Cycles: Revenue, receipts and trade receivables

Question 1

State the nature and purpose of the cycle of revenue, receipts and trade receivables

Answer 1

• Selling goods, rendering of services.
• Receiving of cash in exchange.
• Sales adjustments, writing off bad debts.
• Recording of the above in the accounting records.

Question 2

State the major accounts in the cycle

Answer 2

• Statement of comprehensive income
• Statement of financial position

Question 3

What is the statement of comprehensive income concerned with?

Answer 3

• Revenue.
• Sales Adjustments.
• Bad Debts Written Off.

Question 4

What is the statement of financial positions concerned with?

Answer 4

• Accounts Receivable (including trade debtors).
• Cash and Cash Equivalents.

Question 5

Disclose the all documents used in the cycle

Answer 5

• Customer orders.
• Internal sales order.
• Picking slips.
• Invoice.
• Delivery Note.
• Statement.
• Credit Application Form.
• Receipts.
• Remittance advice.
• Credit note.
• Deposit slips.
• Price lists.
• Back-order note.
• Goods returned note.
• Masterfile amendment forms.

Question 6

State the different functions in the system

Answer 6

• Ordering department
• Warehouse/dispatch
• Invoicing
• Recording sales and raising the debtor
• Credit management
• Goods returned

Question 7

What is the ordering department?

Answer 7

Receiving customer orders and authorizing
sales.

Question 8

What is the warehouse/dispatch?

Answer 8

Processing and dispatching orders

Question 9

What is invoicing?

Answer 9

Notifying the customer of amounts owed for the goods

Question 10

What is credit management?

Answer 10

Evaluating creditworthiness and collecting amounts owed

Question 11

What is goods returned?

Answer 11

Processing credit notes. granting discounts and writing off bad debts

Question 12

Disclose the credit management function

Answer 12

• Responsibility is to reduce the risk of losses from bad debts.
• Identifying whether the customer is creditworthy.
• Credit application forms are used.
• Adding customers to the debtor’s Masterfile.
• Recording credit limits on the system for each client.
• Approving discounts, credit notes and journals.
• Generating debtor statements.

Question 13

Explain the ordering function

Answer 13

• Responsible for receiving orders from customers.
• Pre-printed, sequences, multicopy order forms.
• Informing the warehouse department of orders received.
• Before processing the order they need to communicate with the credit management department to ensure that the client’s account is up to date.
• Filed in numerical sequence and a copy of the internal sales order will be sent to the accounting department.

Question 14

Disclose the warehouse/dispatch function

Answer 14

• Generate a pre-printed, multicopy, sequenced delivery note detailing the goods that were picked for delivery.
• If goods have been picked and a delivery note prepared, goods can be moved to the dispatch area.
• Dispatch will have to inspect goods to ensure that they have been correctly packed and match the relevant documentation.
• When goods are dispatched, they must be accompanied by 2 delivery notes – one for the seller and one for the customer.
• Responsible for selecting goods to be sent to the customer in terms of the internal sales order.
• Can use a picking slip in this process.
• After picking the goods they are sent to the dispatch department for delivery.
• Picking slip and invoice need to agree or clearly indicate which goods are not available and generating a back-order note (contains details of goods that were not supplied when ordered).
• Perhaps can tick off items which have been picked and the rest can be marked as not available.
• Identify ‘out of stock’ items.

Question 15

Disclose the invoicing function

Answer 15

• Notify customers of amounts due by invoicing them.
• Based on the internal order, picking slip and delivery note they will generate an invoice.
• A copy of the invoice will be sent to the customer.
• Invoices need to be pre-printed, multicopy and sequenced.
• Ensure that the VAT, discounts, debtor details, pricing and casting of the invoice is correct before it is sent to a customer.

Question 16

Explain the recording sales raising of debtors

Answer 16

• To create a record of sales made and to raise amounts due by customers.
• Invoices can be allocated against the debtor when processed. If the system is manual all documents will have to be sent to the accounting department to write-up a sales journal.
• Amount will also be reflected in the debtor’s ledger, trial balance and general ledger.

