QUESTION
REQUIRED
From the following scenario, you are required to identify assertions at risk, choose appropriate evidence(s) and write a detailed audit procedure. (15 marks).
What improvements would you suggest to the existing cash receipt procedure? (10 marks).
SOLUTION
Answer:
The following scenario is a transaction process and the assertions at risk involved with a transaction process are as follows:
- Completeness
- Accuracy
- Occurrence
- Classification
- Cut Off
i) Completeness: it should be ensured that all transactions which should have been recorded have been recorded. Not recording any transaction which should have been recorded leads to incompleteness and this is the first assertion at risk.
ii) Accuracy: it should be ensured that all transactions are recorded at their correct value. Recording any transaction at incorrect value leads to the second type of assertion risk that is non accuracy.
iii) Occurrence: all transactions should have actually taken place, hence transactions should be supported by documents as proof of occurrence of the transactions.
iv) Classification: all the transactions should be categorized under proper accounts, entries should be made in the proper accounts. Making entries for transactions under wrong accounts leads to the fourth type of assertion risk that is the risk of wrong classification.
v) Cut-off: all transactions should be recorded in their correct accounting period.If a transaction that took place in the month of May is recorded in June, then it would lead to the fifth type of assertion risk that is risk of Cut off
(Knechel,Salterio and Ballou,2007)
Since it is cumbersome to check each and every transaction record, Auditors adopt certain quick methods to spot and detect errors, these are as follows:
Inspection: the auditor may inspect the various documents filed and the method of filing. In this case it will be the invoices, remittance advices, cash receipts, bank reconciliation. The auditor will be able to spot any lacunas or mistakes in the documents or in the way they are recorded.
Observation: the auditor may observe the whole transaction process and the recording of transactions and may arrive at certain conclusions. In this case he may observe the task flow, incorrect task flow may lead to incompleteness or overlap.
Inquiry: the auditor, upon any doubt may question the accounting personnel; by questioning he will be able to identify possible lacunas or errors in the accounting process.
Re performance: the auditor may ask the accounting personnel to re perform a doubtful transaction, and thereby identify possible mistakes that may have occurred.
Analysis: the auditor may compare the financial statements with previous year records, estimates, budgets, industry data. He may also perform certain ratio analysis such as sales to profit etc. By doing so the auditor may be able to spot any existing anomalies in the transaction recording process and suggest corrective measures.
Hence the evidences which an auditor may choose in this case are:
- Documents of transaction, such as PO, invoice, remittance advices, bank reconciliation statement, cash receipts.
- Books of accounts
- Task flow
Detailed Audit Procedure
A)Checking the transaction process: first of all the auditor should understand the entire transaction process, by breaking it down into steps and checking whether all steps are taking place in order. This cycle comprises several activities including financial transactions, which need to be properly recorded or accounted. Several trade documents also need to be filed and recorded (Kapoor, Bhushan & Maheshwari, 2009). The accounting of financial transactions and recording of documents should be based on a streamlined process so as not to loose any order, or money. The records pertaining to the status of order to remittance cycle should be in a format that allows continuous updation and monitoring Updated records should be easily accessible by the designated staff.
The order to remittance cycle is the heart of the sales function (Kotler. P, 2001 ).It begins from the receipt of order from the client and ends with the receipt of payment from the client.
The major steps involved in the order to remittance cycle, are as follows:
i. Receipt of Purchase Order (PO) from Customer by the Supplier
ii. Sending the invoice and product by the supplier to the customer
iii. Receipt of payment and remittance advice from the customer
i) Receipt of purchase order (PO) from customer by the supplier: this is a very important document, as this is a proof that an order has been placed by the customer and a specification of the product required by the customer. Without the purchase order processing the order or supplying the order is not possible. In retail outlets, for products especially consumer non durables, the purchase order can be verbally announced by the buyer and his/her demand can be easily fulfilled and payment can be immediately realized. The cycle in this case is very short and does not require much documentation or recording unless credit sales are involved. But in other types of sale such as purchase from manufacturers/wholesalers/consumer durables of high value etc, the cycle is much more pronounced and lengthy and requires proper documentation and recording.
ii) Invoice: Invoice is prepared by the supplier, on the basis of the purchase order, and is sent to the customer along with the product from whom PO has been received.
iii) Receipt of Payment and Remittance advice from customers: The payment in cash/cheque is sent by customer along with the remittance advice.
B) Checking the documents: the auditor should check whether the documents related to the transactions are being properly filed or not, and whether the documents contain all the relevant fields of information.
i)The Purchase Order (PO): mentions types, quantities, and agreed prices for products or services the seller will provide to the buyer. When a purchase order is sent by buyer to seller, it is considered as a legal offer to buy the sellers product/services.
