Question

Case

Customers make purchases from AMT by emailing their purchase orders. On receipt of a customer’s purchase order, a Sales Clerk prepares a Sales Order. In doing so, he accesses an authorised price list to determine the price that is to be charged, and inputs the quantities, product descriptions, product codes and delivery requirements. Sales Orders are prenumbered and in triplicate. The Sales Clerk then performs a credit check by comparing the value of the sale with the customer’s credit limit, which is recorded on the customer database. Once the purchase is accepted, Copy 1 of the Sales Order is sent to the Warehouse, Copy 2 is sent to the Accounting Department, while Copy 3 is filed in the Sales Department. The information system also generates an Aged Open Order Report [1]. Periodically, an Administration Clerk inspects this file to ensure that it is cleared.

In the Warehouse a Warehouse Clerk uses the information of Copy 1 of the Sales Order to pick the goods, prepare them for shipping and pass them to the Shipping Clerk, who is responsible for sending the goods to customers. The Shipping Clerk prepares a Shipping Note. Shipping Notes are prenumbered and in quadruplicate. Once per month a Clerk from the Administration Department performs a sequence check on a sample of Shipping Notes.

Before the goods are shipped to the customer, a Second Shipping Clerk checks the consignment to ensure that the goods match the information (item number and quantity) on the Shipping Note.    This Shipping Clerk initials all Copies of the Shipping Note to indicate that he has performed the check. Copy 1 of the Shipping Note is returned to the Sales Clerk, who uses it to clear the open order file. That copy is filed with the Copy 3 of the Sales Order in the Sales Department, and stamped “cleared”. Copy 2 of the Shipping Note is attached to the goods for delivery to the customer. Copy 3 of the Shipping Note is sent to the Accounting Department, while Copy 4 is filed in the warehouse by the Shipping Clerk.

In the Accounting Department, an Accounts Clerk matches the information on the Sales Order with that on the Shipping Order, and, on that basis, prepares a Sales Invoice. The Accounts Clerk takes great care to ensure that the extensions on the Sales Invoice (quantity order x price) are correct. Sales Invoices are prenumbered and in duplicate. Copy 1 of the Sales Invoice is sent to the customer. Copy 2 of the Sales Invoice is stapled to Copy 2 of the Sales Order and Copy 3 of the Shipping Note and is used by the Accounts Clerk to record the transaction in the Sales Journal. The stapled documents are then filed by customer name in the Accounts Department.

Note: [1] An aged open order report is a list of sales orders that is sorted by the date on which the order was generated by the sales clerk. It provides clerical staff with the opportunity to periodically review its orders to make sure that orders have not been lost, or that difficult orders receive special attention.

a) Complete the extract from the Internal Control Questionnaire for sales that is printed below (you can cut and paste it into your assignment). If a control is present, place an X next to it in the ‘Yes’ column. If a control is not present, place an X in the ‘No’ column. If the question has no relevance to the case, place an X in the ‘N/A (not applicable)’ column. In the ‘Comments’ column briefly state the reason for your responses to the questions. This should be done as follows: (1) if you placed an X in the “Yes” column, state the nature of the effective internal control that is described in the Case; or (2) if you entered an X in the “No” column, state the nature of an internal control that AMT could use.

Internal Control Questionnaire (extract from)						W.P. Reference: Sales AO1
Client: AMT Pty Ltd					Audit Date:  30/06/X0
Auditor: B.T.		Date Completed: 30/07/X0	Reviewer C.R.				Date Reviewed 01/08/20X0
				Yes	No	N/A		Comment
A: Sales
A1	Is the customer’s credit approved by an appropriate person?
A2	Is an authorised Prices List used?
A3	Is there an internal control to ensure that all sales are processed?
B: Warehouse
B1	Is a prenumbered written Shipping Note required before inventory leaves the Warehouse?
B2	Is a record of all shipments maintained in the Warehouse?
B3	Are Shipping Notes prenumbered and accounted for?
C: Accounting
C1	Is there an internal control to ensure that the extensions on the Sales Invoice are correct?
C2	Is there an internal control to ensure all shipments are billed
C3	Is there an independent comparison of recorded sales with the Chart of Accounts
C4	Are recorded sales supported by an authorised Shipping Note and an approved Sales Order?

b) For each internal control identified above, outline a test that you could use to test its effectiveness. Ensure that you identify the starting point of the test, the evidence used for verification, the audit procedure that is applied and the assertion you are testing.

Answer 1

The Internal Control Questionaire table is provided below with control assessment and control recommendations.

