AC 718- AUDITING AND ASSURANCE

TUTORIAL QUESTIONS
CHAPTER 14: Auditing Sales and receivables

Review Questions

1. Identify factors that ought to be considered in the assessment of inherent and control
risks specific to sales and accounts receivable.

2. What are the objectives of internal controls of a sales system involving the ordering,
despatch and invoicing for goods sold?

3. If the auditor does not receive a response after sending a letter to confirm a debtor’s
balance, what alternative audit procedures may be performed?

4. There are three stages in applying analytical procedures to sales and receivables in the
final audit. Briefly explain each stage.

5. Identify situations leading to an inherent risk that an entity may wish to (a) overstate
sales revenue and (b) understate sales revenue.

6. Explain what is meant by 'cut-off' and why it is important to auditors in establishing the
fairness of financial statements.

Professional application questions

Question 1
Cash sales system controls

As the internal auditor of the Sellanything Group of companies, you have been asked to
investigate the cash sales system of Stationery Ltd, one of the subsidiaries. Stationery sells
office supplies in the Melbourne area. Its prices are highly competitive and it offers a same-
day delivery service for orders telephoned before noon. Costs are kept down by requiring
cash on delivery. Sales are made in the following way:
1. The customer phones through an order to the sales department, which raises a
prenumbered multicopy sales order, two of which (the invoice copies) are priced and
totalled.
2. The dispatch department makes up the order and gives the goods to the driver with the
invoice copies of the order.
3. The driver delivers the goods, collects the cash and receipts the customer’s copy of the
invoice.
4. The driver returns and hands over the cash and the second copy of the invoice to the
cashier.
5. The cashier records and banks the cash.

Required
(a) State any weaknesses in the cash sales system.
Solutions manual to accompany Modern Auditing and Assurance Services 6e

(b) Describe any audit tests you would perform to ensure that there was no material error or
fraud within the system.

Question 2
High as a Kite Gliding Club is a members-based club for individuals who wish to fly gliders.
The club income comes from subscriptions from club members as well as charging for glider
rides. In the annual report for the year ended 30 June 2014 it was reported that the club had
160 members.
You are planning the audit for the year ended 30 June 2015 and are considering the
completeness of income. From your discussions with the club treasurer you have established
the following:
 Subscriptions are due for the year from July to June and for the 2015 year subscription
was set at $500 per member. Of the 2014 members, 11 did not renew their membership.
 New members are charged a one-off joining fee of $300 plus the annual subscription, 14
new members were signed up from 1 July 2014. In addition to this 7 new members
joined half way through the year, these were each charged the full joining fee but only
50% of the annual subscription during the year.
 Glider flights are charged at a rate of $20 a flight for members and $100 a flight for non-
members. A manual flight book is maintained and this shows that during the year a total
of 2320 flights recorded, of which 1670 were members.

Required
Show how analytical procedures can be used to audit revenue.

Question 3
Controls over cash receipts

The head office of Lighttime Ltd, wholesalers of electrical equipment, has asked you to
review the system of control over cash collection at the Victorian branch because it suspects
that irregularities are taking place. The branch is the largest single outlet of the company and
has substantial annual sales invoiced by the branch.
Enquiries reveal the following procedures for invoicing sales and collecting cash. (Cash
refers to currency and cheques.)
1. There are two invoice sets that are used for cash sales and credit sales respectively.
2. When payment for cash sales is received by the cashier, one copy of the invoice is
stamped as paid and filed alphabetically, and the other is given to the customer.
3. Credit sales invoices are sent to the customers.
4. Mail is opened by the secretary to the credit controller, who passes any cheques to the
credit controller for his review, without recording the amounts received.
5. The credit controller gives the cheques to the cashier by depositing them in a tray on the
cashier’s desk.
6. The cashier then makes a listing of the cheques, which is used by the credit controller for
posting to the accounts receivable ledger.
7. The cheques from credit customers and receipts from cash sales are banked daily by the
cashier, except for once a week when sufficient currency is retained to reimburse petty
cash.
8. The credit controller posts remittances to accounts receivable using a computerised
 Chapter 14: Auditing sales and receivables

accounting system and verifies the cash discount allowable.

9. The credit controller obtains approval from head office to write off bad debts. Any
subsequent remittances received in respect of these accounts are credited to ‘sundry
income’.

Required
(a) Describe control weaknesses in the accounting for cash receipts.
(b) Suggest improvements in internal control to prevent irregularities in the collection of
cash.
(c) Explain substantive audit procedures necessary to determine whether any
irregularities have taken place.