TUTORIAL QUESTIONS AND ANSWERS
QUESTION ONE
BAF BS Co operates a chain of health and fitness clubs. Its year end was 31 October 2022.
You are the audit manager and the year-end audit is due to commence shortly. The following
matter has been brought to your attention. BAF BS’s trade receivables have historically been low
as most members pay monthly in advance. However during the year a number of companies have
taken up group memberships at BAF and hence the receivables balance is now material. The
audit senior has undertaken receivables confirm for the balances at the year-end; however, there
are a number who have not responded and a number of responses
with differences.
Required:
Describe substantive procedures you would perform to obtain sufficient and appropriate
audit evidence in relation to BAF BS’ trade receivables.
ANSWER
Substantive Procedures
i. For non-responses, with the client’s permission, the team should arrange to send a follow
up circularisation.
ii. If the customer does not respond to the follow up, then with the client’s permission, the
senior should telephone and ask whether they are able to respond in writing to the
circularisation request.
iii. If there are still non-responses, then the senior should undertake alternative procedures to
confirm receivables.
iv. For responses with differences, the senior should identify any disputed amounts, and
identify whether these relate to timing differences or whether there are possible errors in
the records of BAF BS.
v. Any differences due to timing, such as cash in transit, should be agreed to post year-end
cash receipts in the cash book.
vi. The receivables ledger should be reviewed to identify any possible mis-postings as this
could be a reason for a response with a difference.
vii. If any balances have been flagged as disputed by the receivable, then these should be
discussed with management to identify whether a write down is necessary
QUESTION 2
PICCO Co is a manufacturer of footballs and is a new audit client for your firm. You are an audit
supervisor of PJG & Co and are currently preparing for the forthcoming interim and final audit
for the year ending 31 October 20X6. You are required to document and assess the sales system,
recommend control improvements to deal with a specific fraud issue as well as undertake
substantive testing of revenue.
Sales ordering, goods dispatched and invoicing
PICCO Co sells footballs to a range of large and small sports equipment retailers in several
countries. Sales are made through a network of sales staff employed by PICCO Co, but new
customer leads are generated through a third party company. Sales staffs are responsible for
assessing new customers’ creditworthiness and proposing a credit limit which is then authorized
by the sales director. The sales staffs have monthly sales targets and are able to use their
discretion in granting sales discounts up to a maximum of 10%. They then record any discount
granted in the customer master data file.
The sales staff visit customer sites personally and orders are completed using a two-part pre-
printed order form. One copy is left with the customer and the other copy is retained by the sales
person. The sales order number is based on the sales person’s own identification (ID) number.
The company markets itself on being able to dispatch all orders within three working days. Once
the order is taken, the sales person emails the finance department and warehouse dispatch team
with the customer ID and the sales order details and from this a pick list is generated.
Sequentially numbered goods despatched notes are completed and filed in the warehouse.
Sequentially numbered invoices are generated using the pick lists for quantities and the customer
master data file for prices. Standard credit terms for customers are 30 days and on a monthly
basis sales invoices which are over 90 days outstanding are notified to the relevant sales person
to chase payment directly with the customer.
Payroll fraud
The finance director, Mirabelle, has informed you that a significant fraud took place during the
year in the payroll department. A number of fictitious employees were set up on the payroll and
wages were paid into one bank account. This bank account belonged to two supervisors, who
were married, and were employed by PICCO Co.
One had sole responsibility for setting up new joiners in the payroll system and the other
processed and authorized bank transfer requests for wages and supplier payments. These
employees no longer work for the company and Mirabelle has asked the audit firm for
recommendations on how to improve controls in this area to prevent this type of fraud occurring
again. PICCO Co. operates a Human Resources department.
Required:
(b) Identify and explain SEVEN deficiencies in the sales system of PICCO Co and provide
a recommendation to address each of these deficiencies.
Note: Prepare your answer using two columns
ANSWER
PICCO Co. Deficiencies and Controls over the Sales System
CONTRL DEFICIENCY CONTROL RECOMMENDATION
New customers’ creditworthiness is assessed New customers should complete a credit
by a salesperson who sets the credit limit, application which should be checked through a
which is authorized by the sales director. credit agency with a credit limit set. Once
The sales staffs have sales targets, and hence authorized by the sales director, the limit
may suggest that new customers are should be entered into the system by a credit
creditworthy simply to meet their targets. This controller
could result in sales being made to poor credit
risks.
