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BKAA2013 AUDITING AND ASSURANCE I

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SCHOOL OF ACCOUNTANCY
BKAA2013 AUDITING AND ASSURANCE I
(GROUP G)

GROUP ASSIGNMENT (GROUP G)


PREPARED FOR:
EN. MOHAMAD ZULKURNAI BIN GHAZALI

PREPARED BY:
NO. MATRIK.NO NAME
1) 221389 HAZRINI BINTI MAZLAN
2) 221789 ATIKAH BINTI AZMI
3) 226603 LIM CHEE YAO
4) 226635 WONG CHUN FEI
5) 227676 WOO CHUN MUN


DATE OF SUBMISSION:
11 MAY 2014

BKAA2013 AUDITING AND ASSURANCE I
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TABLE OF CONTENT

Introduction ................................................................................................................................ 1
Basic Knowledge of Accounting and Documentation ............................................................... 2
The Flow of Preparing Financial Statement .............................................................................. 3
Control Procedures for Ordering and Credit Approval Process ................................................ 6
Control Procedures for Despatches and Invoice Preparation .................................................... 7
Control Procedures for Recording, Accounting and Credit Control.......................................... 8
Tests of Control on Sales and Trade-Receivables System......................................................... 9
Summary .................................................................................................................................. 10
Conclusion ............................................................................................................................... 11
BKAA2013 AUDITING AND ASSURANCE I
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Introduction

This is a report propose to the audit committee of the organization. This report is
prepared for the purpose to identify the risky areas in revenue cycle and establish appropriate
control procedures. In addition, I will explain the flow of preparing financial statement for
audit committee members to obtain a better understanding.
Normally, when we are performing the audit works, we will divide the financial
statement into few smaller segments or components which is revenue, purchase, inventory,
payroll and etc. This division makes the audit work more manageable, easily to focus and
detect fraud as well as assigning tasks to different members of the audit team. Although we
have to divide the audit work to few segment to be audited separately but there are still on a
completely basis. After we have done our work separately, the results of all the segments will
be combined to enable us to draw a conclusion about the financial statement as a whole.
After dividing the financial statement into few segments, we can easily detect fraud or
material misstatement of the financial statement because we can put our concentration on the
identified risky areas of each part of the financial statement.
Since the financial statement is segmented into revenue, purchase, inventory and
payroll, we will emphasize on the revenue cycle of the organization in this case because the
sales in revenue cycle reflects the performance of an organization and any misstatement will
have a critical impact to the organization itself as well as the potential investors.
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Basic Knowledge of Accounting and Documentation

First of all I would like to explain the basic knowledge of accounting to provide a
clearer picture and clarify the audit committee members who are lacked of accounting
knowledge. Here, Ill begin with revenue which is the amount of money that a company
actually receives during a specific accounting period, including discounts and deductions for
returned merchandise.
The revenue usually arises from an organizations operation activities such as sales
and other incomes. For your information, the revenue of an organization mainly contributed
from its sales and the total amount of sales might encompasses cash sales as well as credit
sales. Hence, well record in cash account when organization experiences an inflow of cash
from cash sales whereas well debit the receivables account for credit sales.
According to Malaysia Financial Reporting Standards (MFRS), were required to
apply accrual basis in financial reporting of the organization. Therefore, well recognize
revenue regardless of when cash transactions occur as long as weve provided goods and
services to our customers and the ownership of the goods have been transferred to customers
as well.
Therefore, we will focus and try to foresee risky area on the sales cycle because the
process in the particular cycle can be easily manipulated and lead to material misstatement in
the organizations financial misstatement. After identifying the risky areas, we only manage
to execute the appropriate control procedures in order to mitigate these risks and prevent the
organization suffer from loss.






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The Flow of Preparing Financial Statement

To prepare a true and fair financial statement, we must know about all the documents
from the operation activities within the business. Documents are the original records which
prove a transaction. There are many kind of document which we will normally see in
operation activities such as sales invoice, credit notes, debit notes, shipping document and
others. We must recognise all the documents to enable us to differentiate the uses of the
document and the account treatment. For example, when customers purchase product from
our business on credit, our sales clerk will send a sales invoice to the customer. This sales
invoice is use to record a credit sales from a customer. Therefore, we need to debit the
accounts receivable and credit sales account. Every document has its own treatment in
preparing financial statement.
To record a transaction, we need to post the details of related documents to the basic
book of accounting: Journal. We will record according to the pre-numbered of the documents
and a simple explanation for each document in respective journals. These records are very
important for us to ensure the posting process to be more systematic and enable us to trace
the documents easily.
Next, we will post the transactions from Journals to Ledgers. Ledger is a summary of
all amounts entered in journal which list individual transactions by date. There are 2 types of
ledger: general ledger and subsidiary ledger. Every transaction will normally post from
journal to the ledger accounts. Ledger will have all the details of the accounts within the
accounting period such as beginning balance, changes of amount and ending balance.
After posting the entries to ledger, we need to close the temporary accounts (revenues
and expenses) and calculate the ending balances for permanent accounts (assets and liabilities)
in order to carry forward to the next accounting balance. Then, we have to prepare a trial
balance which is a list of closing balances of permanent accounts at end of the accounting
period. If all the ledger entries had been recorded correctly and all the ending balances had
calculated correctly, the total debit balances in trial balance will be equal to the total credit
balances. Trial balance is use to determine error in preparing journal and ledger according to
double entries concept.


