AUDITING Group Assignment
Case 1 -
Brown Industries Ltd manufactures and wholesales small tools. It sells the tools to a large group of regular customers and makes most sales by telephone to this group.
Additionally, it receives orders online by its sales team who sign up new customers within the sales area.
In the past, Bundy Industries Ltd has had trouble with customers who do not pay their accounts on time. Despite instructing the sales team not to make sales to customers before their creditworthiness has been assessed, sales are still being made to new customers before their limits have been set and to existing customers beyond their credit limit.
Also, the economic recession has started to impact its customers, and Bundy's management is concerned about the possibility of increasing bad debts.
Required:
(a) Explain the purpose of detect controls.
(b) Why would it be important for an entity to have both types of controls (prevent and detect controls)?
(c) Assume Brown Industries Ltd implemented a control to prevent sales being made if the sale took the account balance beyond the approved credit limit unless authorised by the credit manager. During the year following implementation of the prevent control, the auditor finds two sales transactions that are in excess of a customer's credit limit at the time of the sale.
What conclusion would the auditor draw from this evidence?
What other evidence could the auditor consider before concluding that the prevent control has failed to prevent customers exceeding their credit limit?
Case 2 -
The following items are documented in the audit working papers:
(a) A sales transaction for $1,200,000 was included in the year ended June 2016 but evidence from the cut-off procedure suggests that the sale should be dated 1 July 2016.
(b) No expense for impairment of assets has been made by management. A drought-induced recession has adversely impacted property values in regional cities where seven branch offices are located (head office and two branch offices are located in the capital city). Total land and buildings in the trial balance is $5,500,000.
Required:
(a) Evaluate each item above and explain whether it is an error or a judgemental misstatement.
(b) Which accounts would be affected?
(c) What action do you recommend for each item?