Question 17

Explain the receiving and recording function

Answer 17

• Responsibility is to accurately record payments from a debtor.
• Can pay via cash, direct deposit or EFT.
• Cheques need to be physically taken to the bank to be cleared for payment.
• All payments need to be allocated against the outstanding balance.
• Client can send a remittance advise when payment is made.
• Accessing the bank account to identify payments from debtors.
• Processing all receipts to the debtors Masterfile.

Question 18

What would be the fraud in the cycle?

Answer 18

• Recognition of revenue in the incorrect period (cut-off issues).
• Raising fictitious invoices (occurrence issues).
• Understating sales (completeness issues).
• Theft of cash due to cash payments.
• Not recognizing revenue in accordance to the applicable accounting standard.

Question 19

What is the potential risk of cash sales?

Answer 19

There is a potential for theft and physical harm to employees who deal with cash.

Question 20

What is the risk associated with credit sales?

Answer 20

There is a risk that the customer will not pay and the company
will suffer a loss.

Question 21

Define customer orders

Answer 21

The customer’s instruction as to what goods are required (could be sent by post, email, or fax, or be placed over the phone).

Question 22

Define internal sales order

Answer 22

A document compiled by the company’s own sales order clerk that records the goods ordered by the customer.
It is used for sales authorisation and as a basis for creating the picking slip. This is a very important document when orders are taken orally, for example, over the phone.

Question 23

Define picking slip

Answer 23

This document lists all the items that the customer has ordered. It is used to assist the stores personnel to “pick” the goods needed to fill the order from the store so that they can be despatched to the customer.

Question 24

Define Invoice

Answer 24

This is the document that is sent to the customers to notify them of the quantity and price of the goods sold to them, the total amount of the sale, discounts and VAT.D

Question 25

Define delivery note

Answer 25

This document details the date, description and quantity of the goods despatched to the customer and is signed by the customer to acknowledge receipt of the goods. When the company delivers to its customers, details of the deliveries, for example, address and delivery note number, will be entered on a delivery list that is used by the delivery staff to schedule and control deliveries.

Question 26

Define statement

Answer 26

This is a summary of all of the transactions for a period, usually a month, sent by the company to the customer. The statement reflects the opening balance, sales made, payments received, other adjustments, such as credit notes, and the closing balance, as well as a breakdown of the periods for which the total amount owed has been outstanding, for example, 30 days, 60 days, 90 days and over.

Question 27

Define credit application form

Answer 27

This document is filled in by a prospective customer so that the customer’s creditworthiness (ability to pay) can be evaluated. The customer will be required to provide trade references, income and expenditure details, bankers, etc., that are then followed up by the company. Trade references and credit bureau are usually contacted before the company decides on a credit limit and terms appropriate for the customer

Question 28

Define receipt

Answer 28

The receipt records details of payments received from customers.

Question 29

Define remittance advice

Answer 29

This is a document sent by the customer with his/her payment to indicate precisely which invoices are being paid. Where a payment is made directly into the company’s bank account by direct deposit or EFT, the customer should send the remittance advice (and proof of payment) under separate cover.

Question 30

Define remittance register

Answer 30

This is a register or list of payments received by the company (payments from debtors not deposited directly in the company’s bank account by the debtor).

Question 31

Define credit note

Answer 31

A credit note is a document made out by the company and sent to the customer to acknowledge that the customer’s account has been reduced (credited) for some reason other than for a payment received, for example, goods that have been returned by the customer for which credit must be passed.

Question 32

Define deposit slip

Answer 32

This is a bank document that is filled in by the company to record the deposit of payments received from the customer, into the bank.

Question 33

Define price lists

Answer 33

This is a document containing prices (and discounts) of the company’s products to be referred to by the sales order clerk when customers require prices on placing orders.

Question 34

Define back-order note

Answer 34

A document that contains details of goods that could not be supplied when ordered by a customer as there was no inventory available. The back-order notes are filed and regularly and frequently reviewed to establish whether an order has been placed with a supplier for the outstanding goods.

Question 35

Define goods returned voucher

Answer 35

A document made out by the company itself that is used to record the details of goods that have been returned by a customer.

Question 36

Define Masterfile amendment form

Answer 36

This is found in a computerised system in the form of a document used to record an amendment to the debtors masterfile.