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After we had prepared trial balances, we need to do adjusting entries in the
appropriate ledger accounts if any. Adjusting entries usually made on the last day of an
accounting period to ensure that the financial statements reflect the correct amounts in the
period. Adjusting entries are needed due to the accrued or prepaid revenue and expenses
which are not recorded during the accounting period. After we have finished all adjusting
entries, we need to prepare an adjusted trial balance to reflect the most accurate amount for
all permanent accounts.
Before preparing a financial statement, there will be closing entries for the temporary
accounts. Here, we will match the revenues with expenses of the organization for the current
accounting period. If the sum of revenues is higher than expenses, it will be the income and
increase the equity of organization and vice versa.
Financial statement is a formal record of the financial activities of an organization.
Financial statement need to be prepared in accordance with the financial reporting framework
and free from material misstatement and fraud. There are 3 types of financial statement such
as Statement of Financial Position, Statement of Comprehensive Income, Statement of Cash
Flow which reflect the performance and the financial stability of an organization.














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Purchase Order (PO) from
customer.
-To indicate a purchase request.
-Must be approved by credit controller if it
is on credit.
Sales Order (SO) raised and
copies to factory/store and
accounts department.
Official receipt issued for all
receipts received.
Coding and posting into the
accounting system.
Monitoring of debt and
follow-up.
Sales invoice raise and send to
the customer.
Store will issue Good
Despatch Note (GDN) when
sending goods.
-To indicate the terms of sales
-SO must have serial number, physically
controlled and approval is needed.

-To indicate delivery of goods sold.
-Before despatch, match the details of
goods whether consistent with the SO.
-All GDN must have serial number.
-To indicate a request for payment
-Match the details on SO as well as GDN
and approval is needed
-Approval is needed
-There should be a listing of all invoices
posted. This is an audit trial for future use
-To indicate receipt of payment from
customers
-Check bank reconciliation statement for
cheque clearance
-To ensure all credit customers pay on time
-Send remind letters for customers who
overdue debt
Sales Cycle
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Based on the sales cycle that Ive presented earlier, there are 3 risky areas such as:
Ordering and Credit Approval Process
Despatches and Invoice Preparation
Recording, Accounting and Credit Control

Therefore, we need to emphasize in these 3 risky areas and establish the appropriate control
procedures to mitigate these risks in order to meet the organizations objectives

Control Procedures for Ordering and Credit Approval Process

During this process, segregation of duties must be presence among the employees
especially in credit control, invoicing and inventory dispatch. In other words, these functions
must be performed by different persons.
The sales department will first receive the order from customers. All customers order
received must be recorded in a register. They will then verify the customers credit limit in
their customer records (for existing customers). For new customers, they will refer to banks
or third parties for confirmation for credit limit to be granted. The new credit limit for old and
new customers must be authorised by an independent credit controller. Regular review of the
credit terms must also performed. Therefore, the sales department will approve customers
orders only if their credit limit does not exceed the set companys threshold.
The changes in the master customer-data file can only be made with the authorisation
of senior staff, for example, deletion of customer data must be supported by evidence of
balances cleared or customer is in liquidation.
Here, our control objective is to ensure the orders are recorded correctly instead of
being manipulated by the intended persons. On top of that, only bona fide orders received
from customers are executed.
.

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Control Procedures for Despatches and Invoice Preparation

Authorisation of dispatch of goods will be needed throughout the despatches and
invoice preparation because we dispatch only on approved sales order forms and to
authorised customers. Special authorisation need to obtain from senior official of the
company on dispatch of goods free of charge or on special discount terms. Before dispatching
our goods to customers, we must examine the quantity, quality as well as the condition of
goods. After that, we still need to record and match the goods outwards records with
customer orders, dispatch notes (delivery order) and sales invoices.
Besides that, we need to review for dispatch notes not matched by sales invoices
regularly as well as checking the pre-number of sales invoices, dispatch notes and credit
notes. The signatures of customers on dispatch notes must be obtained to ensure the
dispatched goods meet the requirement of customers as well as for their acknowledgement.
For the preparation of sales invoices, the selling price must be from the approved
selling price list, and arithmetic accuracy of the sales invoices must be checked. All sales
invoices must be authorised by a senior official of the company.
The credit notes issued to customers, which are based on goods-returned notes, must
be authorised by a senior official of the company.
After the dispatch of goods and goods returned, the inventory records must be updated
based on dispatch notes and goods-returned notes and sales invoices issued.
By establishing the above controls, all dispatches of goods or services provided are
properly invoiced as well as the goods and services sold are also promptly invoiced. The most
important thing is the credit notes are only given for valid reasons due to authorisation.




