Question

In: Accounting

Case Azzahra is a book publisher, publishes and distributes educational and non-educational books and sell them...

Case

Azzahra is a book publisher, publishes and distributes educational and non-educational books and sell them to libraries and bookstores within Saudi Arabia and in the Arabian Gulf Region (AGR).

Azzahra employs a professional editorial team. All printing and binding activities are outsourced. The annual revenue total 250 millions Saudi Riyals which are disbursed as follows:

In millions

Cash

Credit

Total

Total Customers

Within Saudi

40 120 160 4680

From other AGR

10 80 90 2120

Total

50 200 250 7800

Cash expenditures are 150 million Saudi Riyals. Non-cash expenditures are 50 million Saudi Riyals. While revenues may be paid in different currencies, all processed out in the main center in Riyadh and using Saudi Riyal.

Requirement

Suppose you are a member of the professional editorial team and your task is to audit the revenue and accounts receivable. You probably would like to perform your audit in the following order:

1- Establish audit objectives

2- Determine the scope of the audit

3- Apply the Seven Habits of Highly Effective People (expected outcomes).

4- Understand the auditee (gather relevant information, analytical procedures, control

analysis, process flow, process risks)

5- Identify and assess risks

6- Identify key controls

7- Evaluate controls

8- Create test plan

9- Develop work program

10- Gather evidences

11- Evaluate evidences and reach conclusion

12- Develop observation and formulate recommendation.

Solutions

Expert Solution

Analysis of Information

Amount in Millions
Region Revenue Total Customers
Cash Credit Total
Within Saudi          40         120            160                    4,680
From other AGR          10           80              90                    2,120
Total          50         200            250                    6,800
Share of Revenue - As per Nature
Nature Amount in Millions Share in % terms
Cash                             50 20%
Credit                           200 80%
Total                          250 100%
Share of Revenue - As per Region
Region Amount in Millions Share in % terms
Within Saudi                           160 64%
From other AGR                             90 36%
Total                          250 100%
No. of Customers - As per Region
Amount in Million
Region No. of Customers Contribution % terms Revenue per customer
Within Saudi                        4,680 69%                                0.03
From other AGR                        2,120 31%                                0.04
Total                       6,800 100%

Audit procedures to perform audit of Revenue and Accounts Receivables

1. Audit objective

To obtain reasonable assurance that amount of revenue and accounts receivables are not materially misstated.

2. Scope of Audit

To obtain and evaluate evidences with respect to areas of Revenue and Accounts receivables. The main focus will be on revenue on credit basis as it comprises of 80% of total revenue. Revenue within Saudi region will be required to be audited in depth since it comprises of 64% of Total Revenue and 69% of total customers.

3. Seven habits of Highly effective people

i. Value the important over the urgent

ii. Focus on what matters most

iii. Seek first to understand those you lead

iv. Sharpen the saw

v. Begin with end in mind

vi. Remember ‘someday’ is not the date on the calendar

vii. Be proactive

4. Understand the process

Auditor is required to:

a. gather relevant information for audit.

b. make analysis (as mentioned above) to identify critical and important areas of audit.

c. understand from client exact process and prepare process note

d. identify risks from the understanding of process

e. identify relevant controls to mitigate risks

f. finalise process flow alongwith risks and control and obtain confirmation from client about our understanding

Auditors are required to understand process of credit sales, cash sales, recovery from receivables and monitoring of receivables, etc.

5. Identification and assessment of risks

Auditors is required to identify the risks in the processes of credit sales, cash sales, recovery from receivables and monitoring of receivables, etc. and assessment of risks in said processes in order evaluate actual impact of such risks on financial statements.

6. Identify key controls

During understanding of process flow, Auditor will come across number of controls. Auditors are required to relevant controls which will mitigate the risks identified.

7. Evaluate Controls

Once relevant controls are identified, Auditors are actually required to evaluate controls whether such controls are operating effectively to mitigate risks identified.

8. Test plan

Auditors are required to prepare detailed plan with respect to testing of controls over activities.

9. Develop work programme

Alongwith controls testing, Auditors are required to prepare work programme including substantive testing procedures.

10. Gather evidences

After testing of controls and details, auditors will gather outcome of evidences as a result of procedures.

11. Evaluate evidences and reach conclusion

Based on evaluation of evidences, Auditors will have to conclude whether controls are in place or not, if controls are in place then whether those controls are operating effectively and amounts of revenue and account receivables are not materially misstated.

12. Develop observations and formulate recommendations

Once the conclusion is derived, Auditors are required to develop observations for presentation to the management and formulate recommendations in case where deficiencies in controls are noted during audit.


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