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Auditing case study

Number of Words : 1128

Number of References : 5

Contents

 This report is based on the following case study -
 Task details:
 This isan individualassignment.
 Paul Hewsonwho has extensive interest in music and fashion has set up a fashion clothes
 business in July 2011, Music Fashion Ltd, with his two long term friends Larry Mullen and
 Adam Clayton, and have recently listed Music Fashion Ltd on the ASX.
 Larry Mullen was previously the marketing executive for a clothing manufacturer that
 distributed products through major department stores throughout Australian and the UK and
 has a sound network within the retail sector. Adam Clayton has worked as an accountant for
 a medium-sized family company in the furniture industry for many years.
 New fashion wholesalers often find it difficult to gain retail accounts, as many retailers are
 dismissive of new designers. However Paul has managed to get his garments into two
 major Australian retail store chains. The retail store require the goods to be supplied on
 consignment, with the stores entitled to return any unsold items within two weeks of the end
 of the season. In addition, the payment terms for store are 30-days after consignment sales.
 As a result cash is very tight as 60% of inventory is sold on consignment.
 Music Fashion Ltd has the following staff:
  three directors, Paul, Larry and Adam
  secretary/receptionist
  warehouse manager
  assistant to the warehouse manager
  accounts receivable clerk
  accounts payable clerk
 All operations are conducted from a central office/warehouse facility and during your interim
 audit you note the following processes for the purchases function.
 The warehouse manager orders fashion goods from the suppliers as identified by Paul.
 Price quotes are obtained by the warehouse manager usually via telephone with the
 suppliers. The warehouse manager then prepares an order form for fashion items,
 quantities and prices and then sends this order off via a facsimile and the only copy of the
 order is kept by the warehouse manager.
 The warehouse manager the completes a purchase order in the inventory program on the
 computer system and prints one copy of this form and sends a duplicate copy to the
 accounts payable clerk for filing in date order.
 When the ordered goods are received at the warehouse, the warehouse assistant, checks
 the content of the goods received to the suppliers delivery note attached to the goods and
 signs the delivery note as evidence of this check. The purchase order is then recorded for
 the inventory received in the inventory program. The supplier delivery note comprises of two
 copies, and one copy is returned to the person delivering the goods for returning to the
 supplier and the other copy of the delivery note is forwarded to the accounts payable clerk.
 The accounts payable clerk raises a journal entry in the general ledger accounts payable
 system to credit the supplier and debit inventory on hand. The delivery note is then filed
 alphabetically in a folder of supplier delivery notes awaiting receipt of the suppliers invoice.
 Supplier invoices received by the secretary/receptionist in the mail are forwarded to the
 accounts payable clerk for putting with the purchase order and supplier delivery note.
 Details of the invoice are matched to the purchase order and delivery note and calculations
 for supplier amounts confirmed. If the details of the invoice match to the purchase order and
 the invoice total is correct, the invoice is signed by the accounts payable clerk and then
 processed for payment. Any invoices which are not matched to the purchase order or
 delivery note are forwarded with the purchase order and delivery note to the warehouse
 manager for follow up. The warehouse manager is to the supplier for follow up
 and/or authorise the invoice for payment. The supplier invoice, purchase order and delivery
 note are returned to the accounts payable clerk for payment when the warehouse manager
 is happy for the supplier to be paid and this authorisation is noted on the suppliers invoice
 with the warehouse manager’s signature and date.
 A payment run is made every second Thursday with the accounts payable clerk selected the
 suppliers to be paid in the general ledger accounts payable system that interfaces with on-
 line Banking and all general ledger accounts. A report is generated for suppliers to be paid
 and this report listing each supplier, the invoice number and the amount is reviewed by the
 secretary who confirms copies of all invoices are attached to the report, and this review is
 evidenced by signature and dating the report. The report is then reviewed by one of the
 Directors (Paul, Larry or Adam) and this is also evidenced by signature and date. The
 reviewing director and the secretary both then both authorise the electronic payment via
 electronic banking. The authorised supplier payment report with attached invoices,
 purchase orders and delivery notes attached is then filed in payment date order.
 At the time of your final audit there had not been any changes to the purchases or payment
 of supplier functions from your interim review. In the end of year audit testing a sample of
 100 supplier payments were tested and the following is a summary of this testing:
 Payments showing evidence that all control activities had been
 followed
 Payments that had no supporting documentation attached 3
 Payments that did not have approved purchase orders but all other
 documentation was attached
 Payments that did not bear evidence that the creditor invoice
 calculations had been checked
 Payments that did not bear evidence as being authorised for
 payment by the secretary
 Payments that did not bear evidence as being authorised for
 payment by a Director
 Review of the subsidiary supplier ledger noted debit entries for
 payment corrections and sundry entries
 The aged supplier balances reflected amounts outstanding for 90
 days
 REQUIRED
 1. Identify the inherent risks for Music Fashion Ltd’s due to their relationship with the two
 major Australian retail store chains.
 2. Identify two financial report items that will be affected by these risks and the assertions
 most at risk.
 3. Note how the internal controls will impact on your audit approach for the year end audit
 of the purchasing function.
 4. Explain the implications of the errors noted in the year end audit testing of controls.
 (Take into consideration any concerns with internal controls.)
 5. Briefly discuss how CAATs could be applied to assist your testing in the year end audit.

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