LA 6.1 and 6.2

Question 1

What is internal audit approach when it comes to revenue and receipts process

Answer 1

-Management is responsible for the organizational objectives related to the revenue and receipts cycle

Question 2

What are the characteristics of R&R cycle

Answer 2

-Has 2 broad functions
>Selling of goods and/or serv for cash/credit
>Collection of cash from customers

Question 3

List the type of orgs

Answer 3

-Trading business
-Service business
-Trading and service business
-Manufacturing business

Question 4

What are the functions/activities of the R&R cycle

Answer 4

1. Receiving and processing customer orders
2. Granting credit to customer
3. Delivery of goods/services
4. Invoicing the customer and recording the sale
5. Collecting payment from customers
6. Processing foods returned
7. Writing off bad debts and providing for credit losses

Question 5

What internal control objectives must management achieve w/ regard to R&R cycle

Answer 5

-Compliance w/ policies and laws and regulations
-Achievement of objectives regarding validity of revenue and completeness of cash receipts from customer
-Reliability and integrity of info regarding the sale of goods and rendering of services
-Economic and efficient use of organizational resources regarding sale of goods and rendering of services
-Safeguarding of organizational assets

Question 6

Describe process of receiving and processing customer orders

Answer 6

-Customers can place orders by
>verbally over the phone
>in person or
>via writing thru fax or email
-Sales clerk confirms availability of inventory (or in the case of service) verifies w/ personnel for the delivery pf the service before processing the sales order
-Upon confirmation of inventory or services, sales clerk prepares a pre-numbered internal sales order
-Sales order
>OG to supplier
>1x copy to warehouse
>1x copy to accounting dept
>1x copy filled for reference

Question 7

Describe process of granting credit to purchases

Answer 7

-Credit controller from credit dept is in charge of credit control procedures
-As per NCA 34 of 2005, orgs need to ensure customers are creditworthy before granting credit
-An existing DR’s credit limit,, payment history and outstanding balance are assessed before any credit is granted
-All credit granted is authorized by credit manager
-Large and long outstanding Dr’s acc’s have substantial impact on cash flow of org

Question 8

Describe process of delivering products

Answer 8

-Warehouse in possession of copy of sales order prepares the products for delivery
-Warehouse supervisor authorizes transfer of products to the dispatch dept
-Pre-numbered delivery notes are generated and distributed as follows
>OG and 1x copy to customer (copy is signed and returned to acc dept)
>1x copy to dispatch area of warehouse
>1x copy to sale dept
>1x copy used to update records
-Org should have 1 authorized exit point w/ security guard on duty
-Guard should match each delivery to corresponding DN
-Gate register should be reconciled by independent person
-Guard should inspect vehicles leaving to ensure to unauthorized goods are moved

Question 9

Describe process of rendering a service

Answer 9

-Sales clerk informs service dept of request from customers
-Register of services requested is kept to ensure all services requested are performed w/in reasonable time
-Register to be reviewed on a regular basis and any unperformed services must be followed up
-After delivering service, the personnel submit their timesheets or job cards to the acc dept in order to invoice the customer

Question 10

Describe process of invoicing the customer and recording the sale

Answer 10

-Acc dept matches copies of sales order, DN and signed DN from supplier
-After matching, an invoice is prepared
-Details of customer, date of transaction, type and quantity of products sold, invoice amount and delivery date are reflected on invoice
-Invoices are verified by independent clerk and discount is granted to qualifying customers
-Invoice is sent to debtor, as well as recorded in the
>sales/debtor journal
>debtors subsidiary ledger and
>general ledger
-Recons are done to ensure summarization and posting of all revenue transactions are done correctly

Question 11

Describe process of collecting DRs payments

Answer 11

-Methods of payment include
>EFT
>Cash
>Cheque
-Receipt of payment is responsibility of cash dept or designated cash clerks in acc dept
-If customer pays via EFT… they should send POP via fax or email, indicating any reference number
-If customer pays cash… receipt should be issued
-Cash received should be recorded in CRJ and reconciled w/ cash receipts as well as bank deposit slips, on a daily basis
-Monthly bank recons are performed to ensure all payment received is accounted for
-Pre-numbered receipts issued to debtors that have paid and payment is allocated to the relevant dr’s acc’s and dr’s ledger
-Monthly statements are issued to debtors as a reminder of outstanding balances

Question 12

Describe process of good returned

Answer 12

-Customers returning goods receive pre-numbered credit note after inspection of goods
-CNs authorized by designated manager from warehouse/sales dept
-Sales journal/sales returns journal and debtors ledger as well as the inventory records are updated when products are returned