Sales staff has discretion to grant sales All discounts to be granted to customers should
discounts to customers of up to 10%. This be authorized in advance by a responsible
could result in a loss of revenue as they may official, such as the sales director. If not
award unrealistic discounts simply to meet practical, then the supervisor of the sales staff
sales targets. The discounts granted by sales should undertake this role.
staff are not being reviewed and could result in
unauthorized discounts allowed.
. Sales staff should not be able to access the
Sales staff is able to make changes to the master data file to make amendments. Any
customer master data file, in order to record such amendments to master file data should be
discounts allowed and these changes are not restricted so that only supervisors and above
reviewed. can make changes.
There is a risk that these amendments could be An exception report of changes made should
made incorrectly resulting in a loss of sales be generated and reviewed by a responsible
revenue or overcharging of customers. In official.
addition, the sales staffs are not senior enough
to be given access to changing master file data
as this could increase the risk of fraud.
Inventory availability does not appear to be Prior to the salesperson finalizing the order, the
checked by the sales person at the time the inventory system should be checked in order
order is placed. In addition, PICCO Co markets for an accurate assessment of the availability of
itself on being able to dispatch all orders within goods to be notified to customers.
three working days.
There is a risk that where goods are not
available, the customer would not be made
aware of this prior to placing their order,
leading to unfulfilled orders and customer
dissatisfaction, which would impact the
company’s reputation.
Customer orders are recorded on a two-part The order form should be amended to be at
pre-printed form, one copy is left with the least four-part. The third part of the order
customer and one with the sales person. should be sent to the warehouse department
The sales department of PICCO Co does not and the fourth part sent to the finance
hold these orders centrally and hence would department.
not be able to monitor if orders are being The copy the sales person has should be stored
fulfilled on a timely basis. This could result in centrally in the sales department. Upon
a loss of revenue and customer goodwill. dispatch, the goods dispatch note should be
matched to the order; a regular review of
unmatched orders should be undertaken by the
sales department to identify any unfulfilled
orders.
Customer orders are given a number based on Sales orders should be sequentially numbered.
the sales person’s own identification (ID) On a regular basis, a sequence check of orders
number. These numbers are not sequential. should be undertaken to identify any missing
Without sequential numbers, it is difficult for orders.
PICCO Co to identify missing orders and to
monitor if all orders are being despatched in a
timely manner, leading to a loss of customer
goodwill.
The sales person emails the warehouse The third part of the sales order as mentioned
dispatch team with the customer ID and the previously should be forwarded directly to the
sales order details, rather than a copy of the warehouse department.
sales order itself, and a pick list is generated The pick list should be generated from the
from this. original order form and the warehouse team
There is a risk that incorrect or insufficient should check correct quantities and product
details may be recorded by the sales person and descriptions are being despatched, as well as
this could result in incorrect orders being checking the quality of goods being despatched
despatched, orders being despatched late or to ensure they are not damaged.
orders failing to be despatched at all, resulting
in a loss of customer goodwill and revenue.
Sequentially numbered goods despatched notes Upon dispatch of goods, a four-part GDN
(GDNs) are completed and filed by the should be completed, with copies to the
warehouse department. If the finance customer, warehouse department, sales
department does not receive a copy of these department to confirm dispatch of goods and a
GDNs, they will not know when to raise the copy for the finance department. Upon receipt
related sales invoices. This could result in of the GDN, once matched to the fourth part of
goods being despatched but not being invoiced, the sales order form, a clerk should raise the
leading to a loss of revenue sales invoices in a timely manner, confirming
all details to the GDN and order
The sales person is given responsibility to A credit controller should be appointed and it
chase customers directly for payment once an should be their role, rather than the
invoice is outstanding for 90 days. This is salesperson, to chase any outstanding sales
considerably in excess of the company’s credit invoices which are more than 30 days old.
terms of 30 days which will lead to poor cash
flow.
