Auditing Assignment: Warehouse Company

Questions:

You ,the auditor, attended the inventory count (stocktake ) of your client Smith Equipment and observed the following during the count :

1. Warehouse staff counted specific areas of the stock as determined by the warehouse supervisor ; staff members ,including the warehouse supervisor , were allocated their own area to count on their own.

2. Several blank sheets of paper were issued to each member of staff doing the counting.

3. Staff were instructed to write down the stock description and number counted .

4. Staff were told to write the stock quantities in pencil on the sheets to ensure errors can be corrected .

5. Any staff that completed a section early were allocated to another area to help out one of the other staff .

6.The supervisor collected all sheets at the end of the count to finalise the stock count .

Required :

Identify the weaknesses in the stocktake procedures above and identify how they could be improved.

Question 2

You , the auditor , have spent 5 years as an auditor . In this time you have come across numerous errors in performing bank reconciliations . The following are some of these errors:

1. An unreconciled item of $340 was on the final bank reconciliation of the client and was deemed by the client to be immaterial.

2. Two deposits totalling $4070 relating to accounts receivable were collected on 3July ( 30 June year end) but recorded as cash receipts on 30 June.

3. An amount from an associate company of $40,000 was banked 2 days before the end of the year in the client’s bank account and then paid back 1 week after the end of the year .

4. A cheque for $6,000 was omitted from the outstanding cheque list on the bank reconciliation at 30 June . It cleared the bank on the 14 August .

5. A bank transfer of $20,000 was included as a deposit in transit at 30 June in the accounting records.

Required :

(a) What control should be implemented to reduce the likelihood of each of the above?
(b) What is an audit procedure to detect or prevent each of the above?

Question 3

The following is an extract from a working paper containing the results of the tests of controls in the accounts payable area:

Required:
(a) Identify the key assertion addressed by the test procedure .
(b) Provide an explanation as to why the conclusion reached is appropriate or inappropriate.
(c) Outline the key control procedure that you believe needs to be performed.

Answers:

1. The stock take performed at Smith equipments had some weaknesses:-

• Activity based costing (ABC) analysis was not done before the stock take.
• In place of giving blank papers to the staff members, the papers should contain the complete stock details.
• Each person should be allocated specified areas and he should stick to that area and should not be allocated to another area to help out one of the other staff after his own stock count gets completed.
• The papers provided should contain some specified description criteria so that they can use at time of counting
  
  the stock. For e.g.: Stock in god condition, Stock exposed to sun, stock in bad condition etc.
• Staffs should be guided to write the stock quantities with pen rather than with pencil so as to ensure errors are not corrected.

Improvement Areas

• The main purpose of stock take is to ensure that maximum value stock gets covered in the stock count. This can be done when an ABC analysis stock take is done before the stock count and accordingly allocation should be done.
• In order to ensure that errors committed by the staff are not corrected, they should be given pen rather than pencils for writing the stock quantity.
• Staffs were allocated areas in the warehouse and they should stick to their areas and should not interfere with someone others area, instead of blank pages; they should be given stock details containing stock quantity as per records with columns such as Quantity as per physical and a column where they can specify the condition of the stock.

Answer 2

Error 1:

An unreconciled item of $340 was on the final bank reconciliation of the client and was deemed by the client to be immaterial.

Control: Bank reconciliation is a process/check to ensure that the bank balance as per books gets reconciled with the balances as per the bank statement. Necessary investigation needs to be done for the differences, if any and same should not be deemed as immaterial.

Audit procedure: The auditor should ask the management to provide relevant support for any unreconciled variances in the bank reconciliation.

Error2:

Two deposits totalling $4070 relating to accounts receivable were collected on 3July (30 June year end) but recorded as cash receipts on 30 June.

Control: Any transaction in the bank statement in a particular period should be recorded in the same period in the books. For reconciliation purpose, it is to be ensured that all transaction in the bank statement should be recorded in the books.

Audit procedure: The auditor should ensure all transaction in the bank statement should be recorded in the books and entry in the bank statement pertaining to next period should not be taken into consideration considered at times of preparation of the reconciliation.

Error 3:

An amount from an associate company of $40,000 was banked 2 days before the end of the year in the client’s bank account and then paid back 1 week after the end of the year.

Control: All the transactions in the bank statement should get entered in the books and transactions in the bank statement pertaining to next period should not be taken into consideration at times of preparation of current month’s reconciliation.

Audit procedure: The client in order to match the reconciliation sometimes makes some fake entries and gets the same reversed in the next period. At times of reviewing the bank reconciliation, the auditor should focus on the open items and on the transactions of the next period’s initial 10 days bank statement and bank books available in the records. Through this check these kinds of errors can be mitigated.

Error 4:

A cheque for $6,000 was omitted from the outstanding cheque list on the bank reconciliation at 30 June. It cleared the bank on the 14 August.

Designed Controls: The list of outstanding cheques provided by the management should be checked

Audit procedure: In case a cheque of $6000 was missed from the list of outstanding cheques provided by the management, in this case the reconciliation of June month will not reconcile and there would be an unreconciled variance of $6000 standing. So, the auditor should ask the management to provide relevant support for the same.

Error 5:

A bank transfer of $20,000 was included as a deposit in transit at 30 June in the accounting records.

Controls: For the cheques in transit, the management should have all the necessary support available in records.

Audit procedure: So as to ensure that the cheque in transit on 30th June gets banked in the subsequent period, the auditor should check the bank statement of subsequent period.

Answer 3

Answer 3a: The key assertions addressed by the test procedure are as follows:

• Occurrence
• Accuracy
• Completeness

Answer 3b:  During the test check, out of 50 samples tested, 6 invoices were not authorised and incorrect discount were recorded for these invoices. The management came to the conclusion that the invoicing procedure is accurate being the error committed in the discount claimed is immaterial.

The management for the 6 invoices has done the necessary investigation and out of 6 invoices, for 4 invoices there was no pattern and no specific reason for the error.

The management can however in order to have some confident over the process, could have increased the sample size from 50 to 70

Answer 3c

Key Controls:

• The authorisation procedure for the invoices needs to be documented firmly.
• The management can put a second check. The invoices should be authorised by two persons and both should be held responsible for any miss occurred either in terms of authorisation or in terms of any discount claim.
• A discount rate sheet supplier wise should be provided to the person authorising the invoices and if there is any change or updation required in the discount sheet then the same need to be communicated to the concerned person authorising the invoices.