Assignment
Question 1
You are an audit senior in Brennon & Lewis a public accounting firm. You are current working on the audit of one of its clients, Atlantis Standard Goods (ASG) Co which has a year-end of December 31, 2016. You are preparing the audit program for the sales and despatch system.
Audit documentation is available from the previous year's audit, including internal control questionnaires and audit programmes for the and sales and despatch system. As far as you are aware, ASG's system of internal control has not changed in the last year.
ASG is a retailer of kitchen appliances such as washing machines, fridges and microwaves. All sales are made via the company's Internet site with dispatch and delivery of goods to the customer's house made using ASG's vehicles. Appliances are pur¬chased from many different manufacturers.
The process of making a sale is as follows:
• Potential customers visit ASG's website and select the kitchen appliance that they require. The website ordering system accesses the inventory specification file to obtain details of products ASG sells.
• When the customer chooses an appliance, order information including price, item and quantity required are stored in the orders pending file.
• Online authorisation of credit card details is obtained from the customer's credit card company automatically by ASG's computer systems.
• Following authorisation, the sales amount is transferred to the computerised sales day book. At the end of each day the total from this ledger is transferred to the general ledger.
• Reimbursement of the sales amount is obtained from each credit card company monthly, less the appropriate commission charged by the credit card company.
• Following authorisation of the credit card, order details are transferred to a goods awaiting despatch file and allocated a unique order reference code. Order details are automatically transferred to the dispatch department's computer system.
• In the despatch department, goods are obtained from the physical inventory, placed on ASG vehicles and the computerised inventory system updated. Order information is downloaded on a hand held computer with a writable screen.
• On delivery, the customer signs for the goods on the hand held computer. On return to ASG's warehouse, images of the customer signature are uploaded to the orders file which is then flagged as ‘order complete'.
Required:
Using information from the scenario, list five tests of control that an auditor would normally carry out on the sales and despatch system at ASG and explain the reason for each test.
Arrange your answer in a table as follows:
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Test of control
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Reason for Test
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Question 2
The following information relates to a non-statistical sample used for a price test of inventory:
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Population Information
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Sample Information
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Number of items
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Amount
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Number of Items
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Amount
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Misstatement
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Greater than $30,000
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20
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$1,600,000
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20
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$1,600,000
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$1,000
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Less than $30,000
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200
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$1,500,000
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20
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$ 185,000
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$ 600
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Total
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220
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$3,100,000
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40
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$1,785,000
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$1,600
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Required:
a) What is the best estimate of the total misstatement in inventory?
b) Are these results acceptable, assuming the tolerable misstatement is $25,000? Explain.
c) Assuming the results are not acceptable, what possible courses of action can the auditor take?
d) Which misstatement would be of a greater concern, items > $30,000 or items < $30,000? Explain.
Question 3
You are the In-charge accountant on the audit of Dezine Inc. (DI). It is March 5th, 2017 and your firm is part way through the December 2016 year-end audit. You are currently assigned to working on various sections within the Accounts Payable and Inventory section of the audit file. Inventory at year-end is $5.2 million. Materiality is set at $225,000.
Company Background
DI is a small manufacturer of women's jewelry (including bracelets, necklaces, earrings). Most of its products are made of silver, 14 Kt gold, and various semi-precious stones.
DI has its financial statements audited due to a $15M loan with RBC Business Financing Group. The terms of the loan requires meeting certain financial covenants - a minimum inventory value of $5M carried at "lower of cost or market" and a current ratio of 2:1. DI is also required to submit, within 90 days of its year-end, audited financial statements to RBC.
Information on Inventory Cycle
The majority of inventory consists of raw materials and finished goods. DI uses a periodic inventory system to track the physical quantity of goods on hand. The count is performed annually on December 31 of each year. Below are some details on the inventory and accounts payable cycle:
Raw Materials Inventory
• DI uses average costing method to price its raw materials (metals, stones, supplies and packaging).
• The Semi-precious stones and metals are purchased from suppliers in India and Mexico. Goods are shipped FOB Shipping point (Freight on Board - Shipping point means that ownership passed to the purchaser when it leaves the premises in India).
• Goods take on average 3 weeks to arrive once the supplier has shipped them. The supplier notifies DI that the goods were shipped by emailing them the freight and shipping documents.
• The party responsible (DI or the Vendor) for insuring the goods during shipment is agreed to before shipment.
• All purchase orders are sent to the accounting department once issued.
• Shipping documents and freight/ carrier invoices are emailed directly to the warehouse, after being reviewed (daily) by the purchasing manager and operations manager.
• All documents and freight/carrier invoices are sent to the accounting department.
• The accounting department matches the purchases orders and freight documents and then accrues the purchase.
Work-in-Process and Finished Goods Inventory
• DI uses a job order costing system. Costs are applied to the finished goods as they pass through casting, polishing stone setting, and packaging.
• A manual job ticket is attached to each production batch with quantity of metals, stones, packaging, and number of labour hours (the value is applied at standard labour hour rates).
REQUIRED
a) Identify and explain four inherent risks that are present in the inventory cycle at DI. Tie each risk to the key assertion(s). Specifically tie your risks to case facts (not the inventory cycle in general) - Use the table the table below for your response.
Question 4
You are the in-charge auditor for Mittens Inc., a publicly traded company. The company went public last year and this is the second year that you have performed the audit. The company sells mittens both online via credit cards and to large retailers such as department stores and accessory shops. There are approximately 800 online customers and 50 retail customers.
Last year, there were many errors and adjustments to the financial statements. The management of the company is very focused on growing the company and has not had time to develop controls and procedures. Management does not believe in wasting time and effort to put in controls that they perceive to be administrative and burdensome. Due to significant turnover, the accounting department now has only 5 employees. As a result, duties are not segregated and employees perform most of the tasks without review or approval. In addition, employees work significant overtime and have not performed tasks such as cash collections and reconciliations.
Management is struggling to raise debt financing and needs to show good growth and strong financial ratios. The mitten industry is slowing down due to the warmer climate change worldwide and the increase in glove sales. They have chosen aggressive accounting policies to optimize the company's performance.
You are responsible for auditing the accounts receivable, revenues and inventory for the company. Details of select GL accounts are listed below:
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Year 2
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Year 1
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Accounts Receivable
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$3,500,000
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$1,790,000
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Allowance for Doubtful Accounts
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(400,000)
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(400,000)
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Inventory
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915,000
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310,000
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Revenues - Retailers
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$8,030,000
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$7,500,000
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Revenues - Online
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950,000
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1,100,000
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Required
a) What audit approach would you use to audit revenues and accounts receivable and inventory? Justify your response.
b) Based on your answer in part (a), list four audit procedures, which are not analytical procedures (analytics), that you would perform to audit the Allowance for Doubtful Accounts.