Question 13

Describe process of bad debts

Answer 13

-Senior personnel should be in charge of functions and activities relating to bad debts
-Review of dr’s age analysis is done and all outstanding debts are identified
-Amounts written off are transferred to expense acc named bad debts
-Allowance for credit losses is an accounting estimate based on the % of outstanding debts

Question 14

Risk and controls of selling on credit in terms of the granting of credit function

Answer 14

-Risk
>Products sold to customers who cannot pay
-Ctrl
>Credit controller should exist separately from sales clerk and is in charge of credit granting process
>New dr’s allocated a unique dr number and are required to fill in a credit application form

Question 15

Risk and controls of selling on credit in terms of the placing of orders function

Answer 15

-Risk
>Fictitious customer calls and places order resulting in invalid orders
>Unclear info provided by phone resulting in inaccurate sales orders
-Ctrl
>Up to date approved customer list maintained and provided to sales staff
>Verbal confirmation of order details by sales clerk to customer

Question 16

Risk and controls of selling on credit in terms of the processing of orders received from customers function

Answer 16

-Risk
>Internal sales order received is not processed
-Ctrl
>Sales clerk should prepare pre-numbered internal sales order if all procedures are successfully completed
>Orders received are allocated a unique order # in sequential order for completeness purposes

Question 17

Risk and controls of selling on credit in terms of the dispatching of goods function

Answer 17

-Risk
>Incorrect product types and quantities delivered
-Ctrl
>DN details matched w/ internal sales order by warehouse manager before delivery

Question 18

Risk and controls of selling on credit in terms of gate control function

Answer 18

-Risk
>Theft of inventory
>Incorrect product types and quantities delivered
-Ctrl
>Only 1 exit used for delivery/dispatch of products
>Security guard check and match types and quantities of goods dispatched w/ details of approved DN

Question 19

Risk and controls of selling on credit in terms of invoicing of customers function

Answer 19

-Risk
>Customers do not acknowledge invoice/ disagree w/ type and quantity of details of invoice
>Delivery of goods to customers not recorded in acc records
-Ctrl
>Customer must sign DN for proof of delivery (POD)
>Dr’s clerk must match internal sales order to POD before preparing the sales invoice

Question 20

Risk and controls of selling on credit in terms of recording of sales in acc records function

Answer 20

-Risk
>Sales transactions missing in acc records
>Sales transactions recorded incorrectly
-Ctrl
>Sequential pre-numbering of all docs
>Proper access and updating records applied to all master files used in acc records

Question 21

Risk and controls of selling on credit in terms of Drs control function

Answer 21

-Risk
>Invalid discount granted
>Drs ledger shows incorrect and/or long outstanding balances
-Ctrl
>All discounts granted must be authorized by sales manager
>Regular age analysis of drs must be done

Question 22

Risk and controls of selling on credit in terms of collecting dr’s payments function

Answer 22

-Risk
>Outstanding balances of drs are not collected
>Drs payments are allocated to incorrect dr’s acc
-Ctrl
>Long outstanding drs are followed up by drs clerk
>Monthly statements must be prepared and sent to all drs

Question 23

Risk and controls of selling on credit in terms of returning unsatisfactory goods function

Answer 23

-R
>Unauthorized/invalid goods returned by customers are accepted
>CN issued for goods returned. but goods not received in warehouse
-C
>Policy explaining conditions and procedures for goods returned must exist
>A copy of CN should accompany goods returned to warehouse

Question 24

Risk and controls of selling on credit in terms of allowance for credit losses function

Answer 24

-R
>Unauthorized dr’s balances are written off
-C
>Senior personnel must be resp for approval of bad debt

Question 25

Risk and controls of cash sales in terms of cash sales function

Answer 25

-R
>Sales are made using outdated price lists
>Cash sales not recorded on valid tax invoice
-C
>Date validation are extracted from current master file info
>Pay pts situated @ exit of store

Question 26

Risk and controls of cash sales in terms of cash reconciliations procedures

Answer 26

-R
>Cash in cash drawer is removed fraudulently
-C
>Cashiers must sign for receipts of cash float wen signing on for duty
>Cashiers and supervisors must both sign on cash recon statement after cash up

Question 27

Risk and controls of cash sales in terms of cash sales function safekeeping of cash

Answer 27

-R
>Cash is removed fraudulently from safe
-C
>Keep cash in secure place
>Frequent cash recons must be done by 2 senior personnel