Question 37

State the functions of receiving customers orders

Answer 37

• To record orders from customers and initiate action to fill them.
• Orders will be received in document form (customer order) or over the telephone. Persons receiving the order need to establish that the customer is a valid customer and that the details of the order are accurate and complete in every respect. As this is the initiation of the transaction, it is particularly important to get everything right. If the customer does not have an account,he/she must be referred to the credit manager who will send the customer a credit application.

Question 38

State the documents/records of receiving customer orders

Answer 38

• Customer order
• Internal sales order (ISO)
• Price lists

Question 39

State the business risk of receiving customer orders

Answer 39

• Order may be accepted from a non-account holder, resulting in possible bad debtors who cannot pay the amounts owing to the company.
• Orders may not be acted upon timeously or at all, resulting in a loss of sales and customer goodwill.
• Inaccurate or incomplete order details may be recorded, that will result in incorrect deliveries, returns and customer dissatisfaction.

Question 40

What are the different ways which management can manipulate account balances and totals of the revenue cycle?

Answer 40

• Creating fictitious sales (occurrence) and the corresponding fictitious debtor (existence)
• Understating sales (completeness) and the corresponding debtors (completeness)
• Understating the bad debt allowance (accuracy, valuation and allocation)
• Manipulating the recognition of revenue from sales (occurrence or completeness)

Question 41

Explain the purpose of creating fictitious sales (occurrence) and the corresponding fictitious debtor (existence)

Answer 41

This increases profits and current assets, and improves related ratios.

Question 42

Discuss the purpose of understating sales (completeness) and the corresponding debtors (completeness)

Answer 42

The object here may be to reduce taxation or present a less favourable picture of the company so as to reduce the “value” of the company for, say, negotiating a management buyout.

Question 43

What is the purpose of management manipulating the recognition of revenue from sales (occurrence/completeness) ?

Answer 43

Rather than create a “fictitious” sale, the company may indulge in activities such as pre-invoicing (raising a sale at year-end that is only going to be made or that the company expects will be made in the next financial year, or by recording “lay-by” or “appro sales” as sales). Management may also decide not to record sales that have actually been made (completeness), depending on their motives.

Question 44

With management intention to manipulate account balances and totals.

Explain the effect of management understating the bad debt allowance (accuracy, valuation and allocation)

Answer 44

Normally part of a trend of manipulating allowances and provisions to improve profits, assets and related ratios.

Question 45

State the different ways in which management or employees can misappropriate assets relating to the revenue cycle

Answer 45

• Theft of cash from the cash sales (completeness of sales).
• Theft of cash received from debtors.
• Arranging sales to customers at unauthorized reduced prices
• Theft of goods at the picking/despatch stage (existence of inventory)
• Not paying over VAT on all sales (completeness of liabilities)
• Making invalid adjustments to debtors accounts (completeness of debtors)
• Despatching goods in the normal manner but never raising an invoice.

Question 46

Provide examples of test of control procedure inspection

Answer 46

• A sample of recorded sales could be selected and the supporting internal sales order inspected for a valid
  authorising signature. The inspection of a signed picking slip and despatch note signed by the customer provides some evidence that the sale did actually occur. The best evidence that the sale occurred would be obtained by inspecting the cash receipts journal/bank statement and customer’s remittance advice and matching the recorded sale to the corresponding receipt from the customer. Of course the customer may not have paid, in which case the amount should appear in the debtors masterfile.
• A sample of credit notes issued to customers could be inspected for an authorising signature and the detail on the supporting documentation, for example, a customer returns note could be inspected and matched to the credit note.
• The log of masterfile amendments and supporting documentation could be inspected to confirm that appropriate procedures are carried out in respect of evaluating the creditworthiness of new customers before credit is extended, and that the limits and terms granted are approved.
• A sample of daily till sales reconciliation schedules (cash reconciled to till rolls) could be inspected and compared to bank deposit slips to determine whether cash sales are banked timeously and intact.

Question 47

Provide examples of test of control procedure inquiry

Answer 47

• Inquire of the despatch clerk as to what happens if goods are transferred from the warehouse to the despatch area for delivery without a picking slip.
• Inquire of the invoicing clerk as to what procedures he actually follows to ensure that all despatches/ deliveries of goods result in invoices being made out.
• Inquire of the credit manager as to what use he makes of daily reports that are generated on the system, of credit notes and other adjustments processed against the debtors masterfile.
• Inquire of the financial accountant as to whether and how sales to related parties (e.g. companies within the same group) are identified.