Non acceptance of invoice/product by the customer on delivery: sometimes customers may have problems with the product/invoice actually received and return the product. The returned products /invoice need to be recorded.
ii)The Invoice: contains details such as products, quantities, and agreed prices for products or services payment terms.
iii)Reconciliation of PO and Invoice: can contain columns for PO, Invoice, and Remarks.In the Remarks column, it can be mentioned whether invoice for PO raised or not, reasons for not raising invoice etc. It can be as shown in the table below:
| PO(No. date) | Invoice(No. date) | Payment due date | Remarks |
iv)Remittance advice: is a document sent by the customer to the supplier informing the supplier that the goods were well received and paid.
v)Proof of payment (copy of receipts): receipt of payment document, duly signed by customer, mentioning invoice no. date of payment, mode of payment, details of payment (cheque no., cash receipt no.).
Non Payment by Customer: Credit sales carry several risks, realizing payments from customers can be sometimes difficult and sometimes customers may default. Even in case of cheque payment, sometimes cheques maybe dishonoured.(Rajshekharan,2012)
vi)Reconciliation of Remittance advice and Invoice and proof of payment (this can be in the same document as Reconciliation of PO and Invoice): The reconciliation statement of PO and Invoice can be further extended to include more columns, as shown below:
| PO(No. date) | Invoice(No. date) | Payment due date | Remarks | Remmittance adv no.,cheque no.,cash receipt no.,date | Remarks |
The remarks columns can mention whether payment received or not, if not (whether fully and partially) then brief note.
vii)Proof of bank deposit: the bank provides returns stamped deposit slip as poof of cash or cheque deposited. These proofs must be recorded in files.
viii)Bank reconciliation statement: monthly reconciliation statements can be obtained from banks .This can be used for checking whether cheque payments have been honored or not. If not then brief note in Remarks should be included. The supplier can check with the bank regarding clearance of cheques after the due date of cheque clearance, by phone or internet, instead of waiting for bank reconciliation statement. For cheques dishonored details can be mentioned in remarks column in the above given reconciliation statement. If cheques have been honored, this should also be briefly noted in the remarks column.
C)Checking the books of accounts: the auditor should check the books of accounts and the totals. In this case the concerned books are cash and bank book, sales book, goods book.
Checking of sales ledger or book: whenever goods are sold journal and ledger entries are made. The sales ledger provides the amount due to sales account. When goods are sold sales account is credited and goods account is debited
Checking of Goods ledger: whenever goods are sold or bought, entries are made in journals and respective ledgers. Here goods imply the offer or output of the company that is offered to customers for sale. In this case we are concerned with goods sold; whenever good are sold ,goods account is debited and sales account is credited. Hence goods and sales ledger should have corresponding entries.(Kapoor and Bhushan,2009)
Checking of cash/bank book: for all transactions in cash or cheque journal entries are made and entries are also made in cash book and bank book. When money comes in cash or bank account is credited and the source from which money comes is debited. Whenever money goes out bank/cash account is debited and source to which money goes is credited. Hence in this case money realized due to sales will be credited to cash/bank account and sales account will be debited. In case any cheque is dishonored then this too has to be recorded in the journals and ledger by debiting the bank account and crediting sales.
The total of goods account, sales account and cash account should be tallied for corresponding entries.
What improvements would you suggest to the existing cash receipt procedure? (10 marks).
Answer:
Instead of preparing cheques received list and various other separate documents the firm can prepare a single document of reconciliation and fill in the details during each stage of the order to remittance cycle. The reconciliation form needs to be updated and be made accessible to the designated staff. The complete reconciliation statement is being reproduced as below:
Grand Reconciliation Format
| PO(No. date) | Invoice(No. date) | Payment due date | Remarks | Payment Received (Remittance adv no.,cheque no.,cash receipt no.,date) | Remarks |
It can be seen from above that the complete reconciliation statement is based on the order to remittance cycle and starts with the PO.
The above is a format and needs to be supported by documents, such as the PO, Invoice, Remmittance Advice, Payment Receipt, Bank deposit receipt, bank reconciliation. All these documents should be filed and referred by number or date.
Personals can be made responsible for recording of these documents, and the records can be stored centrally as well as distributively. These documents can be also scanned and stored in the computer system, especially the PO, Invoice, Payment Receipt and be made accessible to designated personnel.
