Question

1. Client’s cash balance per book and cash balance per bank are often different and this difference is mostly driven by timing difference and/or errors. Please list at least 3 reconciliation items which may create timing difference.

2. Please identify and describe important internal controls over the credit sale (NOT cash sale) process.

3. Please identify and describe important internal controls over the credit sale (NOT cash sale) process.

4. How does the presence of perpetual records affect the audit? (Tip from the professor: Unless there are well-controlled perpetual records, auditing standards require the auditor to observe the physical count of inventory at year-end. If the client has well-kept perpetual inventory records, the observation can correspond to the client's periodic counts if taken during its fiscal year).  

5. For manufacturing firms, their inventories should be valued based on the lower of cost or market price. Please explain how to decide the market price? If the cost is higher than the market price, what kind of accounting adjustment a firm should make?

6. Please identify and describe important internal controls over the credit purchase process.

7. What are the key supporting documents involved in a credit purchase transaction at a manufacturing firm? Which department issue which document? Who has the authority to sign the payment checks and mail them to suppliers?

8. Inventory consists of three sub-accounts. Please name all of them for a manufacturing firm.

Answer 1

1

The below cases may create timing difference for cash balance as per book and cash balance as per bank

a

Interest charged by banks may not be accounted in the books of account until bank statement is received

b

At the end of financial year check which are issued by the company but not cleared will result in timing differences

c

Electronic deposits made directly by customers into bank account will not be reflected in the books until bank statement is reviewed

2

Internal controls are necessary in case of credit sales as there could be possibility of sales getting recorded in the books without any actual sales made which results in higher sales and higher revenue for the company without there being actual sales

This creates misleading financial statements for the investors

In case of credit sales it is important to review both invoices and the accounts receivable in the books as both goes hand in hand

The sales order received from customers needs to be reviewed and whether it is properly signed and stamp by the customers

When goods are disptached they need to be reviewed with the sales order and check for any extra sales made or inventory provided to customers

The credit sales made is to relevant customer as per the companies policies

Check the invoice of credit sales and compare with accounts receivable in order to avoid higher sales with actually no sales made

Whether the cash received for a particular invoice set off against the same accounts receivable

3

Internal controls are necessary in case of credit sales as there could be possibility of sales getting recorded in the books without any actual sales made which results in higher sales and higher revenue for the company without there being actual sales

This creates misleading financial statements for the investors

In case of credit sales it is important to review both invoices and the accounts receivable in the books as both goes hand in hand

The sales order received from customers needs to be reviewed and whether it is properly signed and stamp by the customers

When goods are disptached they need to be reviewed with the sales order and check for any extra sales made or inventory provided to customers

The credit sales made is to relevant customer as per the companies policies

Check the invoice of credit sales and compare with accounts receivable in order to avoid higher sales with actually no sales made

Whether the cash received for a particular invoice set off against the same accounts receivable

4

Under perpetual inventory system the company continously records the sale and purchases as an when they occur

It is important for the company to have well controlled perpetual records to maintain the inventory, if the same is not available the auditors will have to undertake periodic count of the inventory

as the record maintain the books may not be correct and will lead to misled results, if the company has well controlled systems the auditor can review the periodic physical count may by the management and check for discrepancies in the physical count as there is possibility of errors being undertaken in this case

5

Market price is the net realisable price or replacement price when goods are sold in the market. In case where the cost is higher than the market price the inventory is bought down to its market price by crediting the inventory account and debited as loss on inventory adjustment

6

Internal controls over credit purchases involve that correct goods are ordered as per the requirement, Goods are ordered from the suppliers in the list of approved suppliers by the company whether the suppliers are correctly paid as per the purchases made by the company and there is no over payment of goods purchased

7

The key important supporting documents involve in credit purchase is the purchase order, invoice provided by the supplier, transportation receipts for dispatch of goods by suppliers

The purchase department issues the purchase order document based on the inventory on hand, the payment department checks for the invoice and issue the payments

The head of the finance or the cash controller usually signs the payment check and the purchase team mail them to suppliers

8

In case of manufacturing company, inventory consists of Raw Materials, Work In process and Finished Goods