AUDIT EVIDENCE

 

Group 7

Noor Quraitul Ain Binti Shamsul Rahman 10DAT19F1044

Nurul Hanis Binti Amat 10DAT19F1078

Razwani Ilyana Binti Muhammed Reydzal 10DAT19F1023

Siti Nur Shahida Binti Ismail 10DAT19F1203

Nur Adlina Bint Jamuddin 10DAT19F1002

1. What are two major controls of sales returns and allowances transactions?

Internal control

• Internal Controls are the set of systems put in place in order to ensure the accuracy of the financial information provided on the financial statements. The internal controls allow for confirmation which improves legitimacy and accuracy.

Two major controls of sales returns and allowances transactions:-

1. Each credit memorandum should be approved by someone other than the individual who initiated it.

-Provides segregation of duties between access to the customer's record and authorization for issuing a credit memo

2. A credit for returned goods should be supported by a receiving document indicating that the goods have been returned.

-Perform test of controls on credit memo by examining a sample of credit memo for a proper approval and the presence of the respective receiving documents.

2. list four analytical procedures that can be used to test revenue related accounts.

Analytical Procedures

• Analytical procedures are a type of evidence used during an audit. These procedures can indicate possible problems with the financial records of a client, which can then be investigated more thoroughly. Analytical procedures involve comparisons of different sets of financial and operational information, to see if historical relationships are continuing forward into the period under review. In most cases, these relationships should remain consistent over time. If not, it can imply that the client’s financial records are incorrect, possibly due to errors or fraudulent reporting activity.

Four analytical procedures:-

1. Compare the days sale outstanding metric to the amount for prior years. This relationship between receivables and sales should remain about the same over time, unless there have been changes in the customer base, the credit policy of the organization, or its collection practices. This is a form of ratio analysis.

2. Review the current ratio over several reporting periods. This comparison of current assets to current liabilities should be about the same over time, unless the entity has altered its policies related to accounts receivables, inventory, or accounts payable. This is a form of ratio analysis.

3. Compare the ending balances in the compensation expense account for several years. This amount should rise somewhat with inflation. Unusual spikes may indicate that fraudulent payments are being made to fake employees through the payroll system. This is a form of trend analysis

4. Examine a trend line of bad debt expenses. This amount should vary in relation to sales. If not, management may not be correctly recognizing bad debts in a timely manner. This is a form of trend analysis.

3. What potential misstatements are indicated by each of these analytical procedures.

- Unrecorded (understated) revenue, Fictitious (Overstated) revenue, Changes in pricing, and product pricing issues.

- Under or overstatement of allowance for uncollectible accounts.

- Under or overstatement of sales returns.

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