Appraisal of the present cash receipt procedures:
| Personnel |
Tasks |
Remarks/Suggestions |
| Garry Stafford | Receives payment mails, collates the cheques and remittance advices, sends to Li Wong | |
| Li Wong | Receives remittance advices and cheques from Garry Stafford | Should record remittance advices, it is assumed that PO, Invoice have already been filed. |
| Receives list of collections from sales and remittance advices from Chris O Brien | This list should come from Jeremy as he receives the cash from Chris, the list should be tallied and signed by Geremy | |
| Prepares cheques received list | Recommendation: Make entries in the grand reconciliation form in the Payment received column for payment received by mail as well as from sales dept. It is assumed that preceding columns have been filled earlier. Makes accessible this updated format to designated staff through computer system. | |
| Makes two copies of the list | NA | |
| Sends original copy with cheques to Barry Seymour | NA | |
| Sends one copy to Mary Beyes | NA | |
| Keeps one copy of cheques received list with himself | NA | |
| Makes entries in trade receivables subsidiary ledger for payment received by mail and from sales dept. | Entries for trade receivables should be made in journal also. Corresponding entries also need to be made in Goods accounts in journal and ledger, as when trade receivables account was credited goods account was debited. For each credit entry there should be a debit entry and vice versa. | |
| Records the copy in file. | NA | |
| Barry Seymour | Prepares the deposit form | |
| Makes three copies of the deposit form | Can be made accessible by computer system. | |
| Makes entries in the cash receipts journal | Should also make entry for cash receipts from sales department and the copy should come from Li wong, via Jeremy via Chris. | |
| Files a copy of deposit for his own records | ||
| Takes the cheques and two copies of the deposit form to Jeremy Mooney | ||
| Sends a copy to Mary Bayes with a reconciliation form | Recommendation: another recommendation form need not be prepared, entries posted by Li Wong in the grand reconciliation format under the purchase column can be rechecked though. | |
| Chris O Brien | Receives list of collected amounts and amounts from sales staff | |
| Prepares a total list of amount received | ||
| Makes three copies of the total list | Should send copy to Jeremy and Mary. Since Jeremy Seymour is receiving the cash ,he should check the total and tally the list and thereafter send a copy of the list to Li wong, Li wong can send to Barry . | |
| Sends one copy with supporting copies of sales staff list to MaryBayes | ||
| Sends original to Jeremy Mooney along with amount collected | ||
| Sends a copy to Li Wong with remittance advices | Through Jeremy | |
| Mary Bayes | Reconciles total of cheques received list with sub total copy of deposit form and total posted in the cash receipts journal | Recommendation: Needs to check the grand reconciliation form filled by Li wong and checked by Barry Seymour, can be done on computer system. |
| Checks and adds the cash collected by sales staff | Should be done by Jeremy as he is receiving the cash, Mary can check the payment column in the Grand Reconciliation form filled by Li Wong and checked by Barry and tally the account books updated by Li Wong and Barry | |
| Initials the reconciliation form | Also dates it. | |
| Files the reconciliation form | ||
| Jeremy Mooney | Deposits the cheques and cash in bank | Should check the cash and cheque received and tally with deposit form and sales staff list. |
| Records copy of stamped deposit slip given by bank | ||
| Does the monthly bank reconciliation | ||
Reconciliation of PO with Invoice: Reconciliation of PO with Invoice will give information regarding orders which could not be fulfilled. Particulars regarding such orders such as status of availability, substitute etc can be passed on to the sales department for further follow-up by them and information to the customers. This way the system can ensure maximum efficiency on customer orders.
Reconciliation of PO, Invoice and payment: by reconciling these invoices for which payments have been received in full can be considered as one cycle closed. The invoices against which payments have been partially received or not received at all, or for which cheques have been dishonored, are open cycles. These data can be filtered from the entire document and formed into a separate list for follow by sales department or designated persons with reference to the reason for non payment. Defaulting customers can be noted and legal action can be taken against them, and further orders received from such customers can be treated with caution. Seriously defaulting customers can be blacklisted.(Ballauo, 2007) Hence by such measures the supplier can form a profitable customer data base and weed out the defaulters.
Reconciliation of Books of Accounts: pertaining to the assignment, three books or ledgers of accounts are relevant in this case: The goods ledger (goods in this case refer to the products of the firm offered for sale to customers), the sales ledger and the cash & bank ledger. These books contain corresponding entries relating to sales of goods and receipt of payment. These entries should be matched and tallied.
Documentation of Cash Receipts: When cash are received by salespeople, they should provide customers with the receipt of this cash and keep a copy of the receipt, duly signed by the customer with themselves to be submitted to office. In the event of cash not being deposited by salesperson due to any reason, this document retained with the customer can serve as a proof.
Introducing On Line Payment Options: It is given in the assignment that payment for goods sold to customers are received through cheques mailed by customers or cash given to salespeople by the customers. A third form of payment that is online payment can be introduced as a payment option, and especially in the contemporary times this form of payment has become very much popular due to its swiftness.
The advantages of following this system are as follows:
- Format based on Order to Remittance Cycle
- Single Format usable via computer links by multiple authorized personnel
- Reduction in paper work
- Swift
- Streamlined
- Reduction in possibility of errors
- Enables tracking of status of orders at a glance
- Enables retrieval of data useful for follow-up, demand prediction, production scheduling and inventory management.
- Maximizes efficiency of order fulfillment
- Reduces unnecessary burden on staff
- Staff can save time for other useful activities.
- Contains reference to all trade related documents in one single thread.
- Enhances communication and coordination amongst designated staff.
- Enhances interdepartmental communication and cooperation between sales and accounts.
- Is a useful and handy tool for reporting to senior management.
- The status on orders is readily available and complete with respect to all aspects.
Reference:
Knechel,Salterio and Ballou, 2007.Auditing:Assurance & Risk 3rd ed. San Diego: South Western College.
Kotler.P.,2001.Marketing Management,10th ed, India: Pearson Education Ltd.
Kapoor N.D.,Bhushan B. & Maheshwari R.P.,2009.A Complete Course in ISC Commerce, 7th ed, India:Pitambar Publishing Company (P) Ltd.
Rajshekharan.V., 2012. Accounting for Managers.India:Dorling Kinderseley India Pvt. Ltd.
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