Question

Prepare the memo requested by the chief audit executive Westgate Company Ltd.

Answer 1

This memorandum resolves to identify the chief areas to review for the strategic planning activity for the year 2017. The short memo also highlights the general criteria to apply in the audit and the audit procedure to follow.

Westgate Company is considering improving the sales and revenue areas for 2017. It anticipates increasing sales revenue by $100 million and a 5% increase in returns to investors. The company also plans to increase the research and development budget to 5% of sales, intended for innovation or new implementation to increase sales in North America.

The strategic planning activity for 2017 will include the corporate objectives and the means for its achievements. All the corporate objectives connect to sales. Thus, an increase in sales is central. Therefore, the auditor will examine the sales revenue and plan audit procedures to achieve comfort on 2017 sales figures. The auditing team must check the policies made for sales and net income. The auditor should also review sales price authorization and the control over it.

Substantive Audit Procedure

The auditor could apply a test of control to assess the risk on all sales accounts. They will plan the controlling nature, timing, and extent of substantive procedure based on the combined risk assessment of sales and account receivable account balances. The auditor could perform an analytical review of sales accounts to investigate significant changes or the absence of expected changes. It could perform revenue recognition procedures by product, region, location, and segment. It could also inquire from the sales and marketing team about unusual transactions and review the sales credit terms and policies for handling sales returns.

Analytical Audit Procedure

The auditing team could prepare a comparative sales analysis by product, region, and segment to investigate the completeness of revenue. It could also compare the current account balances of another income account with the prior year's account balances and inquire about those with significant changes.

The auditor will review all sales activities each month and quarter for changes and compare current year balances with the prior year's account balances to investigate variations or unusual activity. The auditor could perform the additional analytical procedures for comparing sales discount and allowances accounts with the previous year. They could also perform the percent of sales method for investigation purposes. In addition, they should conduct a separate investigation of account receivables to verify sales invoices, goods sold, and cash receipts. They could also investigate cash journals and sales journals for unusual transactions observed.

Test of Details

The auditor testing the occurrence of sale revenue will trace the financial statement amount to the working trial balance. The auditing team will take a sample from a sales transaction to review against quotations, sales invoices, goods delivered, and sales orders, and trace the information in the accounting system to recording in the general journal. The auditor could also inspect the numerical sequence of sales invoiced and shipping documents for completeness. They could refer to account receivables data for the procedures relating to control tests of the cutoff of sales invoices and credit memos. The auditor would also test the foreign currency translation account for accurate foreign exchange translation and reporting.

In addition, the auditor will test the revenue accounts on the income statement and the account receivable account on the balance sheet. The auditor will also review the company's credit policy and perform an account receivable analysis. They will also examine the written-off account receivable amount to assess its reasonability. The auditor may also investigate revenue recognition issues because companies often inflate their revenues artificially to make the financial statements attractive or sales bonuses linked to sales performance incentives.