Question 48

Provide examples of test of control procedure observation

Answer 48

• Observe the despatch clerk counting and checking goods against the picking slip/despatch note before packing items into boxes for delivery.
• Observe the procedures undertaken at the counter when a cash sale is made, for example, if the sale has been rung up.
• Observe whether gate control personnel actually check goods leaving the premises (being delivered) against the delivery note/invoice.

Question 49

How can an auditor able to obtain evidence that recorded sales actually occurred (occurrence)?

Answer 49

The auditor would need to trace a sample of recorded sales transactions back to the source and inspect the supporting documentation for the invoice to confirm:
– that an order was received from an approved customer
– that a picking slip and despatch note for the goods invoiced, duly signed by the picker and despatcher (and possibly the customer to acknowledge receipt) exist, and
– that the goods invoiced to the customer were of a type sold by the company.
The auditor should also trace each sale in the sample through to the cash receipts journal/bank statement and customer remittance advice and, by inspection, determine whether a payment of the correct amount for each invoice was received. (If a payment has not been received, the auditor would trace it through to the debtors account in the debtors ledger.)

Question 50

What other specific consideration should the auditor consider in respect of occurrence of recorded transactions?

Answer 50

In certain instances the auditor may need to give specific consideration to whether the performance obligations per the contract have been met, for example:
1. Where the goods are supplied to the customer on approval (that means that the customer may return the goods by a specified date if he does not want them). A sale should not be recognised until the buyer has “approved the goods” or the specified date has been reached
2. Where goods have been placed with an agent on consignment, a sale should not be recognised until the agent has sold the goods, and
3. Where a buyer purchases goods but requests that the supplier delays delivery, the sale can only be recognised when the contractual performance obligation has been met. Therefore, whether delivery was an aspect of the contractual obligation will need to be considered.

Question 51

How can an auditor obtain information that the amounts of sales have been recorded appropriately (accuracy)?

Answer 51

An easier way would be for the auditor to select a random sample of invoices and for each invoice:
– confirm the mathematical accuracy of the invoice by recalculating all extensions, casts, discounts and VAT calculations
– confirm prices and discounts charged and granted to official price lists or other sources
– confirm that the invoice is a valid tax invoice (e.g. VAT registration number is included), and
– agree the quantity and description of the goods invoiced to the quantity and description of the goods on the despatch note.

Question 52

How can an auditor obtain information that the sales transactions have been accounted for the correct accounting period (cut-off)?

Answer 52

The auditor should:
* at year-end obtain the document numbers of the last documents used in the financial year, for example, sales invoices, and despatch notes
* at a later stage he should agree this number to the last entry in the sales journal and sequence test, say, the last two weeks of invoices before year-end, for any missing invoice numbers (these may represent sales that have been made but not entered prior to year-end)
* scrutinise the subsequent month’s sales journal for any invoice numbers lower than the cut-off number (none should be found)
* select, say, the first 20 invoices (or invoices for material amounts) entered in the sales journal for the month after year-end and trace them to the supporting despatch notes/delivery records and by inspecting dates on the documents, confirm that the goods were not actually delivered prior to the year-end, and
* select, say, the last 20 despatch notes prior to the year-end cut-off despatch note number and by inspection of the sales journal, confirm that the corresponding sale was raised prior to year-end.
* inspect the cash sales records (e.g. till slips, cash receipts) for, say, the two or three days either side of the financial year-end and confirm by inspection of the cash sales ledger account and dates on deposit slips, that the sale and the asset were raised in the correct accounting period.

Question 53

What should the auditor note when obtaining information about the sales transactions have been accounted for the correct accounting period (cut-off)

Answer 53

Note:
- If the company receives an order before year-end but only processes (picks and delivers) and records it in the following year, there is no “cut-off” issue.
- If the company receives an order before year-end, processes it (picks and delivers it) before year-end but only records it after year-end, there is a “cut-off” issue.
- If the company receives an order before year-end, records the sale before year-end but only processes (picks and delivers) it after year-end, there is a “cut-off” issue.