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Control Procedures for Recording, Accounting and Credit Control

Similarly to the control procedure for the ordering and credit approval process, there
must be segregation of duties between recording sales, maintaining of customers accounts,
and preparing customers statements of accounts.
When recording the sales invoices, we need to ensure the sales invoices are in running
number as well as matching the sales invoices with the cash receipts for cash sales (cash must
be kept safely and must be banked-in promptly).
For credit sales, when payment is received from customers by the accounts
department, they have to match the payment received with the relevant sales invoices. Then,
authorised receiving vouchers and official receipts will be issued for customers to sign for
acknowledgement. However, if the payment is received through mail, the mail must be
opened by two persons, for example, one person opens the mail and another person records
the money received (segregation of duties).
When the payment is done, the Accounting Department should take up the entries
accordingly, stamp the sales invoices with the word PAID and DATE of the payment
was made, and pass a copy of the Official Receipt to the Sales Department for recording.
Meanwhile, the Accounting Department should cash the cheque promptly and document the
bank-in slip together with the receiving vouchers, sales invoices and goods-dispatch notes
accordingly. Sales returns must be separately recorded based on goods-returned notes and
credit notes issued. Cut-off procedures should be considered to ensure that goods dispatched
or vice versa are dealt with in the correct accounting period. It relates to completeness and
accuracy.






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Meanwhile, we can execute appropriate internal controls on trade-receivable like
conduct regular preparation of trade-receivable statements of accounts and must be
authorized by a senior official before being sent to customers. We also can conduct regular
checking of trade-receivables accounts for any overdue accounts. If there are any, there
should be follow-up by sending overdue statements, charging overdue interest, refusing to
continue work until overdue accounts are paid, employment of specialist debt collectors, and
presenting creditors petition for official bankruptcy of debtors. Other than that, bad debts
written off should be properly authorized and recorded to prevent falsification from staff.
Reconciliation of sale-ledger control account to individual sales-ledger account should be
conducted to ensure the figures are actually exists and accurate as well as preventing
manipulation. Analytical review of sales ledger and profit margins to uncover unusual
amount.
Tests of Control on Sales and Trade-Receivables System

Tests of control are ordinary and extended procedures designed to produce evidence about
the effectiveness of client controls that should be in operation.
To ensure the effectiveness of control that weve implemented earlier, we shall do the
following:
Check new customers have been authorised by credit controller or designated senior
staff.
Check sales invoices and cross-check to any documentation of credit approval to
ensure that the orders are only accepted from customers who are within their credit
period and credit limits.
Check the numerical sequence of sales orders, good despatch notes and credit notes.
Check sales invoices on prices charged with official price lists or approved sales order.
Check entries of sales day book to sales ledger.
Check that all bad debts written off have been authorised by the management of the
company.
Hence, we can ensure the organization has a reliable system as well as avoiding material
misstatements due to poor internal control system.
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Summary
RISKY
AREAS
RISKS IMPACTS INTERNAL
CONTROLS








Ordering and
Credit Approval
Process

Manipulation of
transaction
documents
Losses in revenue;
overstatement of
inventory in the
balance sheet

Segregation of
duties
Manipulation of
master customer-
data file

Overstatement of
accounts receivable
Authorisation

Credit limit of
customers
accounts approved
by unauthorized
persons


Overstatement of
accounts receivable;
losses of cash
receipts when
subsequent
collections on
written-off accounts
are misappropriated
by perpetrators of
the fraud

Authorisation





Dispatches and
Invoice
Preparation

Unauthorised sales
order
Overstatement in
revenue,
overstatement of
inventory dispatch.

Authorisation
Dispatch notes
disagree with sales
invoices

Losses in revenue Accounting
Records
Unauthorised sales
invoices and credit
notes

Overstatement in
revenue
Authorisation



Recording,
Accounting and
Credit Control

Fraudulent of
account receivables
Overstatement of
account receivables
Segregation of
duty
Incorrect recorded
of sales return
Incorrect in revenue
as well as costs for
goods

Authorisation
Bad debts written
off


overstatement of
account receivables
Authorisation
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Conclusion

In conclusion, we can divide the report into few parts such as:
Introduction and segmentation of financial statement
Explanation basic knowledge of accounting and documentation
Sales cycle
Control procedures to mitigate the risky areas.
The primary objective of reviewing the sales cycle is to foresee and discover the
problem existing in the operation process. Prevent is better than cure, executing appropriate
control procedures, we can mitigate the risky areas which caused by the poor internal controls.
In order to ensure the effectiveness of control procedures, we will examine test of control as
stated earlier. Ultimately, I believe the control procedures that we are going to implement
would assist the organization to meet its business objectives and able to present a true and fair
financial statements.