Internal Control Questionnaire (extract from)
W.P. Reference: Sales AO1
Client: AMT Pty Ltd	Audit Date:  30/06/X0
Auditor: B.T.	Date Completed: 30/07/X0	Reviewer C.R.	Date Reviewed 01/08/20X0
		Yes	No	N/A	Comment
A: Sales
A1	Is the customer’s credit approved by an appropriate person?		X		Customer's credit should be approved by a management authorized representative
A2	Is an authorised Prices List used?	X			Sales Clerk refers to the Authorized Price List as made available to him
A3	Is there an internal control to ensure that all sales are processed?		X		Sales process begins with the receipt of Purchase Orders which are emailed directly by client. Their should be a Purchase Order receipt register which should also record the subsequent Sales Order Reference and Sales Person accountable for that transaction.
B: Warehouse
B1	Is a prenumbered written Shipping Note required before inventory leaves the Warehouse?	X			Shipping Notes are pre-numbered and raised in quadruplicate. They're also cross-verified by an independent person before clearing shipment.
B2	Is a record of all shipments maintained in the Warehouse?	X			One copy of the Shipping Notes are also stored in Warehouse for shipment.
B3	Are Shipping Notes prenumbered and accounted for?	X			Yes, shipping notes are pre-numbered and accounted for.
C: Accounting
C1	Is there an internal control to ensure that the extensions on the Sales Invoice are correct?		X		The control is only placed on the Accounting Clerk and is not self-reliant. It needs to be cross-verified by an independent person.
C2	Is there an internal control to ensure all shipments are billed	X			An open aged sales order report is generated by Sales Clerk which can also act as a control document to check on the invoice raised for that client against shipment.
C3	Is there an independent comparison of recorded sales with the Chart of Accounts		X		No such control established. It's highly recommended to perform the same.
C4	Are recorded sales supported by an authorised Shipping Note and an approved Sales Order?		X		The Sales Orders are not approved by a superior authority and hence the control is lacking. All documents including Purchase Order, Sales Order, Shipping Note and Invoice should be verified to confirm that all sales have been approved and booked respectively.

b) Control Assessment, Audit methodology & Assertion for testing

Internal Control Questionnaire - Control Assessment
W.P. Reference: Sales AO1
Client: AMT Pty Ltd	Audit Date:  30/06/X0
Auditor: B.T.	Date Completed: 30/07/X0	Reviewer C.R.	Date Reviewed 01/08/20X0
		Yes	No	Control Test	Audit Procedure	Assertion
A: Sales
A1	Is the customer’s credit approved by an appropriate person?		X	Validation of Credit Approval	Verify whether the credit limit provided by the Sales Person has been approved by a management authorized representative, i.e Sales Head. Initially, perform a sample check. If satisfactory, the control is assessed else expand to the larger sample.	All credits are approved with management supervision
A2	Is an authorised Prices List used?	X		Validation of Sales Order with Authorized Price List	Verify the frequency, source and sanctity of the authorized price list. Perform a sample check of some material Sales Orders to check if the prices reconcile. Also, check for variances in different Sales Orders of same client and look for reasons. List out major reasons for changes in prices, specially if they're governed by external factors like tax rates, government subsidy, policy changes, bulk discount etc.	All Sales Orders are raised as per Authorized Price List
A3	Is there an internal control to ensure that all sales are processed?		X	Whether all sales are processed	Perform reconciliation of all Purchase Orders received, corresponding Sales Orders, invoices and shipment notes raised and invoice values matching items as per Purchase Order. If there're amounts mentioned in Purchase Order, whether the invoice is exceeding that value which might cause a billing dispute.	All Purchase Orders are converted to Sales & Invoices raised
B: Warehouse
B1	Is a prenumbered written Shipping Note required before inventory leaves the Warehouse?	X		Are there any missing Shipping Notes sequences	Verify if there're any Shipping Notes which are either not shipped or not raised at all.	All Shipping Notes are numbered and accounted for.
B2	Is a record of all shipments maintained in the Warehouse?	X		Verify all inventory movement against Shipping Notes	Perform a sample check by comparing Shipping Note with respective items moved from inventory	All shipments are recorded and maintained in warehouse
B3	Are Shipping Notes prenumbered and accounted for?	X		Already covered above	Already covered above	Already covered above
C: Accounting
C1	Is there an internal control to ensure that the extensions on the Sales Invoice are correct?		X	Extensions of Sales Invoices accuracy	Perform sample check to verify if there're any sales invoice extensions raised, they're properly documented with evidences and approvals.	All Sales Invoice Extensions are duly accounted for and correct.
C2	Is there an internal control to ensure all shipments are billed	X		Verify if all shipments have corresponding invoices raised	Perform an end-to-end test comparing items mentioned in Customer Purchase Order, Sales Order raised, invoice and Shipping Notes to have same item description and quantity. Invoices should be raised as per authorized price list.	All shipments are billed with respective invoices
C3	Is there an independent comparison of recorded sales with the Chart of Accounts		X	Independent audit of all sales recorded under respective heads and mapped to Chart of Accounts	Perform a detailed check of all sales transactions with corresponding journal entries to verify their accounting completeness.	All sales are duly recorded in the ledger
C4	Are recorded sales supported by an authorised Shipping Note and an approved Sales Order?		X	Shipping Notes & Sales Order Authorization already covered above.	Do a wholesome health check to relate Authorized Sales Orders with respective Shipping Notes raised.	All recorded sales have documented Sales Orders & Shipping Notes with respective approvals.