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.
(4 marks)
(b) Using information from the scenario, list SIX tests of control that an auditor would normally carry out on the
despatch and sales system at Seeley Co and explain the reason for each test. (12 marks)
(c) State and explain the meaning of FOUR assertions that relate to the direct confirmation of receivables.
(4 marks)
(d) (i) Describe the procedures up to despatch of letters to individual receivables in relation to a direct
confirmation of receivables. (5 marks)
(ii) Discuss which particular categories of receivables might be chosen for the sample. (5 marks)
(30 marks) 1 (a) – Prior year internal control questionnaires
– Obtain the audit file from last year’s audit. Ensure that the documentation on the sales system is complete. Review the
audit file for indications of weaknesses in the sales system and note these for investigation this year.
– Obtain system documentation from the client. Review this to identify any changes made in the last 12 months.
– Interview client staff to ascertain whether systems have changed this year and to ensure that the internal control
questionnaires produced last year are correct.
– Perform walk-through checks. Trace a few transactions through the sales system to ensure that the internal control
questionnaires on the audit file are accurate and can be relied upon to produce the audit programmes for this year.
– During walk-through checks, ensure that the controls documented in the system notes are actually working, for example,
verifying that documents are signed as indicated in the notes.
(b) – Tests of control
(c) Assertions – receivables
Assertion Application to direct confirmation of receivables
Existence The receivable actually exists which is confirmed by the receivable replying to the
receivables confirmation.
Rights and obligations The receivable belongs to Seeley Co. The receivable confirms that the amount is owed to
Seeley again by replying to the confirmation.
Valuation and allocation Receivables are included in the financial statements at the correct amount – the receivable
will dispute any amounts that do not relate to that account.
Cut-off Transactions and events have been recorded in the correct accounting period. The
circularisation will identify reconciling items such as sales invoices/cash in transit.
(d) (i) Receivables circularisation – procedures
– Obtain a list of receivables balances, cast this and agree it to the receivables control account total at the end of the
year. Ageing of receivables may also be verified at this time.
– Determine an appropriate sampling method (cumulative monetary amount, value-weighted selection, random, etc.)
using materiality for the receivable balance to determine the sampling interval or number of receivables to include
in the sample. Test of control Reason for test
Review a sample of goods despatch notes (GDN)
for signatures of the goods despatch staff and
customer.
Ensures that the goods despatched are correctly
recorded on the GDNs.
Review a sample of GDNs for signature of the
accounts staff.
Ensures that the GDN details have been entered
onto the computer system.
Observe despatch system ensuring Seeley staff
have seen the customers’ identification card prior
to goods being loaded into customers’ vans.
Ensures that goods are only despatched to
authorised customers.
Review the error report on numeric sequence of
GDNs produced in the accounts department and
enquire action taken regarding omissions.
Ensures that the sequence of GDNs is complete.
Observe despatch process to ensure that the
customers’ credit limit is reviewed prior to goods
being despatched.
Ensures that goods are not despatched to poor/bad
credit risks.
Note: reviewing credit limits is not specifically
stated in the scenario; however, most despatch/
sales systems will have this control and most
candidates mentioned this in their answers. Hence
marks were awarded for this point.
Review a selection of invoices ensuring they have
been signed by accounts staff.
Ensures the accurate transfer of goods despatched
information from the GDN to the invoice.
– Select the balances to be tested, with specific reference to the categories of receivable noted below.
– Extract details of each receivable selected from the ledger and prepare circularisation letters.
– Ask the chief accountant at Seeley Co (or other responsible official) to sign the letters.
– The auditor posts or faxes the letters to the individual receivables.
(ii) Specific receivables for selection:
1. Large or material items. These will be selected partly to ensure that no material error has occurred and partly to
increase the overall value of items tested.
2. Negative balances. There are 15 negative balances on Seeley’s list of receivables. Some of these will be tested to
ensure the credit balance is correct and to ensure that payments have not been posted to the wrong ledger account.
3. Receivables in the range $0 to $20,000. This group is unusual because it has a relatively higher proportion of
older debts. Additional testing may be necessary to ensure that the receivables exist and to confirm that Seeley is
not overstating sales income by including many smaller receivables balances in the ledger.
4. Receivables with balances more than two months old. Receivables with old balances may indicate a provision is
required for non-payment. The lack of analysis in Seeley Co’s receivable information indicates a high risk of nonpayment
as the age of many debts is unknown.
5. Random sample of remaining balances to provide an overall view of the accuracy of the receivables balance. | 
发表于 2008-10-11 15:45
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