Further, as the sales people have sales targets,
they are more likely to focus on generating
sales orders rather than chasing payments. This
could result in an increase in bad debts and
reduced profit and cash flows.
QUESTION 3
Which TWO of the following controls of a sales system ensure that all goods despatched are
completely and accurately invoiced?
(1) Good despatched notes are matched to sales invoices
(2) Sales invoices are sequentially numbered
(3) Sales invoices are matched to customer orders
(4) Regular review of unfulfilled orders
A. 1 and 2
B. 2 and 4
C. 2 and 3
D. 1 and 4
ANSWER
D
Sequential numbering of invoices confirms the completeness of sales invoices, however, it does
not give assurance that all goods despatched are invoiced. Agreeing invoices back to orders does
not confirm that the goods have actually been despatched yet.
QUESTION 4
Banbell Toys Co (Banbell) is a manufacturer of children’s building block toys; they have been
trading for over 35 years and they sell to a wide variety of customers including large and small
toy retailers across the country. The company’s year-end is 31 May 2011.
The company has a large manufacturing plant, four large warehouses and a head office. Upon
manufacture, the toys are stored in one of the warehouses until they are despatched to customers.
The company does not have an internal audit department.
Sales ordering, goods despatched and invoicing
Each customer has a unique customer account number and this is used to enter sales orders when
they are received in writing from customers. The orders are entered by an order clerk and the
system automatically checks that the goods are available and that the order will not take the
customer over their credit limit.
For new customers, a sales manager completes a credit application; this is checked through a
credit agency and a credit limit entered into the system by the credit controller. The company has
a price list, which is updated twice a year. Larger customers are entitled to a discount; this is
agreed by the sales director and set up within the customer master file.
Once the order is entered an acceptance is automatically sent to the customer by mail/email
confirming the goods ordered and a likely dispatch date. The order is then sorted by address of
customer. The warehouse closest to the customer receives the order electronically and a dispatch
list and sequentially numbered goods dispatch notes (GDNs) are automatically generated.
The warehouse team packs the goods from the dispatch list and, before they are sent out, a
second member of the team double checks the dispatch list to the GDN, which accompanies the
goods.
Once despatched, a copy of the GDN is sent to the accounts team at head office and a
sequentially numbered sales invoice is raised and checked to the GDN. Periodically a computer
sequence check is performed for any missing sales invoice numbers.
Fraud
During the year a material fraud was uncovered. It involved cash/cheque receipts from customers
being diverted into employees’ personal accounts. In order to cover up the fraud, receipts from
subsequent unrelated customers would then be recorded against the earlier outstanding
receivable balances and this cycle of fraud would continue.
The fraud occurred because two members of staff ‘who were related’ colluded. One processed
cash receipts and prepared the weekly bank reconciliation; the other employee recorded customer
receipts in the sales ledger.
An unrelated sales ledger clerk was supposed to send out monthly customer statements but this
was not performed. The bank reconciliations each had a small unreconciled amount but no-one
reviewed the reconciliations after they were prepared.
The fraud was only uncovered when the two employees went on holiday at the same time and it
was discovered that cash receipts from different customers were being applied to older
receivable balances to hide the earlier sums stolen.
Required:
Recommend SIX tests of controls the auditor would normally carry out on the sales system of
Banbell, and explain the objective for each test.
ANSWER
Tests of control and objective of each test for the sales cycle of Banbell Toys Co (Banbell)
TEST OF CONTROL OBJECTIVE OF TEST
The auditor should attempt to enter an order for a To ensure that orders are only accepted and
fictitious customer account number. The system processed for valid customers.
should not accept this order.
With the client’s permission, attempt to enter a To ensure that goods are not supplied to poor credit
sales order which will take a customer over the risks.
agreed credit limit, the system should reject the
order.
Inspect a sample of processed credit applications To ensure that goods are only supplied to customers
from the credit agency and follow through the with good credit ratings.
credit limit agreed to the sales system.
Obtain a copy of the current price list and agree for To ensure that goods are only sold at authorized
a sample of invoices that relevant/current prices prices.
have been used.
Confirm discounts applied to invoices agree to the To ensure that sales discounts are only provided to
customer master file. Attempt to process an order valid customers.
with a sales discount for a customer not normally
entitled to discounts to assess the application
controls.