Question 54

How can the auditor gather information that all sales have been recorded in the proper accounts?

Answer 54

The auditor may also choose to:
* Test transfers of amounts from the monthly sales journals (both cash and credit sales) to the sales and VAT accounts in the general ledger to confirm that the amounts were posted to the correct account; and
* Inspect the sales account for the inclusion of any amounts that are recorded as revenue, but do not constitute sales, for example, interest, income, dividend income.

Question 55

Provide examples on how the auditor gather information that all sales should have been recorded, have been recorded (completeness)?

Answer 55

The substantive procedures that the auditor will conduct for completeness testing will be analytical.
For example:
* analysis of gross profit fluctuations
* comparisons of sales/debtors to prior periods
* analysis of recorded sales by characteristic for comparison to prior periods, for example, by product, branch, region, month, customer, and
* comparison of sales ratios to prior periods, for example, sales commission to sales, cash sales to credit sales.

Question 56

Disclose the methods the auditor can inspect the financial statements to confirm the assertion presentation

Answer 56

• Sales are reflected as a single aggregated line item in the statement of comprehensive income
• Any disaggregation of sales in the disclosure notes is accurate, relevant and clearly described, for example, where sales have been broken down (disaggregated) to reflect sales by product, location or division, and
• The accounting policy is clearly expressed and understandable.

Question 57

How can proof of the right of the company controls or holds to the trade receivables be gathered?

Answer 57

• By inspection of:
  1. Prior year work papers
  2. Minutes of directors’ meetings
  3. Loan agreements
  4. Bank confirmations, and
• By enquiry of management, determine whether receivables have been factored, ceded or encumbered in any way.

Question 58

State the two major procedures to test for trade receivables included in the balance actually exist, they are not fictitious ( assertion-existence)

Answer 58

• debtors circularisation by which, with the consent of management, independent confirmation is sought from the debtor
• the matching of amounts owed at year-end (receivables) to payments from debtors received after yearend. (This is termed subsequent receipt testing.) The principle is simple; if a debtor is listed as “in existence” at year-end, and a payment is received after year-end from that debtor, the existence of the debtor at year-end is confirmed, provided the amount paid subsequent to year-end is in respect of the amount owed at year-end, and not for sales made after year-end.

Question 59

How can the auditor test the assertion existence to verify trade receivables included in the balance actually exist and not fictitious through debtors circularisation?

Answer 59

• The auditor takes control of all debtors statements (at a particular month-end) immediately after they have been printed and:
  1. Tests from the statement to the debtors ledger (or debtors schedule/age analysis list) and vice versa to ensure that a statement has been produced for each debtor and that there is a debtor recorded for each statement, and
  2. Elects a sample of statements for circularisation.
• Two different types of confirmation may be used by the auditor:
  1. A positive confirmation requests that the debtor confirms with the auditor whether the balance on the statement is correct or not, and
  2. a negative confirmation requests that the debtor confirms with the auditor only if the balance on the
  statement is not correct.
• For the sample selected, the auditor encloses the following in the envelope with the statement:
  1. A sticker/letter requesting that the debtor confirm the balance directly with the auditor, and
  2. A self-addressed envelope (for positive confirmations only).
• The auditor then supervises the mailing of all debtors statements and does the following:
  1. Stamps all envelopes to direct “addressee unknown” statements to the auditor’s address, and
  2. Tests debtors whose addresses are “PO Boxes” to confirm that they are not fictitious, for example, by looking them up in the telephone/business directories and confirming the address with them telephonically.
• The auditor thereafter monitors all replies to the circularisation, following up all disagreements and “addressee unknowns” (positive and negative circularisation) and “no replies” (positive circularisation only) so as to collect evidence relating to existence and to a lesser extent valuation:
  1. Disagreements should be followed up by reference to relevant source documentation, discussion with credit controller, and, if necessary, follow up with the client’s attorneys; and
  2. “No replies” (positive)and “addressee unknowns” should be followed up by re-circularising the debtors concerned (after correcting the address if necessary), telephone/fax enquiries, and reference to receipts after year-end for evidence of subsequent payment of balances that have not been confirmed.
• Errors identified through the circularisation should then be projected over the entire population of
  debtors to establish the extent of possible misstatement of the overall debtors balance.

