Trimester 3, 2017
Assessment 2, Part B– Case study
Description / Requirements
PART I: Internal Controls
Review and evaluation of internal controls is an important aspect of a financial report audit. The auditor must obtain a proper understanding of the entity’s internal controls; document the understanding; perform tests of controls and suggest to client management areas that need improvement in the existing internal control system.
- What are the responsibilitiesof the client management, company directors and auditors, in relation to internal controls?
- Explain the impactof the auditor’s understanding of internal controls on the audit strategy?
(Suggested word count: 300 words. 150 words per question)
PART II: Strengths and Weaknesses of an Internal Control System
You are the audit senior of Maga Associates (Maga), a mid-tier accounting firm. You and your team is engaged in the financial reports audit of Caroma Bathrooms Australia Limited (Caroma) for the year ended 30 June 2017. Caroma is specialised in manufacturing and supplying bathroom fittings.
All sales are made on credit, with 30 days credit period. Customers can purchase bathroom fittings from Caroma by emailing, faxing or telephoning their purchase requests. Immediately upon the receipt of customer requests, a sales officer prepares a sales order. Sales orders are pre-numbered and produced in three copies. One of the copies is sent to the shipping department, one to the invoicing department and the last copy is filed in the sales department.
When the shipping department receives the sales order, the shipping officer obtains the items from the warehouse, packages them, prepares a shipping note and arranges transport. Shipping notes are pre-numbered, and prepared in two copies. The original is sent to the invoicing department, and the second copy is filed by the shipping officer.
Information in the shipping note is transferred to a delivery docket, which is pre-numbered and produced in three copies. Two copies of the delivery docket is given to the carrier. One of these copies is given to the customer by the carrier, while the other is signed by the customer and retained by the carrier. The third copy of the delivery docket is forwarded to the invoicing department.
An officer in the invoicing department checks the information on the purchase order, the shipping order and the delivery docket; matches the information on the documents; and then prepares the sales invoice. Sales invoices are pre-numbered and produced in three copies. One copy of the sales invoice is sent to the customer, one is forwarded to the accounting department and the third is filed by the invoicing officer.
The accountant uses the sales invoice to make an entry in the sales journal, which is used to update the sales ledger and the accounts receivable subsidiary ledger. The sales invoice is then filed by customer name.
Two officers are appointed to receive the customer payments. They check the electronic bank receipts and record the receipts in the prelist. Also they match the receipts against the remittance advice and forwards it to the accounts receivable officer, who updates the accounts receivable subsidiary ledger.
Bank reconciliations are prepared monthly by an accountant who is not responsible for receiving payments. Sales returns and allowances are processed only after authorisation by the financial controller. Bad debts are written off only after authorisation of the financial controller, after discussion with the credit manager.
- Identify three internal control activitiesin Caroma’s sales and accounts receivable
- For each control identified in (1) above, explain how the control preventsor detects material misstatements?
- Identify key assertionsaddressed by each controls have identified in (1) above.
- Identify three internal control weaknessesin the processing of transactions of Caroma’s sales and accounts receivable
- For each control weaknessyou have identified in (4) above, identify at least one account balance at risk of material misstatement.
- For each account balance at risk of material misstatement, identify key financial report assertionat risk.
(Suggested word count: 600 words-100 words per question)
*****Answers be based on Australian Auditing Standards (ASA)
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