Inspect a sample of orders to confirm that an order To ensure that all orders are recorded completely
acceptance email/letter has been generated. and accurately.
Observe the sales order clerk processing orders and
assess whether the order acceptance is
automatically generated.
Visit a warehouse and observe the goods dispatch To ensure that goods are despatched correctly to
process to assess whether all goods are double customers and that they are of an adequate quality.
checked against the goods dispatch note (gdn) and
the dispatch list prior to sending out.
Inspect a sample of GNDs and agree that a valid To ensure that all goods despatched are correctly
sales invoice has been correctly raised. invoiced.
Review the last system generated sequence check To ensure completeness of income for goods
of sales invoices to identify any omissions. despatched.
QUESTION 5
J-Star is a theme park based on a popular series of children’s books. Customers pay a fixed fee to
enter the park, where they can participate in a variety of activities such as riding roller-coasters,
playing on slides and purchasing themed souvenirs from gift shops.
The park is open all year and has been in operation for the last seven years. It is located in a
country which has very little rainfall – the park is open-air so poor weather such as rain results in
a significant fall in the number of customers for that day (normally by 50%). During the last
seven years there have been on average 30 days each year with rain.
J-Star is now very successful; customer numbers are increasing at approximately 15% each year.
Cash sales
– All ticket sales are recorded on a computer showing the amount of each sale and the
number of tickets issued. This information is transferred electronically to the accounts
office.
– Cash is collected regularly from each ticket office by two security guards. The cash is
then counted by two accounts clerks and banked on a daily basis.
– The total cash from each ticket office is agreed to the sales information that has been
transferred from each office.
– Total cash received is then recorded in the cash book, and then the general ledger.
Credit card sales
– Payments by credit cards are authorized online as the customers purchase their tickets.
– Computers in each ticket office record the sales information which is transferred
electronically to the accounts office.
– Credit card sales are recorded for each credit card company in a receivables ledger.
– When payment is received from the credit card companies, the accounts clerks agree the
total sales values to the amounts received from the credit card companies, less the
commission payable to those companies. The receivables ledger is updated with the
payment received.
You are now commencing the planning of the annual audit of J-Star. The date is 3 June 2009 and
J-Star’s year end is 30 June 2009.
Required:
For the cash sales system of J-Star, identify the risks that could affect the assertion of
completeness of sales and cash receipts
ANSWER
Risk affecting completeness
i. The computer system does not record sales accurately and/or information is lost or
transferred incorrectly from the ticket office computer to the accounts department
computer.
ii. Cash sales are not recorded in the cash book; cash is stolen by the accounts clerks.
iii. Tickets are issued but no payment is received – that is the sale is not recorded.
iv. Cash is removed by the ticket office personnel, by the security guards or by the account
clerks.
v. The account clerks miscount the amount of cash received from a ticket office.
QUESTION 6
The audit of Nasha Co’s financial statements for the year ended 31 October 2014 has been
completed; the audit report and the financial statements have been signed but not yet issued.
The finance director of Nasha Co has just informed the audit team that he has received
notification that a material receivable balance has become irrecoverable and Nasha Co will not
receive any of the amounts owing.
What actions, if any, should the auditor now take to satisfy their responsibilities under ISA 560
Subsequent Events?
A. No actions required as the audit report and financial statements have already been signed
B. Request management to adjust the financial statements, verify the adjustment and
provide a new audit report
C. Request management to make disclosure of this event in the financial statements
D. Request that management adjust for this event in the following year’s financial statements as
it occurred in year ending 31 October 2015.
QUESTION 7
Jacha 4U Co (Jacha) manufactures breakfast cereals and has three factories, four warehouses and
three distribution depots spread across Tanzania. The audit for the year ended 31 December 2015
is almost complete and the financial statements and audit report are due to be signed shortly.
Profit before taxation is Tshs. 7•9 million. The following events have occurred subsequent to the
year end and no amendments or disclosures have been made in the financial statements.