Question 60

True or False

The positive circularisation provides better evidence supporting the existence assertion, for example, if a negative circularisation letter.

Answer 60

True, the positive circularisation provides better evidence supporting the existence assertion, for example, if a negative circularisation letter is not returned it could mean that:
* The debtors balance is correct
* That it went to a fictitious debtor; or
* That the debtors balance is incorrect but in favour of the debtor.
The point is that very little evidence is provided by the negative circularisation.

Question 61

Through subsequent receipts testing, how does the auditor obtain the information for the assertion existence to verify trade receivables included in the balance actually exist and not fictitious?

Answer 61

(b) Subsequent receipts testing
* A sample of debtors on the year-end debtors list is selected.
* Payments received after year-end from the selected debtors are identified (cash receipts journal).
* These are then traced to debtor’s remittance advices to identify which invoices the payment is in respect of.
* These invoices and matching delivery notes are then inspected to confirm that:
– they are dated prior to the year-end, and
– they were included at year-end in the sales journal and debtors ledger.

Question 62

How can the a auditor test the assertion accuracy, valuation and allocation (gross amount) of trade receivables are included in the financial statements at appropriate amounts and related disclosures have been appropriately measured and described?

Answer 62

(a) Gross amount
* The debtors control account in the general ledger should be reviewed for unusual entries, for example, debits arising from journal entries at year-end , and followed up.
* The total on the list of individual debtors should be matched to the debtors control account in the general ledger and the trial balance:
– amounts included on the list of debtors balances should be traced to the individual debtors accounts in the debtors ledger.
* If the comparison of the debtors list (per the debtors ledger) to the balance in the debtors control account reveals that there are reconciling items, the following procedures should be carried out on the reconciliation:
– casts
– testing of the reconciliation logic
– follow up of reconciling items.
* The debtors list should be reviewed for credit balances and these should be followed up and reversed if necessary (material).
* Reference should be made to the results of any debtors circularisation and subsequent follow up for evidence of debtor valuation problems, for example, a debtor claiming that he has been charged twice:
– the debtors list and control account should be cast
– for debtors invoiced in a foreign currency
– obtain the amount of the sale in the foreign currency by reference to the invoice
– obtain, from a financial institution, the exchange rates at transaction date and at the financial year end date, and multiply the amount by each of the two rates; and
– where there is a difference, confirm by inspection of the debtors account, that the balance on the account has been calculated using the financial year-end rate (i.e. the currency fluctuation has been accounted for).

Question 63

How can the a auditor test the assertion accuracy and allocation of the bad debts allowance of trade receivables are included in the financial statements at appropriate amounts and related disclosures have been appropriately measured and described?

Answer 63

• Enquiry should be made of the method and procedures adopted by management to estimate the allowance for bad debts.
• The authorisation procedure should be established and evaluated, for example, is it authorised by the credit controller (manager) or the financial director (the more independent of credit control the authorising person is, the better).
• An assessment of whether the basis of calculating the allowance is reasonable and consistent with the prior year should be made, for example, whether circumstances that occurred during the year, such as a change in credit policy, have been taken into consideration.
• All calculations should be re-performed.
• The aging of debtors should be re-performed by selecting a small sample of debtors and tracing the amounts owed back to the source documents, for example, sales invoices and receipts, to determine whether they have been allocated to the correct time period in the age analysis.
• All long outstanding debtors and material debtors outside their credit terms should be identified and discussed with credit management.
• The debtors’ correspondence and legal files should be inspected to identify disputed debtors and debtors who have been handed over.
• Analytical reviews should be performed:
  – comparison of allowance (percentage) to prior year
  – comparison of bad debts written off during the year to prior year
  – comparison of age analysis to prior year, i.e., whether debt is getting older
  – calculation of ratios, and investigation of changes year on year, for example, days outstanding debtors compared to prior year.
• Enquiry of management should be made as to any matters that might affect the allowance, for example, relaxing of the company’s credit terms during the year, deterioration in the trading conditions of the business sector of the company’s major customers.
• The actual bad debt write-offs during the year under audit should be compared to the prior year allowance to obtain an indication of the company’s ability to set a reasonable allowance.
• All reports given to management (say, on a monthly basis) about debtors should be reviewed, for example, reports on specific debtors who have liquidity problems, lists of debtors written off.

