Question

Bob Downe is auditing Red Gum Home Furniture (RGHF), a manufacturer and retailer of boutique home furniture. RGHF was founded 25 years ago by a husband and wife team and has grown rapidly in the last five years as solid, environmentally friendly, wooden furniture has grown in popularity. However, although RGHF’s owners have attempted to expand the administration department to keep pace with the growth in sales, some systems are not operating as effectively as they should. This is partly due to difficulty in attracting and retaining accounts staff with appropriate experience and skills.

RGHF’s owners have recently realised that they need to increase pay and improve conditions for accounts staff to avoid regular periods without sufficient qualified staff, particularly for sales invoice processing. The staff shortages have resulted in sluggish performance in processing invoices, sending out customer statements, and collecting cash from account customers. In addition, there have been numerous mistakes in processing sales invoices, some of which have been discovered after customer complaints.

Bob is selecting a sample of sales invoices for substantive testing. All documents relating to sales invoices for the last five years are stored in boxes in the shed behind the office. The shed is very small and the boxes are stacked on top of each other because the shelves are full. Due to the damp conditions some labels have peeled from the boxes, so it is not clear which boxes relate to the current year.

a.       Describe the population(s) that would be relevant to Bob’s sample selection.

b.      Which sample selection methods would be appropriate for choosing sales invoices for substantive testing at RGHF? Explain the factors that would influence your choice.

Answer 1

Requirement a

Ø Occurrence & Existence: Examining sales deal and invoice (vouching back to safeguard customer orders complemented with invoice).

Ø Accuracy, Valuation & allocation: outlining (ensure the sales revenue & cash/AR are recorded at the correct amount)

                                      Dr cash/AR

                                             Cr sales revenue

                                    Dr COGS

                                            Cr inventory

Ø     Cut-off (Does the sales revenue recorded at the accurate period?)

Requirement b

Ø The audit would be tough to recognize number of total invoices (whole number of population).

Ø The most suitable technique:

Ø Random (each item has equal chance of being selected & sample can be stratified before choosing random sampling to escalate competence)

Explain the factors that would influence your choice:

Ø Many errors & staff scarcity in handling sales invoices and certification

Ø The moist state of some labels have peeled from the boxes, so it is not clear which boxes narrate to the current year

Ø Thus, it may be most operational for the auditor to classify which box is relate to present year before stratification and chance choice