Feedback to Text PAQ 10.36 Accounts transaction file

Required

1. Help Victoria explain to her audit assistants the reasons why they must account for the numerical sequence of sales invoices, credit (sales returns) memos, sales orders and shipping documents.
2. One of the audit assistants is checking credit memos. The task is to compare the credit memo and supporting documents with the entries to debtors for sales returns and allowances as to dates, customers, products, quantities, prices and amounts. He checks all memos with dates of up to and including 30 June (year-end) and reports that he finds nothing unusual. Why would Victoria send the assistant back to examine credit memos with July dates? Explain.
3. Why is it important for Victoria to undertake some procedures herself, such as reviewing the accounts for unusual items, instead of assigning the tasks to the assistants? What types of things would she be looking for when performing these procedures? What other procedures would be best performed by a more senior auditor?

(a) Internally generated documents are often numbered consecutively. The numbers provide a convenient reference for the audit trail. For example, the sales invoice number is used to identify the document underlying the transaction entered into the sales journal. In addition, the numbers reveal if a document has been omitted from the records, or duplicated in the records. The control is stronger if the numbers are preprinted on the forms or automatically numbered by the software program when the invoice is generated (because they cannot be duplicated). For example, the sales invoices should be entered consecutively in the sales journal. If a number appears twice, there is an error because two valid invoices cannot have the same number. If the sales invoices in the sales journal omit a number, the original document should be accounted for (i.e. the document is cancelled and filed in a cancelled document file).
The numerical sequence is also useful for cut-off testing. The auditor should establish the last valid number for the current financial year and ensure that all documents for previous numbers are recorded for the current year, and all subsequent numbered documents are recorded in the next financial year.
All documents mentioned are internally generated documents and should be preprinted (for forms that are completed by hand) or numbered by the computer software when the electronic form is generated.

(b) Credit memos are the documentary basis for a credit to debtors and a corresponding debit to sales returns and allowances. These entries result in a lower balance for debtors and an increased expense (or reduced revenue). They are used to reverse a recorded sale. The greater audit risk for debtors and sales relates to their overstatement, thus the auditors are particularly interested in any evidence that a recorded sale was not valid.
Victoria would be worried that credit memos and the resulting credits to debtors and debits to sales returns and allowance are made following the year-end to reverse invalid sales recorded in the current financial year. These reversals could be processed after year-end. Therefore, Victoria wants evidence about the validity of sales returns in July, to provide evidence about the validity of sales prior to year-end.

(c) Victoria would undertake some substantive testing herself because the audit assistants are inexperienced; they would be less likely to detect ‘unusual’ relationships because they are not familiar enough with what is ‘usual’. In some cases, a lack of fluctuation in an account can raise more questions than a fluctuation because other evidence suggests that the account balance should be different. A more senior auditor would have a better understanding of how non-financial information relates to financial data.

Other tasks usually performed by more senior auditors would be interviewing senior client personnel, including directors, obtaining access to confidential documents and board meeting minutes (where a junior auditor would not understand the discussion), communicating with external parties such as solicitors about complex matters, making judgement estimates, such as the provision for doubtful debts, speaking to experts about valuations, auditing complex accounts, such as derivatives, auditing disclosures such as related parties, reading contracts between the client and its customers/suppliers/employees, reading contracts for leasing of PPE.