The auditors shall evaluate the adequacy of the systems as a base for the financial statements and shall recognize risks of material misstatements to give a basis for designing and performing further audit procedures. This is completed by testing the control.
Afterward the assessment of the system will help the auditors to find out the extent the extent of substantive procedure.
Question 1:
a) Define a test of control and a substantive procedure.
b) State one test of control and one substantive procedure in relation to the sales invoicing.
Question 2: Carwash Ltd (CWL) is a car washing company. Customer’s cars are cleaned monthly, the car cleaner then posts a stamped addressed envelope for payment via the customer’s front door.
CWL has a big number of receivable balances and these customers pay by cheque or cash that is received in the stamped addressed envelopes in the post. The given procedures are applied to the cash received cycle:
a) A junior clerk from the accounts department opens the post and if any cheques or cash have been sent, she records the receipts in the cash received log and then places all the monies to the locked small cash box.
b) The contents of the cash box are counted each day and every few days these sums are banked by which ever member of the finance team is obtainable.
c) The cashier records the details of cash received log to the cash receipts day book and as well updates the sales ledger.
d) Generally on a monthly basis the cashier performs bank reconciliation, which he then files, if he misses a month then he catches this up in the given month’s reconciliation.
Required:
For the cash cycle of CWL:
a: Identify and describe three deficiencies in the system.
b: Propose controls to address each of such deficiencies.
c: List tests of controls the auditor of CWL would perform to evaluate if the controls are operating efficiently.
d: Explain substantive procedures an auditor would execute in verifying a company’s bank balance.