Question

Fish Meal Manufacturing is a small privately-owned producer of canned fish, fish oil products for the consumer market. They hired an auditor to perform the audit of Fish Meal for the calendar year ended December 31, 2019. Auditor came to know that there were fluctuation in purchase pricing on every voucher since no official purchase order are maintained for trade purchases and delivered goods used to be returned from the sea port due to export department mistakes.

Based on the above scenario:

1. Identify and explain the control deficiencies, substantive errors, and lastly other matters related to purchases and various vouchers that the audit team will prepare.                                        (3 marks )

2. Describe types of vouching system that the team can be used.

Answer 1

A.

The auditor's objective in an audit of internal control over financial reporting is to express an opinion on the effectiveness of the company's internal control over financial reporting. Because a company's internal control cannot be considered effective if one or more material weaknesses exist, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain appropriate evidence that is sufficient to obtain reasonable assurance about whether material weaknesses exist as of the date specified in management's assessment. A material weakness in internal control over financial reporting may exist even when financial statements are not materially misstated. The auditor should use the same suitable, recognized control framework to perform his or her audit of internal control over financial reporting as management uses for its annual evaluation of the effectiveness of the company's internal control over financial reporting

The auditor should properly plan the audit of internal control over financial reporting and properly supervise the engagement team members. When planning an integrated audit, the auditor should evaluate whether the following matters are important to the company's financial statements and internal control over financial reporting and, if so, how they will affect the auditor's procedures -

• Knowledge of the company's internal control over financial reporting obtained during other engagements performed by the auditor;
• Matters affecting the industry in which the company operates, such as financial reporting practices, economic conditions, laws and regulations, and technological changes;
• Matters relating to the company's business, including its organization, operating characteristics, and capital structure;
• The extent of recent changes, if any, in the company, its operations, or its internal control over financial reporting;
• The auditor's preliminary judgments about materiality, risk, and other factors relating to the determination of material weaknesses;
• Control deficiencies previously communicated to the audit committee8 or management;
• Legal or regulatory matters of which the company is aware;
• The type and extent of available evidence related to the effectiveness of the company's internal control over financial reporting;
• Preliminary judgments about the effectiveness of internal control over financial reporting;
• Public information about the company relevant to the evaluation of the likelihood of material financial statement misstatements and the effectiveness of the company's internal control over financial reporting;
• Knowledge about risks related to the company evaluated as part of the auditor's client acceptance and retention evaluation; and
• The relative complexity of the company's operations.

B.

There are four different types of Vouchers in Accounting. They are:

• Debit or Payment voucher
• Credit or Receipt voucher
• Non-cash or Transfer Voucher
• Supporting Voucher

1. Debit or Payment Voucher - A Payment voucher is used to record a payment of cash or cheque. In this case, the cash/bank will be credited and there will be an outflow of funds.

2. Credit or Receipt Voucher - A Receipt voucher is used to record cash or bank receipt. Here there is an inflow of funds. Receipt Vouchers are of two types:

• Cash receipt voucher – It represents receipt of cash in hand
• Bank receipt voucher – It indicates receipt of a cheque or demand draft i.e., money is not received in the form of cash in hand. Instead, the money is credited to the bank account of the assessee.

3. Non-cash or Transfer Voucher - Non-cash vouchers are used for non-cash transactions. They are basically used as documentary evidence. e.g., Goods sold on a credit basis. In these cases, the cash / bank account of the assessee is not affected.

4. Supporting Voucher - Supporting voucher serves as documentary evidence of the transactions happened in the past. For example, you can attach the bill of an expense along with the original voucher just to further support the primary voucher. Petrol Bills attached to the conveyance vouchers is a good example of Supporting Voucher.