Question 64

What should the auditor note when test for the assertion of accuracy, valuation and allocation of bad debts allowance of trade receivables are included in the financial statements at appropriate amounts and related disclosures have been appropriately measured and described?

Answer 64

• Note (a): Potentially uncollectible debtors should be provided for on a debtor-by-debtor basis, i.e. an assessment of the recoverability of each debtor should be undertaken. Simply creating an allowance for bad debts by taking a fixed percentage of the gross debtors’ balance is not acceptable unless there is very strong historical evidence that the percentage chosen is an accurate reflection. Obviously it is only those debtors that display worrying characteristics that need to be considered individually, for example, long outstanding/disputed debtors.
• Note (b): When considering a debtor for recoverability, all aspects of the debtor should be considered, for example, a large chain store may only pay on 90 days, but at the same time the chain store may be a reliable payer.

Question 65

How the auditor test for the assertion completeness of trade and other receivables?

Answer 65

Enquiry of management as to policy and scrutiny of debtors age analysis, confirm that only trade and other receivables that are expected to be paid (received) within the next twelve months are included

Question 66

State the method auditors use to confirm the assertion presentation the financial statements

Answer 66

• The auditor must inspect the financial statements to confirm that:
  – the trade and other receivables appear as a separate line item under current assets on the face of the statement of financial position, net of impairments
  – the disclosure in the notes reflects trade receivables before and after impairment allowances, and any other required information, for example, any encumbrances on receivables and/or comments on credit risk.

Question 67

What does the inspection of AFS for the assertion completeness confirm?

Answer 67

• By inspection of the AFS and reference to the applicable reporting standard and the audit documentation, confirm that
  – disclosures are consistent with the evidence gathered (amounts, facts, details)
  – any disaggregation of the balance reflected in the statement of financial position is relevant and accurate, for example, short-term loans and other receivables may be included in the aggregated amount
  – the wording of disclosures is clear and understandable, (e.g. explanation of encumbrances); and
  – all required disclosures have been included.

Question 68

Disclose the method the auditor may use to test the assertion of rights, existence and completeness of bank accounts

Answer 68

• Obtain a schedule of all bank accounts held by the company at year-end
  – Compare the accounts listed on the schedule to the prior year’s schedule and note any changes.
• Obtain a bank confirmation from the bank. Refer to chapter 17 – External confirmations from financial institutions – SAAPS 6

Question 69

Disclose the method the auditor may use to test the assertion of accuracy and valuation of bank accounts

Answer 69

• Agree the balances for each bank account on the schedule to the balances in the general ledger and cash book(s).
• Agree the balances on the reconciliation to the cash book, bank statement and bank confirmation balances respectively.
• Re-perform the casts on the reconciliation and, at the same time, test the logic of the reconciliation.
• Trace reconciling items through to the cash book prior to year-end, and agree the amounts and dates.
• Trace reconciling items through to the post-year-end bank statement to confirm that they went through the bank and were not cancelled.
• Where reconciling items are anything other than immaterial, request the client to reverse the items, particularly if there is any suggestion of window dressing, for example, EFT payments recorded in the cash book but not actually paid until after year-end.

Question 70

What should the auditor note when testing for the assertion accuracy and valuation of bank accounts?

Answer 70

Note (a): Where the company makes material transfers close to the year-end between its own bank accounts held at different banks and between its own bank account and other related party bank accounts, for example, a subsidiary’s bank account, the auditor should:
* compile a schedule of all movements between the various accounts
* confirm by reference to source documentation and enquiry, that the transfers are in respect of valid arm’s-length transactions, and
* that the transactions are properly accounted for in the correct period, in other words, that the payments and receipts from and into the respective bank accounts are accounted for in the same accounting period.

Note (b): Because the risks associated with EFT payments can be so high, the auditor may at this stage decide to select a random sample of EFT payments from the bank statements to confirm the validity of the bank account details to which the payment was made. Audit work would already have been done on this when substantive tests on payments were conducted, but the auditor might wish to supplement his “cash at bank” testing. For this specific test, it is not sufficient to refer solely to payee documentation, for example, an invoice. With current accounting packages, it is very easy to duplicate the standard invoice produced by these packages, but not to change the banking details on the invoice. The procedure would be to confirm the banking details directly with the payee.