Question 28

Risk and controls of cash sales in terms of banking of cash

Answer 28

-R
>Cash not banked, lost or stolen
>Cash stolen from staff on way to bank
-C
>Copy of bank deposits slip sent to the acc dept
>A drop safe facility must be used for bank deposits

Question 29

General risk and controls in R&R cycle

Answer 29

-R
>Collusion
-C
>Honest, competent personnel must be employed
>Dual electronic authorization

Question 30

What is the purchases and payments cycle

Answer 30

1. Determine the need for goods/services
2. Ordering of goods/services
3. Receiving of goods/services
4. Record of purchases
5. Payment and recording of credit purchases
6. Goods returned

Question 31

Describe Determining the need for goods and service

Answer 31

-First function of procurement process is to determine need for materials and to communicate this to purchasing section
-OG requisition form is forwarded to purchasing dept and the copy is kept for reference purposes

Question 32

Describe process of ordering of goods and service

Answer 32

-On receipt of authorised requisition form, purchasing clerk selects a supplier from a pre-approved suppliers list
-Purchases order must be authorised by head of purchasing dept based on availability of funds, supplier used and a duly authorised purchase requisition
-Copies of PO’s are generated and distributed as follows
–>OG goes to supplier
—>1x copy goes to acc dept
–>1x copy goes to receiving section of warehouse
–>1x copy goes to dept requesting the goods
–>1x copy is filled for reference

Question 33

Describe process of receiving of goods and service

Answer 33

-The receiving dept of the warehouse is responsible for accepting and acknowledging the delivery of goods from suppliers that match valid POs
-Prior to acceptance, physical inspection of quantity, quality and description of goods should be carried out
-A good received note (GRN) is generated as proof distributed as follows
–>OG goes to supplier
–>1x copy goes to purchased dept
–>1x copy goes to accounting dept
–.1x copy goes used to update warehouse records

Question 34

Describe process of recording of purchase

Answer 34

Purpose is to record purchase in financial accounting records
-After receipt of goods, invoice received from supplier s matched to PO, supplier delivery note and goods received note for the following info
–>quality check
–>quantity
–>supplier info
–>dates etc
-Creditors recons should be performed on regular basis by independent person to ensure that the journalsing and posting activity is performed accurately

Question 35

Describe process of payment and recording of credit purchases

Answer 35

-Extremely important as invalid payments/fictitious payments to creditors may be made
-Timing of payments is important as interest may be charged on late payments
-2 senior ppl should review supporting docs before payment is authorised
-Independent person should reconcile the creditors control acc and creditors ledger monthly

Question 36

Name risks and controls of determining need for goods/services

Answer 36

Risk
»Incorrect/unnecessary goods ordered
»Wastage and liquidity issues
Controls
»Stores/production personnel need to confirm that goods are really needed
»Goods only ordered based on authorized requisition

Question 37

Name risks and controls of ordering goods/services

Answer 37

Risk
»Invalid purchase orders for goods/serv
Controls
»PO’s should be recorded on pre-numbered forms
»Suppliers should be rotated and reviewed on regular basis
»Approved electronic requisitions should be converted to electronic order forms

Question 38

Name risks and controls of receiving of goods/services

Answer 38

Risk
»Quantities of goods received are incorrect
»Goods received are not in good order
Control
»Receiving clerk inspects goods to establish condition
»Pre-numbered GRN’s used
»Store man signs transfer note or GRN as proof of receipt

Question 39

Name risks and controls of recording of purchases

Answer 39

Risk
»Purchase transactions are not recorded
»Purchase transactions recorded incorrectly
Controls
»Invoiced should be compared to PO’s, debit note (DN’s) and GRN’s
»All GRNs received should be kept in pending file and matched to incoming invoices

Question 40

Name risks and controls of payment and recording of creditors

Answer 40

Risk
»Incorrect payments made
»Transactions recorded inaccurately
Controls
»Cheque signatories should agree beneficiary and amount w/ supporting documents
»All supporting doc should be cancelled/stamped “paid”
»EFT payments approved electronically through passwords by 2 supervisor employees

Question 41

Name risks and controls of returning goods

Answer 41

Risk
»Incorrect goods returned
»Goods that aren’t damaged returned
»Inventory records incorrect
Controls
»Update inventory records
»Pre numbered DN’s are issued

Question 42

Name general risks and controls

Answer 42

Risk
»Collusion btwn 2+ employees
»Staff not being skilled enough
Controls
»Competent personnel employed
»Segregation, rotation of duties with adequate supervision

Question 43

Examples of fraud in terms of purchases and payments cycle

Answer 43

Tender fraud
Nepotism
Cronyism
Purchases for personal use
Fictitious suppliers paid