Question

In: Accounting

Heraklion Co is a manufacturer of footballs and is a new audit client for your firm....

Heraklion Co is a manufacturer of footballs and is a new audit client for your firm. You are an audit supervisor of Spinalonga & Co. and are currently preparing for the forthcoming interim and final audit for the year ending 31 October 2016. You are required to document and assess the sales system, recommend control improvements to deal with a specific fraud issue as well as undertake substantive testing of revenue.

Sales ordering, goods dispatched and invoicing

Heraklion Co sells footballs to a range of large and small sports equipment retailers in several countries. Sales are ma de through a network of sales staff employed by Heraklion Co, but new customer leads are generated through a third party company. Sales staff are responsible for assessing new customers' creditworthiness and proposing a credit limit which is then authorized by the sales director. The sales staff have monthly sales targets and are able to use their discretion in granting sales discounts up to a maximum of 10%. They then record any discount granted in the customer master data file.

The sales staff visit customer sites personally and orders are completed using a two-part pre-printed order form. One copy is left with the customer and the other copy is retained by the sales person. The sales order number is based on the sales person's own identification (ID) number.

The company markets itself on being able to dispatch all orders within three working days. Once the order is taken, the sales person emails the finance department and warehouse dispatch team with the customer ID and the sales order details and from this a pick list is generated. Sequentially numbered goods dispatched notes are completed and filed in the warehouse.

Sequentially numbered invoices are generated using the pick lists for quantities and the customer master data file for prices. Standard credit terms for customers are 30 days and on a monthly basis sales invoices which are over 90 days outstanding are notified to the relevant sales person to chase payment directly with the customer.

Required:

(a) Describe TWO methods for documenting the sales system, and for each explain ONE advantage and ONE disadvantage of using this method.      

(b) Identify and explain SEVEN deficiencies in the sales system of Heraklion Co and provide a recommendation to address each of these deficiencies.

Note: Prepare your answer using two columns headed Control deficiency and Control recommendation respectively.                                                                                                                                

(c)     Describe substantive procedures the auditor should perform to obtain sufficient and appropriate audit evidence in relation to Heraklion Co's revenue.      

Solutions

Expert Solution

There're various methods that can be adopted for documenting the sales system of Heraklion Co.

1) Narrative Notes

Narrative Notes refers to the running description of the sales system and it contains step by step detailed procedures of the complete process.

Advantage: It covers each & every step of the complete process in narration form.

Disadvantage: It might be too cumbersome especially in case of long & complex procedures of large enterprises which might not be too useful or user-friendly for the auditor.

2) Questionaires

They're also referred as Internal Control Questionaires (ICQs) or Internal Control Evaluation Questionaires (ICEQs).

ICQs majorly contain a list of questions and the same are answered to assess whether the controls exist or not whereas the ICEQs are used to assess the effectiveness of those controls in place.

Advantage: They're quite short & crisp in nature due to their question-answer format and provide to the point details.

Disadvantage: Due to it's format, it might miss out the details for which the questions are not asked.

Sl. No. Internal Control Deficiency Control Recommendation
1 The credit worthiness of new customers is verified by the sales person who sets the credit limit, which is then authorized by the sales director. Once the new customers complete their application, it should be verified by a credit agency with a credit limit proposed for the customer. The same should then be authorized by the Sales Director.
2 Sales Staff have discretion to provide sales discount upto 10%. This might have a risk of unreasonable discounts with chances of revenue leakage. All discounts should be authorized by the management representative, i.e. Sales Director.
3 Sales Staff are able to make changes to Customer Master Data File for providing discount. Sales Staff shouldn't have any access to provide discounts.
4 At the time of placing order, the Sales Staff doesn't check the inventory availability. This is specially when Heraklion Co. markets itself for shipping within 3 days. Prior to placing customer's order, inventory availability should be checked for timely shipment
5 Customer orders are recorded in two-part form, one is left with customer and the other with salesperson. Order form should be atleast four-part, one for customer, one for salesperson, one for warehouse and one for despatch.
6 Sequentially numbered GDNs are raised by the Warehouse Department. If the Finance Department doesn't receive a copy of GDN's, they'll never know when to raise Sales invoices. Atleast a four part GDN should be created; one for warehouse department, one for customer, one for sales department and one for Finance to raise invoices.
7 The Sales person has the responsibility to chase customers whose dues are beyond 90 days. Company credit period is 30 days and this also raise the receivables ageing. A dedicated person should be employed to collect receivables from customers and the same should be followed after 30 days once the credit period is over to improve collections.

