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Lesson#23
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SUFFICIENT APPROPRIATE AUDIT EVIDENCE
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SUFFICIENT APPROPRIATE AUDIT EVIDENCE
AND
TESTING THE SALES SYSTEM
Recap:
Audit evidence includes: the information contained in the
accounting records underlying the financial
statements.
Audit evidence might include:
• Documents (invoices,
credit notes, cash receipts)
• Accounting entries
(write down to NRV, depreciation)
• Answers from the
management (Provisions)
• Information from third
parties (banks, debtors)
• Computations
(depreciation, accruals, provisions)
• Observations (inventory
count)
Sufficiency: The measure of quantity of audit evidence.
Appropriateness: The measure of quality i.e. relevance and
reliability of audit evidence.
Key questions for the auditor to consider therefore will be:
1. Do I have enough evidence to reach a conclusion on this audit
area?
2. Is the evidence that I have, reliable enough to, allow me to
reach a conclusion on this area of the
audit?
Assertions in obtaining Audit Evidence
(a) Assertions about classes of transactions and events for the
period under audit;
i. Occurrence – transactions and events that have been recorded
have occurred and pertain
to the entity;
ii. Completeness – all transactions and events that should have
been recorded have been
recorded (accruals & depreciation);
iii. Accuracy – amounts and other data relating to recorded
transactions and events have been
recorded appropriately. (valuation and estimations)
iv. Cutoff – transactions and events have been recorded in the
proper period.
v. Classification – transactions and events have been recorded
in the proper accounts.
(b) Assertions about account balances at the period end.
i. Existence – assets, liabilities, and equity interests exist;
ii. Rights and obligations – the entity holds or controls the
rights to assets, and liabilities are
the obligations of the entity;
iii. Completeness – all assets, liabilities and equity interests
that should have been recorded
have been recorded;
iv. Valuation and allocation – assets, liabilities, and equity
interests are included in the financial
statements at appropriate amounts and any resulting valuation or
allocation adjustments
are appropriately recorded.
(c) Assertions about presentation and disclosure:
i. Occurrence and rights and obligations – disclosed events,
transactions and other matters
have occurred and pertain to the entity;
ii. Completeness – all disclosures that should have been
included in the financial statements
have been included;
iii. Classification and understandability – financial
information is appropriately presented and
described, and disclosures are clearly expressed;
iv. Accuracy and valuation – financial and other information are
disclosed fairly and at
appropriate amounts.
Audit procedures for obtaining Audit Evidence
The auditor uses one or more types of audit procedures described
below:
page
86
(i) Inspection of Records or Documents
It consists of examining records or documents whether internal
or external, in paper form,
electronic form, or other media. Inspection provides evidence of
varying degrees of reliability
depending on their nature and source and in the case of internal
records, on effectiveness of
controls over their production.
(ii) Inspection of Tangible Assets
It consists of physical examination of the assets. It may
provide reliable audit evidence of their
existence cannot necessarily about other assertions.
(iii) Inquiry
It means seeking information of knowledgeable persons throughout
the entity or outside the entity.
Those may be formal written or informal oral. It provides an
auditor with new information or
corroborative evidences. It may also bring to high information
different from the one possessed by
the auditor. Certain oral inquiries might be got confirmed
through written representations.
(iv) Confirmations
It is a specific type of inquiry. It is the process of obtaining
a representation of information or an
existing condition directly from a third party. Confirmations
are sought from debtors, creditors,
bankers, legal advisors etc.
(v) Recalculation
It consists of checking the mathematical accuracy of documents
or records. It can be performed
through use of information technology.
(vi) Re-performance
It is the auditor’s independent execution of procedures or
controls that were originally performed
as part of the entity’s internal control, either manually or
through the use of CAATs, for example,
reperforming the aging of accounts receivable.
(vii) Analytical procedures
It consists of evaluations of financial information made by a
study of plausible relationship among
both financial and non-financial data. It includes investigation
of significant fluctuations found and
the relationship that are inconsistent.
TESTING THE SALES SYSTEM
Control Objectives
For many businesses, sales are made on credit and so objectives
for the sales cycle includes control debtors
as well.
These control objectives include:
a) Customers' orders
should be authorized, controlled and recorded in order to execute them
promptly
b) Goods shipped and work
completed should be controlled to ensure that invoices are issued and
revenue recorded for all sales.
c) Goods returned and
claims by customers (for example, in respect of damaged goods) should be
controlled in order to determine the liability for goods
returned and claims received. .
d) Invoices and credits
should be appropriately checked for accuracy and should be authorized before
being entered in the receivables' records.
e) Authorized customer
transactions, and only those transactions, should be accurately entered in the
accounting records.
f) There should be
procedures to ensure that sales invoices are subsequently paid by customers and
that doubtful amounts are identified in order to determine any
provisions or write offs required
Control procedures over sales and debtors
There are a large number of controls that may be required in the
sales cycle due to the importance of this
area in any business and the possible opportunities that exist
for diverting sales and cash receipts away from
the business.