Question 71

State the procedures auditor utilize to verify cash on hand

Answer 71

The takings from each till (adjusted for any floats) will be entered on a till count reconciliation and subsequently onto a daily spreadsheet of takings. The spreadsheet will be cast and cross-cast, and a deposit slip will be made out. A security company usually collects the takings for banking. If the auditor decides that the cash on hand should be verified, he should
* be present at the time(s) the cash in the tills is counted:
– he should make sure that he is not left on his own with an open till at any time (could be accused of theft if there were a shortfall)
* observe the counting of cash closely, ensuring that cash and credit card slips are separately identified
* confirm that the totals of the different types of sales (cash or credit card) counted agree with the totals recorded on the (independent) till roll total and that any differences are recorded on the till reconciliation document and that the cashier and the controller (person doing the counting) sign the till roll and the reconciliation
* ensure by observation that the cash from the first and subsequent tills counted is kept separate and secure and cannot be included in the cash counted for other tills, and that the tills that have been counted are closed/deactivated
* confirm by inspection that the takings for each till (per the reconciliation) were entered accurately on the daily spreadsheet and re-perform the casts and extensions
* obtain the spreadsheet for the two trading days prior to the current trading day and confirm that takings for these days were banked prior to the year-end
* inspect the bank deposit slip for the current day’s takings and agree the totals to the daily spreadsheet
* inspect the bank statement subsequent to the year-end and confirm that the deposit went through the bank
* a work paper should be created that records the balances and other details, and
* confirm by inspection of the respective ledger accounts that these cash sales/VAT were included at the year-end.

Question 72

Helpers at Heart (Pty) Ltd.
When a position becomes available within any department, the section head will provide a written motivation. The section head will sign the motivation after agreeing with the personnel department on the specifications of the position and the skills required. The personnel department will consult their archives for filed CV’s from which a suitable candidate is then selected. The candidate is sent an appointment letter with the necessary starting date details. Since Helpers is an “human” business, no employee files are kept to ensure that their “human” touch does not get replaced by unnecessary paper weight. All employees receive their clock cards for the year once they start their employment. When an employee is is identified by his//her manager as a candidate for a bonus or pay increase the manager will inform the payroll department via phone to make the necessary adjustments. Management informed you that due to staff shortages, there is only one wage clerk responsible for the payroll preparation. This person also signs off the payroll cheques.

Identify the weakness in the personnel (HR) and timekeeping functions and provide recommendations.

Answer 72

Weakness
- Requests for new applicants are not countersigned by the section head
- Requests for new applicants are not referenced to the budget
- Changes to promotions are not decided upon by the personnel department
- Wage changes are not documented and authorised by the authorizing body
- Amendments to employee’s details are not promptly committed to sequenced payroll amendments forms
- No interviews and background checks are performed on new employees
- Employee files of the following information on each employee are not kept: copies of relevant PAF’s; the employment contract; performance appraisals and disciplinary warnings; personal details including qualifications and background information

Recommendations
- New appointment should be countersigned by the section manager as proof that the appointment is needed as that it is a valid request
- New appointments should be referenced to the budget to ensure that those appointments can be afforded and falls within the budget
- Changes to promotions should be decided on by the personnel department after ( due consultation with interested parties; consideration of relevant laws and regulations) to ensure that all policies and procedures have been adhered to.
- Wages changes should be documented and authorised by the authorizing body to ensure that no fictitious or unauthorised changes are made
- Amendments to employee’s details should be promptly committed to sequenced payroll amendments forms to ensure that only authorized changes are made as authorized by a senior member of the personnel section
- Sound personnel practices should be followed to ensure that honest and competent personnel are appointed
- Employee files should be kept to include: copies of relevant PAF’s; the employment contracts; performance appraisals and disciplinary warnings; personal details including qualifications and background information, to ensure that a paper trail of all personnel issues are kept
- Pre-printed clock cards should be prepared for each employee on the valid employee list to ensure that only valid employees can clock hours
- Strict stationery controls should be place to ensure that fictitious employees can’t claim for hours worked