Question

REVENUE CASE 4

As auditor of Da Do Enterprises Bhd, you have just completed of review of the sales ordering system and you have made the following observations: Orders are received by the sales office through the mail from customers. A sales order form is immediately prepared in duplicate for each customer order. These sales order form are pre-printed and kept in the sales office, but are not serially numbered. Copy #2 is retained on file together with the customer order. Copy #1 is sent to the credit department for authorization and approval. The credit manager checks the order against the approved customer’s list and the current accounts receivable subsidiary ledger account balance. The approved sales order is sent to the storekeeper, who checks whether the goods are available in stock to meet the request. If available, a multi-copy sales invoice is prepared. Like the sales order forms, the sales invoices are also preprinted but are not serially numbered. One copy of the sales invoice is sent to the customer. A second copy is sent to the accounts department. A third copy is sent to the customer with the goods as a packing slip. A fourth copy is filed together with the customer order by the storekeeper. The shipping clerks checks to make sure all shipments accomplished by a copy of the sales invoice.

Required:

a) Indicate weakness in internal control over the existing sales ordering system.

b) Recommend one improvement for each of the weakness identified.

c) Describe the audit tests (both tests of controls & substantive tests) the auditor may perform to determine if there are any errors or irregularities.

Answer 1

1) Weakness in internal control over the existing sales ordering system

Common internal controls on the sales cycle include counted sales invoices and purchase order authorization exceeding a certain threshold, and authorization on receipt write-offs. If the control is that all purchase orders are approved by management, the auditor checks the manager's signature on each document.

• Inadequate documentation or records
• Key business cycles not properly
• Lack of control with authorized transactions
• Ineffective information systems
• Lack of security.
• No formal ethical policies procedures

2) Improvement for each of the weakness

• Develop written policies and procedures.
• Perform reconciliations regularly.
• Approved processes/Transactions.
• Maintain and Supporting documentation.
• Provide adequate training to staff.

3) Critical tests conducted by audit auditors include details of transactions and account balances and tests of analytical procedures. The original tests are intended to detect material misstatements in financial statements. The auditor selects particularly important tests to achieve auditor objectives and controls the risk to the contents of the financial statements, including the evaluation level of control risk and the expected effectiveness and efficiency of such tests, provided by the auditor by a combination of inherent risk and assessment of control risk, and by critical tests. Provides a reasonable basis for the resulting opinion on the fairness of the financial statements.