Question

You have been assigned to perform tests of controls on the sales system at EDB Pty Ltd as part of the 30 June 2018 audit. EDB is a wholesaler of bathroom supplies such as vanity units, toilets, taps and sinks. During testing, you noted the following errors: Invoice mo. 59328 issued on 18 March 2018 matched the customer’s order. However, the order was only partially filled because of a lack of stock in the warehouse, meaning items that were never delivered were included in the invoice. The error was discovered when the customer rang to complain about being overcharged.

Required:

(a) Describe application controls that would have prevented or detected the error.

(b) Describe further work you would perform in relation to each of the errors.

(c) Explain the implications of the errors for your substantive testing of accounts receivable.

(d) Briefly discuss how you would present these matters in your year-end management letter

Answer 1

1. The company should have applied application controls in the system for the reconciliation of Inventory module with the Invoicing module which can act as a Preventive as well as Detective Control.

As Preventive Control, system could have restricted raising of invoice with the Inventory if there was shortage of Inventory.

As Detective Control, the system should have made a check to ensure that alert is shown to the process owner that the quantity being shipped does not agrees with the Invoice quantity at the time of making shipment and as important notifications on a regular basis. Regular stock taking could also have been a good detective control

2. The occurrence of the mentioned situation casts our doubt as an Auditor over the reliance on the Control System prevailing within the company.

In such case, we would require to perform Risk Assessment and reassess the risks associated with the transactions during the period and the associated account balances.

Basis the results of above Risk Assessment, we would finalise the Scope, Nature, Timing and Extent of our Testings.

For example, Sample size can be enhanced to bring our overall Audit Risk to acceptable level.

3. As mentioned in (b) this would impact our Population of testing for Substantive Testing. We can consider-

1. performing additional procedures (like some analytical ratios, External Party Confirmation, tracking the subsequent recoveries from subsequent Bank Statement)
2. Enhancing Sample Size

4. As an auditor, we will get this finding into the management letter where Company agrees to Management's responsibility of the possible misstatement due to error.