Event 1 – Fire
On 15 February 2016, a fire occurred at the largest of the distribution depots. The fire resulted in
extensive damage to 40% of the company’s vehicles used for dispatching goods to customers;
however, there have been no significant delays to customer deliveries. The company estimates
the level of damage to the vehicles to be in excess of Tshs. 650,000. Only a minimal level of
inventory, approximately Tshs. 25,000, was damaged. Jacha’s insurance company has started to
investigate the fire to assess the likelihood and level of payment, however, there are concerns the
fire was started deliberately, and if true, would invalidate any insurance cover.
Event 2 – Inventory
On 18 February 2016, it was discovered that a large batch of Jacha’s new cereal brand ‘Loopy
Green Loops’ held in inventory at the year-end was defective, as the cereal contained too much
green food coloring. To date no sales of this new cereal have been made. The cost of the
defective batch of inventory is Tshs 915,000 and the defects cannot be corrected. However, the
scrapped cereal can be utilized as a raw material for an alternative cereal brand at a value of
Tshs. 50,000.
Required:
For each of the two subsequent events described above:
i. Based on the information provided, explain whether the financial statements require
amendment; and
ii. Describe audit procedures which should now be performed in order to form a conclusion
on any required amendment.
ANSWER
Subsequent events
Event 1 – Fire
– A fire has occurred at the largest of the company’s distribution depots and property, plant
and equipment in excess of Tshs. 650,000 has been damaged as well as inventory of
Tshs. 25,000.
– The company has contacted its insurance company and they have begun to investigate the
likelihood and level of any payment.
– This event occurred after the reporting period and is not an event which provides
evidence of a condition at the year-end and hence this is a non-adjusting event.
– Normally as the company is insured, only uninsured losses suffered by Jacha 4U Co
(Jacha) would need to be accounted for, which in the normal course of events would be
an immaterial amount.
– However, the insurance company is investigating, as there is a possibility the fire was
started deliberately, and this would invalidate the insurance policy.
– If this is the case, the total damaged assets of Tshs. 675,000 (650 + 25) would be material
as they represent 8•5% (675/7,900) of profit before tax.
– Therefore as a material non-adjusting event, the assets should not be written down to
their scrap value in the current year financial statements; however, the directors should
include a disclosure note detailing the fire and the total value of assets which may be
impacted due to the possibility of a lack of an insurance settlement.
The following audit procedures should be applied to form a conclusion on any amendment:
i. Obtain a schedule showing the damaged property, plant and equipment and agree the net
book value to the non-current assets register to confirm the total value of affected assets.
ii. Obtain a breakdown of the inventory stored at the distribution Centre on 15 February
2016 and compare to earlier records or dispatch documents to ascertain the likely level of
inventory at the time of the fire.
iii. Review any correspondence from the insurance company confirming the amount of the
claim, and the current status of their investigation into the fire and any likely payments to
assess the extent of any uninsured amounts.
iv. Discuss with the directors whether they will disclose the effect of the fire, as a non-
adjusting event, in the year-end financial statements.
Event 2 – Inventory
– Jacha has identified that inventory at the year-end with a cost of Tshs. 915,000 is
defective, due to an excessive amount of food coloring; the scrap value of this inventory
is Tshs. 50,000.
– This information was obtained after the year end but provides further evidence of the net
realisable value of inventory at the year-end and hence is an adjusting event.
– IAS 2 Inventories requires that inventory is valued at the lower of cost and net realisable
value. The inventory of Tshs. 915,000 must be written down to its net realisable value of
Tshs. 50,000.
– The write down of Tshs. 865,000 (915 – 50) is material as it represents 10•9%
(865/7,900) of profit before tax. Hence, the directors should amend the financial
statements by writing down the inventory to Tshs. 50,000.
The following audit procedures should be applied to form a conclusion on the adjustment:
i. Discuss the matter with the directors and enquire if they are prepared to write down the
cost of the inventory to net realisable value.
ii. Review the board minutes to assess whether this event was the only case of defective
inventory as there could potentially be other inventory which requires writing down.
iii. Obtain a schedule showing the defective inventory and agree to supporting production
documentation that it was produced prior to 31 December, as otherwise it would not
require a write down at the year-end.
iv. Discuss with management how they have assessed the scrap value of Tshs. 50,000 and
agree this amount to any supporting documentation to confirm the value.