Typical control procedures at key stages of the sales cycle are:
1. Orders
2. Dispatch
3. Invoicing and credit notes
page
87
4. Returns inwards
5. Receivables
6. Bad Debts
(a) Orders
(i) Existing customers should be allocated a credit limit and it
should be ascertained whether this limit
is to be exceeded if the new order is accepted. If so the matter
should be referred to credit control.
(ii) Any new customer should be referred to the credit control
department before the order is accepted.
(iii) All orders received should be recorded on pre-numbered
sales order documents so that a check can
be made that all orders have been dealt with -a completeness
check.
(iv) All orders should be authorized before any goods are
dispatched.
(v) The sales order document should be used to produce a
dispatch note for the goods outwards
department. No goods may be dispatched without a dispatch note.
(b) Dispatch
(i) Dispatch notes should be pre-numbered and a register kept of
them to enable them to be matched
with relate to sales invoices and customer orders.
(ii) Dispatch notes should be authorized before goods leave the
company.
(iii) Regular checks should be made to ensure that all
dispatches have been invoiced.
(c) Invoicing and Credit Notes
(i) Sales invoices should be authorized by a responsible
official and matched with the authorized order
and dispatch note.
(ii) All invoices and credit notes should be entered In daybook
records, the sales ledger, and sales
ledger control account. Batch totals should be maintained for
this purpose.
(iii) Sales invoices and credit notes should be checked for
prices. casts and calculations by a person
other than the one preparing the invoice.
(iv) All invoices and credit notes should be serially
pre-numbered and regular sequence checks should
be carried out.
(v) Credit notes should be authorized by someone unconnected
with dispatch or sales ledger functions.
(vi) Copies of cancelled invoices should be retained.
(vii) Any cancellation of an invoice should lead to a
cancellation of the related dispatch note.
(viii) Cancelled (and free of charge) invoices should be signed
by a responsible official.
(ix) Each invoice should distinguish between different types of
sales and, if relevant, different rates of
VAT or sales tax. Any coding of invoices should be periodically
checked independently
(d) Returns
(i) Any goods returned by the customer should be checked for
obvious damage and, when accepted. a
document should be raised.
(ii) All goods returned should be used to prepare appropriate
credit notes
(e) Receivables/Debtors
(i) A receivables ledger control account should be prepared
regularly and checked to individual sales
ledger balances by an Independent official.
(ii) Receivables ledger personnel should be independent of
dispatch and cash receipt functions.
(iii) Statements should be sent regularly to customers.
(iv) Formal procedures should exist for following up overdue
debts which should be highlighted either
by the preparation of an aged list of balances or by the
preparation of regular customer statements.
(v) Letters should be sent to customers for collection of
overdue debts. A policy should be in place for
the Institution of legal proceeds where appropriate.
f) Bad debts
(i) The authority to write off a bad debt should be in writing.
Appropriate adjustments should be
made to the sales ledger and the control account
page
88
(ii) The use of court action or the writing-off of a bad debt
should be authorised by an official
independent of the cash receipt function.
Tests of Control
Tests of control should be designed to check that the control
procedures are being applied and that
objectives are being achieved. Tests may be appropriate under
the following broad headings.
(a) Carry out sequence test checks on invoices, credit notes,
dispatch notes and orders. Ensure that all
items are included and that there are no omissions or
duplications.
(b) Check the existence of evidence for authorization in respect
of:
i. acceptance of the order (the creditworthiness check)
ii. dispatch of goods
iii. raising of the invoice or credit note
iv. pricing and discounts
v. write-off of bad debts.
Check both that the relevant signature exists and that the
control has been applied.
(c) Seek evidence of checking of the arithmetical accuracy of:
i. invoices, including pricing, and VAT and sales tax
calculations
ii. credit notes,
This is often done by means of a 'grid stamp' containing several
signatures on the face of the document.
Ensure that the control has been applied by checking the
accuracy of such invoices and credit notes.
(d) Check dispatch notes and goods returned notes to ensure that
they are matched with invoices and
credit notes.
(e) Check that control account reconciliations have been
performed and reviewed.
In all cases, tests should be performed on a sample basis. |
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