Module Title: Auditing 2

Transcription

1 CORK INSTITUTE OF TECHNOLOGY INSTITIUID TEICNEOLAIOCHTA CHORCAI Semester 2 Examinations 2010 Module Title: Auditing 2 Module Code: ACCT 7006 School: Business Programme Title: Bachelor of Business in Accounting Year 3 Programme Code: BACCT_7_Y3 External Examiner(s): Internal Examiner(s): Mr. E. Langan Mr. Martin O Sullivan Instructions: Answer Question 1 and 2 other questions Duration: 2 Hours Sitting: Summer 2010 Requirements for this examination: Note to Candidates: Please check the Programme Title and the Module Title to ensure that you have received the correct examination paper. If in doubt please contact an Invigilator.

2 Question 1 The recent trading results of Mark Co, an established distributor of photocopiers, facsimile and scanning machines, have been disappointing; showing a steady decline in sales and profits and an increase in bad debts incurred. Whilst the company s directors are sure that new product range innovations will increase sales figures, they are not confident that the current internal controls exercised over the sales and trade receivables system actually meets the system s objectives. They have therefore asked your firm to conduct a review of the system and to recommend improvements as appropriate. From examination of the existing sales and trade receivables system you have ascertained the following: (1) The company sales team comprises a sales manager and ten sales representatives. Each sales representative is engaged in the generation of sales leads and the management of customer accounts, including the auctioning of all aspects of credit control. (2) Sales bonuses paid to each sales representative are based on invoiced gross sales achieved, with each representative having authority to discount prices at up to 40% against standard prices as set by the company s board of directors. At the end of each month the sales manager reviews the representatives sales figures based on invoices raised and then forwards authorised summaries of these to one of the company s wages clerks for immediate entry onto the company s payroll and subsequent payment of bonuses. (3) Most sales leads are generated from telephone contact or appointments attended by the sales representatives. They are each responsible for assessing the creditworthiness, and the granting of credit facilities to customers before accepting sales orders. To facilitate effectiveness in this regard, all have received training from the company in credit control procedures. (4) It is a requirement of Mark Co that all customer orders for the purchase of machines are confirmed by a simple message sent to the appropriate sales representative. (5) On receipt of an ed order sales representatives: (i) an electronic copy of the order to the company s warehouse staff adding any appropriate clarifying message as required. This activates the picking of the order from the warehouse inventory of approximately 1,000 machines, packing and then delivery to customers along with a pre-numbered goods delivery note. A copy of each delivery note is retained in the warehouse and subsequently matched and filed by warehouse staff with the customer signed copy as returned by Mark Co s delivery drivers, and a downloaded hard copy of the ed order. (ii) Prepare and forward a sales invoice to the customer using pre-numbered stationery generated in the sales office. Detailed on each invoice is the invoice date, sales reference, customer order reference and name and address including delivery address, quantity and detail of the machine(s) supplied, price information and confirmation of Mark Co s standard payment terms. A copy of each invoice raised is retained in the sales office. (iii) electronic copies of the customer order and sales invoice to Mark Co s accounts department. On receipt, the accounts department staff download hard copies of the order and invoice, immediately open a new customer account in the trade receivables ledger as required and post the sales invoice to the company s accounting records. Posted invoice copies are then filed in sequential number order attached to the ed copy orders. 2

3 Required: State FIVE objectives of internal controls that should be exercised over a sales and trade receivables system. (b) With regard to the controls exercised over sales and trade receivables and also the payment of bonuses by Mark Co, review the procedures employed in the system from the receipt of customer orders to the posting of sales invoices into the company s accounting records and: 1. Identify FOUR weaknesses in the system; (8 Marks) 2. Describe the implications of each weakness identified; and (8 Marks) 3. Recommend improvements to address the weaknesses. (8 Marks) You should assume that there are a sufficient number of employees in the company to operate effective controls. State with reasons whether Mark Co should have implemented a continuous (perpetual) system of counting, or a year end count as a means of controlling its inventory of machines. (6 Marks) (Total 40 Marks) 3

4 Question 2 CleanUp Ltd manufactures a range of vacuum cleaners, operates from large factory premises and prepares its annual financial statements to 31 January. It has a stores area from which raw materials and parts are issued to production, and a finished goods store. In recent months the company has encountered severe difficulties in controlling its inventory resulting in losses, stopped production due to the shortage of parts and incorrect valuation of inventory. The company has been using a system of continuous inventory checking (also known as a perpetual inventory system ) as a means of control, but the directors recognise that the system has failed during the current year. Consequently they have agreed that company employees will carry out a physical inventory count as at 31 January 2008, as a basis for valuing inventory for inclusion in the company s annual financial statements. The directors have also agreed to seek advice from your audit firm in connection with the introduction of a satisfactory system of continuous inventory checking to be introduced from February 2008 and also in connection with the valuation of inventory. Required: (b) State FIVE objectives of the internal controls that should be exercised over inventory, including inventory records. (5 Marks) State FIVE procedures that CleanUp Ltd will need to incorporate in its revised continuous inventory checking system, if it is to be relied upon by the company s auditors. (5 Marks) Describe SIX matters that should be covered by the physical inventory count instructions to facilitate an efficient and reliable count as at 31 January (12 Marks) (d) (i) Define the term cost as applied to inventory; (3 Marks) (ii) Define the term net realisable value as applied to inventory; (3 Marks) (iii) State how CleanUp Ltd should value its inventory as at 31 January 2008 in accordance with IAS2 Inventories. (2 Marks) 4

5 Question 3 Your firm has selected you to attend a discussion workshop as part of your audit training programme. Attendees at the workshop will discuss the auditor s responsibilities in the audit of financial statements regarding the appropriateness of the going concern assumption as a basis for the preparation of the financial statements. Required: Explain the underlying assumption applying to an entity when its financial statements are prepared on a going concern basis. (6 Marks) (b) State EIGHT financial indicators and FOUR operating or other indicators of risk that the continuance of an entity as a going concern may be questionable. (12 Marks) State SIX audit procedures to obtain evidence that the going concern assumption is appropriate for an entity. (12 Marks) Question 4 Describe how you would check a client s bank reconciliation. (b) Explain the nature and role of the letter of representation. If a client is to bring a successful action for negligence against an auditor then the client must satisfy the court in relation to THREE matters, all of which must be established. Discuss. 5