Seminar 11 - Substantive Test of Transactions and Balances II

School: Nanyang Technological University - Course: ACC 2104 - Subject: Accounting

Seminar11 Outline SubstantiveTestsofTransactions&Balances I

Question 1 You are the audit manager of EXO & Associates (EXO), founded by Mr. Ee, Ms. Xie, and Mr. Onn. The three founders were working together in one of the Big Four audit firms and they left the firm in 2011 to form EXO. The firm has been growing steadily over the years and it now counts a few large local companies as clients, providing them with audit and other assurance services. One of your audit clients is Panaromic Components Pte Ltd (Panaromic), a manufacturer of electronics components with a financial year ending 30 June. The company has been in business for over 30 years, and it sells the components to a variety of local customers including vehicle servicing and repair companies, home appliance manufacturers and electronic parts retailers. Panaromic has a manufacturing plant as well as a large warehouse and a head office building. You are given the following internal control system narrative notes by the senior in charge. The notes relate to the sales system of Panaromic: Each customer is given a unique customer account number, and this is used to enter sales orders received in writing from customers. The orders are entered by the sales officer and the system automatically checks that the order will not take the customer over the credit limit set by the credit controller. The company has an approved price list, which is updated at the end of every month by the sales director. The warehouse receives the order electronically and the sales system generates a dispatch list and a goods dispatch note (GDN). A store man from the warehouse packs the goods based on the dispatch list and another staff in the warehouse double checks the details on the dispatch list and the GDN to the goods before the goods are sent out. Once the goods are dispatched, a copy of the GDN is sent to the accounting department at the head office and a sequentially numbered sales invoice is generated by the system. The sales invoice is checked against the GDN and approved by the accountant before sending it out to the customers. Required (a)Identify and explainFIVE (5)internal control strengths in the sales system of Panaromic Components Pte Ltd. (b)ForEACHinternal control strength identified in (a) above, (i)IdentifyONE (1)assertion and related class of transactions or account balances affected by the control. (ii)DescribeONE (1)audit procedure (other than inquiry) that you would carry out to test the operating effectiveness of the control.