APPLYING THE AUDIT PROCESS

Part A: Identifying Internal Controls and Tests of Controls/Prepare an Audit Program

a) List the internal controls for the six transaction-related audit objectives

The six transaction-related audit objectives over sales are existence, completeness, accuracy, timing, classification, and posting and summarization. The corresponding internal controls in the client organization are:

i) Existence pre-numbered sales invoices are made in duplicate and duplicate copies as well as the supporting customer orders and bills of lading are stored in an electronic file that is easily retrievable. Duties are segregated such that sales recording and authorization are done by different clerks in the order and credit departments

ii) Completeness pre-numbered documents including sales order forms, invoices, and bills of lading are available in sequence

iii) Accuracy there is an approved commodity price list for use by billing staff and invoice totals are calculated with the help of computer software to ensure accuracy in generated invoices

iv) Classification transactions are accurately classified in the respective journals and ledgers

v) Timing there is a clear sequence of shipping documents, dates match and are properly recorded

vi) Posting and summarization the accounts receivable master file and general ledger are reconciled and subjected to regular internal audits

b) For each control, list a useful test of control to verify the effectiveness of the control

i) Existence check whether pre-numbered sales invoice duplicates and supported by customer orders and bills of lading. Check whether duties are segregated such that sales recording and authorization are done by different employees

ii) Completeness check whether pre-numbered shipping documents, including invoices and bills of lading, are available in sequence and are all used and accounted for

iii) Accuracy check whether the approved commodity price list is accurate, with clear information on allowable discounts, and whether totals are calculated with the help of computer software to ensure accuracy

iv) Classification check whether transactions are accurately classified in the respective ledgers and journals

v) Timing checks whether there is a clear sequence of shipping document and whether dates match and are properly recorded

vi) Posting and summarization check whether the accounts receivable master file and general ledger are properly reconciled

c) For each transaction-related audit objective for sales, list appropriate substantive tests of transactions audit procedures, considering internal controls

i) Sales transactions existence - in analyzing existence, the auditor i) traces sales journal entries to the corresponding shipping documents to check whether there are recorded sales that were not shipped; ii) examines cancelled shipping documents to check for sales records that could have been made more than once; and iii) checks for the degree of segregation of duties to verify that the people recording sales are not the ones authorizing the same such that there is a minimal risk of sales to fictitious persons.

ii) Completeness the auditor checks for potential misstatements by tracing customer orders to the corresponding sales invoices and entries in the sales journal to the accounts receivable master file and general journal

iii) Accuracy - a fundamental test for accuracy is to examine sales journal entries and comparing the totals of selected transactions with the total postings to the accounts receivable master files and general journal

iv) Classification a fundamental test for classification is to examine the duplicate sales invoices to check whether cash and credit sales are classified in their proper accounts. This would reveal misstatements such as sales of operating assets wrongly classified as sales rather than in the general journal.

v) Timing a fundamental test is to compare the dates when a sale is recorded in the sales journal to the date on the bill...

…the tests of control in this audit as controls over cash have already been shown to be excellent (Puncel, 2007). Further, the fact that this is a repeat audit means that the auditor is well-acquainted and already has a good understanding of the design and operation of the organizations internal control system. Moreover, past audits did not find issue with the organizations internal control system, eliminating the need to put a lot of effort on the same in the current audit.

Substantive Tests of Transactions: these tests are used to verify the financial statements and ensure that they present a true and fair view of the statement of affairs (Puncel, 2007). There are several reasons why the auditor would need to emphasize these tests. First, the organization faces a threat to its revenue streams as a result of the banks reluctance to extend additional credit. In this regard, there is a high risk of revenue overstatement as the management attempts to present the organization as a going concern to lenders. Moreover, the fact that there are few accounting personnel in the organization limits internal verification of receipts, invoices, and other documents, thereby increasing the risk of accounting errors.

Substantive Analytical Procedures: these are substantive tests used to evidence about particular assertions related to classes of transactions or organizational procedures. There may not be a need to emphasize these tests as the auditor has already conducted previous audits in the organization in previous years and they already have a good understanding of the same.

Tests of Details of Balances: there is a need to emphasize this test in the current audit because past audits have yielded little information due to poor patient response rates. There is a need for the auditor to obtain more relevant information to make an informed audit decision. Potential tests could…