The substantive procedures that the auditor should perform to obtain sufficient & appropriate audit evidence that the revenue is assured are as follows:

  • Compare the overall revenue of Hiraklion Co. against previous years and budgets and identify any significant variances.
  • Compare the sales report segregated by product and analyze any variances with the budgets & previous years for unusual fluctuations & variances.
  • Verify the gross margins over periods and understand if there are any reasons for variances specially with steep growth & decline.
  • Select a sample of invoices to verify if the prices have been applied correctly based on customer records and prices quoted.
  • Select a sample of credit notes to identify if the credits have been applied properly to each customer account or they need verification.
  • Validate customer accounts either randomly or with a pre-selected sample with end-to-end documentation to identify if all the documents are correct and recorded.

Related Solutions

Tiyumba Co is a new client of Anwaar and Co, an audit firm. Tiyumba Co runs...
Tiyumba Co is a new client of Anwaar and Co, an audit firm. Tiyumba Co runs a spa, trading as Tiyumba. The spa is open to non-members and members. Members pay an annual membership fee that entitles them to 50% off spa rates for individual treatments and sessions. The spa employs lifeguards, masseuses, beauty therapists and nursery nurses for its crèche facilities. In addition, there is also administrative staff, including a finance controller, who reports to the managing director, Ibrahim...
Company A is a construction company and is a new audit client of your firm. It...
Company A is a construction company and is a new audit client of your firm. It has never been audited but a different accounting firm performed a review engagement for y/e 31 Dec 2016. Your firm is auditing A’s financial statements for y/e 31 Dec 2017. Company A is privately owned by the Jones family in Country X, using the X$ currency. The president, VP, secretary/treasurer, controller and various levels of managers are all family members. All management employees who...
One of the audit partners for your firm consults with you on a possible new client....
One of the audit partners for your firm consults with you on a possible new client. What are three things you would want to ask the audit partner (or the potential client) about when considering whether this new client would be a good fit for the firm?
b) Supreme Ventures is a manufacturer of quality home accessories and a client of your audit...
b) Supreme Ventures is a manufacturer of quality home accessories and a client of your audit firm. You are carrying out the audit of the purchases system of Supreme Ventures. The company has revenue of Ghc 12.5 million, and all the shares are owned by Mr. Ado, and Mr. Tekpe, who are non-executive directors and are not involved in the day-to-day running of the company. Kofi Badu is the accounts clerk who maintains all the accounting records and prepares the...
The audit team is preparing to audit a new client in the fashion industry. The client...
The audit team is preparing to audit a new client in the fashion industry. The client imports garments from manufacturers in several Asian countries and retails them in a chain of shops located throughout the United States. You have access to the following information for the client: a. prior period financial statements b. anticipated results for the current year c. industry averages Required Discuss how you would use the information to understand your new client.
Simean & Co, a firm of CPA’s, issued an unqualified audit report for its client, Xing...
Simean & Co, a firm of CPA’s, issued an unqualified audit report for its client, Xing Manufacturing Corporation, a footwear manufacturer in Asia. Xing Manufacturing, listed its head office in Toronto, Ontario, and its shares were traded on a Canadian Stock Exchange. Simean & Co. knew the company was in the process of refinancing a significant bank loan coming due, and the bank was anxious to see the year end results. After an unqualified audit report was issued, the regulator...
Your audit client, a manufacturer of surgical gloves, wants to increase the value of its inventory...
Your audit client, a manufacturer of surgical gloves, wants to increase the value of its inventory even though it has not experienced any changes in manufacturing costs. Your client explains that it wants the value of its inventory to reflect the fact that it can now charge a higher price for these high demand items. Is this permissible under U.S. GAAP?
Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client....
Post, CPA, accepted an engagement to audit the financial statements of General Co., a new client. General is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Post discovered that General's financial statements might be materially misstated due to the existence of fraud. A. Describe post's responsibilities in the circumstances described above. B. Describe post's responsibilities for reporting on general's financial statements and other communications if post is precluded from applying...
Deanza, CPA, accepted an engagement to audit the financial statements of Foothill Co., a new client....
Deanza, CPA, accepted an engagement to audit the financial statements of Foothill Co., a new client. Foothill is a publicly held retailing entity that recently replaced its operating management. In the course of applying audit procedures, Deanza discovered that Foothill's financial statements may be materially misstated due to the existence of fraud. Required: (a) Describe Deanza's responsibilities on the circumstances described above. b) Describe Deanza's responsibilities for reporting on Foothill's financial statements and other communications if Deanza is precluded from...
The International Bank of Commerce (IBC) is an audit client of your public accounting firm. IBC...
The International Bank of Commerce (IBC) is an audit client of your public accounting firm. IBC is a multinational financial institution that operates in 23 countries. During the current year’s audit, you have discovered the following problems: a. Improper loans were made to stockholders and other related parties. b. Loans were recorded on the books that appear to be either false or deceitful. You are especially concerned about these findings because it appears that members of senior management were aware...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT