Gemma Paul ACC331- Auditing Assignment 2

Assignment 5 – Identifying errors in the accounting process W/p ref: A5 - 1

Assignment 6 – Identifying Controls Prepared By: GAP
Cloud 9 Pty Ltd Date Prepared: 1/04/2011
Period ending 31 December 2010
Identifying errors in the accounting process & Identifying controls
Significant process Potential misstatements Assertions Transaction level internal controls
Sales Ordered goods have been Occurrence The drivers have the customers sign for the goods
Accounts Receivable invoiced without being shipped Existence and then give the signed copy to the finance
- Revenue and receivables are department. This will give the finance person
overstated through the evidence that the goods have been shipped and will
failure of recording a sale then allow them to proceed with producing an
when the customer hasn’t invoice.
yet received their products. The finance department also matches the
quantities in the invoice against the dispatch note
and confirm customer sign off. This way, they only
bill for those goods that were actually received by
the customer
Sales Ordered goods may not be Completeness Every day the warehouse manager downloads the
shipped Occurrence outstanding sales orders to handheld computer
scanners. Warehouse personnel use these to select
the items off the shelves onto pallets. Pallets are
taken to a staging area where each product is
scanned. This establishes the dispatch note in swift
which gets printed for delivery. Sales order is
automatically matched to dispatch note prior to
shipment.

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Gemma Paul ACC331- Auditing Assignment 2

Sales Goods shipped may not agree
with goods order
Sales Staff may make fictitious
Accounts Receivable transactions or duplicate billings
Allowance for bad debts
Cash Receipts Staff could be pocketing cash and
not entering the sales
transactions into the system
Accuracy Swift matches the quantities and products on the
draft dispatch note to the sales order. Once they
match, the approval box is activated and the
shipping supervisor can enter his passcode. This
officially approves the dispatch note and it gets
printed.
Occurrence After the driver have customers sign for the goods,
Existence the accounting department go into the billing
Completeness system and pull up the draft invoice that was
generated when the dispatch note got approved.
They match the quantities in the invoice against the
dispatch note and confirm customer sign off. At
4pm a batch run is done for the day’s invoices.
Completeness Most payments are received via Eftpos.

Cash Receipts Staff could be recording fictitious Existence -Segregation of duties between the AR Clerk and
Sales cash receipts Occurrence the financial controller who reviews the AR clerks
work and signs off.
-Bank reconciliation is also done. This is completed
by the AR clerk and is then signed off by the
financial controller.

Cash Receipts Cash receipts recorded in the Cut-off AR clerk downloads the previous day receipts from
incorrect period online banking. She then goes into the sub-ledger
to post the receipts against the customer account.
After finishing each posting, a batch report of all
postings is ran. She than reconciles this back to the
bank report.

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Gemma Paul ACC331- Auditing Assignment 2

Assignment 7 – Testing Controls W/p ref: A7 - 1

Cloud 9 Pty Ltd Prepared by: GAP
Period ending 31 December 2010 Date prepared: 1/04/2011

Sales process –testing internal controls

Customer Shipping
Sales Sale Amt Invoice matches signature Dispatch supervisor
Invoice # Date Customer Name (excl. GST) dispatch note (A) present (B) note # authorisation (C)
20 132811 13/10/20 David Jones – Parramatta 1,009.71   D00132811 
10 Junction
21 133410 27/10/20 Rebel Sport – World Square 796.09   D00133410 
10
22 134063 04/11/20 Myer – Brisbane CBD 827.42   D00134063 
10
23 134104 06/11/20 Cross Country Sports 252.42  No D00134104 
10 signature
24 135215 12/12/20 Wide Road Speciality retailer 1,311.35   D00135215 
10
25 135947 20/12/20 Footlocker – Pitt St Mall 1,123.76   D00135947 
10

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Gemma Paul ACC331- Auditing Assignment 2

Cloud 9 Pty Ltd W/p ref: A7 - 2

Period ending 31 December 2010 Prepared by: GAP
Cash receipts process - testing internal controls Date prepared: 1/04/2011

Total posted to Total bank Evidence of

Date accounts receivable deposit review (D)
20 19/09/2010 10,577.23 10,577.23 

21 08/10/2010 8,765.49 8,765.49 

22 23/10/2010 5,490.61 5,490.61 

23 12/11/2010 9,302.20 9,302.20 

24 03/12/2010 12,567.33 12,567.33 

25 19/12/2010 13,874.85 13,874.85 

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Gemma Paul ACC331- Auditing Assignment 2

W/p ref: A7 - 3
Cloud 9 Pty Ltd
Prepared by: GAP
Period ending 31 December 2010 Date prepared: 1/04/2011
Assessing control risk

Account assertion Control risk Explanation

Sales The testing of checking the dispatch notes for a signature by the customer makes sure that all sales
- Occurrence HIGH recorded are bona fide transactions for merchandise actually shipped to customers. This test however,
failed as invoice #134104 had no signature and was still invoiced. Therefore, the control will be classified
as high.
Sales - the test of matching the total amount of the bank receipts to the a/c receivable was satisfactory and no
- Completeness LOW errors occurred.
- A batch report of all postings is ran and reconciles back to the bank
- All sales shipped have been invoiced and recorded in accounting records. This was completed by
matching the Qty’s and products ordered on the invoices to the dispatch notes.
Sales Comparing the daily bank receipts to accounts receivable allows you to pick up on any bank deposits that
- Accuracy LOW weren’t recorded correctly or completely. This test has been completely and no errors occurred.
Therefore, the control risk should be low. Also matching the Qty’s and products ordered on the invoices
to the dispatch note ensures accuracy and as this test was sound the risk is low.
Accounts Receivable - Control risk is considered low as we have vouched supporting documentation underlying the a/c
- Existence MEDIUM receivable entries. This was done by obtaining reconciliations of daily bank receipts to a/c receivable and
matching the total amounts of the bank receipts to the accounts receivable postings. These tests were
found reasonable and correct.
- The test that Cloud 9 has implemented to see whether or not accounts receivable actually exists is when
the supervisor enters in the passcode which officially approves the dispatch note. Before the passcode
can be entered, the Qty’s and products ordered on the invoice have been matched to dispatch notes. This
test was successful as all invoices had YES under authorisation.
- A test was done to ensure that all sales recorded are bona fide transactions for merchandise actually
shipped to customers. This however failed as an invoice that was processed did not have a signature from
the customer. I’m not exactly sure if you would jump to the top end of risk or include the other risks that
were low and classify the risk overall as medium.

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Gemma Paul ACC331- Auditing Assignment 2

Accounts Receivable What should have been recorded has been recorded, bank receipts weren’t adjusted and it matches to
- Completeness LOW the accounts receivable. Due to the above mentioned, it is evident that control risk will be low.

Accounts Receivable - Reconciliation and journals have been checked and matched. One thing that this ensures is that the
- Valuation LOW entries have been recorded for the correct dollar amounts. This test was specifically done by matching
the total amount of the bank receipts to accounts receivable postings.
- Subsequent daily bank receipts provide evidence of the amount that the company has subsequently
received. By examining this evidence the test of valuation assertion has been satisfied. The valuation
assertion found no errors and therefore the control risk will be low.

Cash Testing reconciliations of daily bank receipts to accounts receivable and matching the total amount of
- Existence LOW bank receipts to the accounts receivable postings ensures that the cash exists. This test was completed
and no errors occurred, leading to a low risk of control.
Cash Reasons for the control risk to be low are that:
- Completeness LOW - all cash receipts were found as deposited.
- the test of matching the total amount of the bank receipts to the a/c receivable was satisfactory and no
errors occurred.
- A batch report of all postings is ran and reconciles back to the bank.

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Gemma Paul ACC331- Auditing Assignment 2

W/p ref: A8 - 1
Assignment 8 Cloud 9 Pty Ltd
Prepared by: GAP
Period ending 31 December 2010 Date prepared: 16/04/2011
Assessing detection risk

Account assertion Inherent risk Control risk Overall risk assessment Detection risk
Sales HIGH HIGH
- occurrence (Brought forward from (Brought forward from HIGH LOW
Assignment 3) Assignment 7.3)
Sales HIGH LOW
- completeness (Brought forward from MEDIUM MEDIUM
Assignment 7.3)
Accounts receivable HIGH MEDIUM
- existence (Brought forward from (Brought forward from LOW
Assignment 3) Assignment 7.3)
Accounts Receivable HIGH LOW
- completeness (Brought forward from MEDIUM MEDIUM
Assignment 7.3)
Cash HIGH LOW
- existence (Brought forward from (Brought forward from MEDIUM MEDIUM
Assignment 3) Assignment 7.3)
Cash HIGH LOW
- completeness (Brought forward from MEDIUM MEDIUM
Assignment 7.3)
The assertions that have not yet been allocated a level of inherent risk have all been determined to be of HIGH inherent risk. The reason being
is the sales is of a high risk which accounts receivable is also associated with and will therefore be of a high risk. Another reason for the risk to
be high is because the overall risk was high.

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Gemma Paul ACC331- Auditing Assignment 2

W/p ref: A8 - 2
Cloud 9 Pty Ltd
Prepared by: GAP
Period ending 31 December 2010 Date prepared: 16/04/2011
Sales and cash receipts process – designing substantive procedures
Substantive testing is performed to detect material misstatements in the financial report assertions and include tests of details of classes of transactions,
account balances and disclosures as well as substantive analytical procedures.
The Objective is to obtain reasonable assurance that the accounting records are accurate and reliable.
As the detection risk for sales- occurrence and accounts receivable - existence was low, this means we must do more substantive testing to get the risk of a
material misstatement not being caught to that relatively low level. The rest of the account balances and assertions had a medium level of detection risk.
This means that a reasonable amount of substantive will still be required to reduce the risk of a material misstatement not being detected.

Completeness

Obligations/

Present and
occurrence

Valuation/
Existence/

disclosure
accuracy

Rights &

cut-off
# Description of procedure
1 CASH
To ensure the cash in the statement of financial
position exists at the balance date a request for    
bank confirmation (BAC) should be done. By
receiving confirmation of the BAC, loan balances
can also be verified. The following assertions relate
to the confirmation of loan balances.
1-existence or occurrence because there is written
acknowledgment that the loan balance exists
2-rights and obligations because the loan is a debt
of the client
3-valuation or allocation because the response
indicates the amount of the loan balance
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Gemma Paul ACC331- Auditing Assignment 2

2 CASH
To ensure cash in the statement of financial
position includes all cash items at the balance date    
and is stated at the correct amount, undertaking
tests of bank reconciliations is required.

Tests include:
Comparing amounts on the reconciliation with
totals in the bank statement, general ledger
and cash receipts records, including a
comparison of the balance per bank with the
amount confirmed by the bank.
Testing the clerical accuracy of the
reconciliation
Consider the need to investigate outstanding
cheques that have not been cleared.
Vouch reconciliations to supporting
documentation.

3 CASH
Analysing the clients summaries of undeposited   
cash receipts as well as computing various
cash ratios and analysing them for signals of
possible manipulation.
4 ACCOUNTS RECEIVABLE
Reviewing the aged trial balance of debtors and 
check for debtors to a certain amount of days, say
120 days.

5 ACCOUNTS RECEIVABLE
Subsequent receipts review verifying whether the
amount in outstanding receivables is subsequently   

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Gemma Paul ACC331- Auditing Assignment 2

received (after year end but before the completion

of the audit.)

6 SALES/REVENUE
Vouch entries in the sales journal to supporting
documentation such as the sales invoice   

7 SALES/REVENUE
Check the sales invoice and the shipping
document.
You will verify prices, quantities and computation   
on sales invoices as well as verifying the quantity to
shipping documentation
Also check the last sales invoices before balance
date and first sales invoices recorded after balance
date are recorded in the correct period by verifying
the delivery date on shipping documents.

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Gemma Paul ACC331- Auditing Assignment 2

Assignment 10-Substantive testing Cloud 9 Pty Ltd W/p ref: A10 - 1

Period ending 31 December 2010 Prepared by: GAP
Testing of purchasing – audit program Date prepared: 16/04/2011

Audit program item Tick marks Initials Date References

1. Complete the following tests and document A10-2
your testing on the evidence provided and in
the relevant work paper table
a. For each supplier invoice, match the Qty A GP 1/04/2011 A10-2
invoiced to the Qty received by Cloud 9 and
recorded on the receiving report and on
the purchase order.
b. For each supplier invoice, recalculate the B GP 1/04/2011 A10-2
cost of each line item.
c. For each supplier invoice, recalculate the C GP 1/04/2011 A10-2
total cost of the invoice.
d. For each supplier invoice and receiving D GP 1/04/2011 A10-2
report, check that the correct dollar
amount is recorded in the purchases
journal.
e. For each entry in the purchases journal, E GP 1/04/2011 A10-2
ensure it is recorded in the correct financial
period.
2. Document the misstatements found and make GP 1/04/2011 A10-3
a conclusion as to whether the account is
materially misstated
3. List the adjusting journal entries that should be GP 1/04/2011 A10-4
completed.

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Gemma Paul ACC331- Auditing Assignment 2

Cloud 9 Pty Ltd W/p ref: A10 - 2

Period ending 31 December 2010 Prepared by: GAP
Substantive testing of purchasing Date prepared: 16/04/2011

Item Date P.O # R.R # A B C D E

Qty match Line cost Invoice cost Journal check Period Check
22 22/09/2010 #578 #654     

23 07/11/2010 #635 #718 #718 receiving report    

doesn’t match the qty
on the purchase order
or the supplier invoice
24 12/12/2010 #697 #788     

They have received

25 01/12/2010 #713 #806    
stock in the 2010
period and have
recorded or
recognised it in the
2011 period.

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Gemma Paul ACC331- Auditing Assignment 2

W/p ref: A10 - 3

Cloud 9 Pty Ltd
Prepared by: GAP
Period ending 31 December 2010 Date prepared: 16/04/2011
Summary of misstatements detected during
Substantive testing
Misstatement Recorded amount Audited amount Misstatement
W/p ref: A10-2 Qty Price Equals Qty Price Equals Audited - Recorded
R.R #718 – Receiving report has the wrong qty of stock for item 450 * $85 = $38,250 475 * $85 = $40,375 $40,375 - $38,250
heavenly 456 – size 7. The qty should total 475 as does the purchase
order and supplier invoice. However, it has a qty of 450 instead. A = $2,125.00
quantity difference being 25.

W/p ref: A10-2 Nil for the 2010 period $56,184 $56,184
P.O #713 R.R 806 – They have received stock in the 2010 period and
they have entered the purchase journal in the 2011 period. Revenue
is to be recognised upon the delivery of products and services and
therefore should be recognised in the 2010 period when they
actually received the stock
Total sample misstatement $58,309

Projected misstatement
Total sample misstatement (1) $58,309
Dollar value of sample (2) $738,174
Percentage of sample dollar misstatement (3) = (1) / (2) ($58,309 / $738,174)= 7.90%
Dollar value of population $20,596,975
Projected dollar value of misstatement = (3) * Dollar Value of population (.079 * $20,596,975)= $1,627,161

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Gemma Paul ACC331- Auditing Assignment 2

Conclusions: The amount of misstatements for this financial period was quite low. No evidence was found of manipulating the accounting
records or acting in any fraudulent or unprofessional manner. The first error seem to be more from carelessness, however this could have
occurred from a number of different reasons. Eg. Under pressure, fatigue.
Overall the total misstatement dollar value totalled $58,309 which was 7.9% of the sample dollar misstatement and the projected dollar value
of misstatement came to $1,627,161.

W/p ref: A10 - 4

Cloud 9 Pty Ltd
Prepared by: GAP
Period ending 31 December 2010 Date prepared: 16/04/2011
Suggested adjusting journal entries

Date Accounts Amount ($)

7/12/2010 – receive stock Dr Creditors clearing Dr 38,250
Cr Inventory Cr 38,250
Notation (450 * $85)
Reversal of the receiving report journal which
was understated. Have used, these accounts
as I am assuming the sales invoice doesn’t
arrive until the 9/12/2010.

7/12/2010 Dr Inventory Dr 40,375

Cr Creditors clearing Cr 40,375
Notation (475 * $85)
Journal entry for receiving stock at the
purchased and invoiced stock amount.

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Gemma Paul ACC331- Auditing Assignment 2

I have assumed the invoice has not yet been

received as receiving report was received two
days earlier than the supplier invoice.

7/1/2011 Dr Account payable Dr 56,184

Cr Inventory Cr 56,184
Notation
Reversing the journal entry made in 2011
period
31/12/2010 Dr Inventory Dr 56,184
Cr Accounts Payable Cr 56,184
Notation
Stock is recognised
As the purchases journal states the correct amount, there may be no need for this correction. However, when they receive stock, if they do
any journal entries they would have entered incorrect amounts as the Qty on the receiving report was incorrect.

15 Lecturer: Naomi Stuart