AUE202M/202/1/2009

DEPARTMENT OF AUDITING
AUDITING MODULE: AUE202M

INTRODUCTION TO THE PERFORMING

OF THE AUDIT PROCESS

FIRST SEMESTER
TUTORIAL LETTER 202/1/2009 - KEY TO ASSIGNMENT 02/2009 AND 03/2009
ASSIGNMENT 02/2009

QUESTION 1
1.1

Programmed controls for electronic fund transfers (EFTs)

6 marks

Reference: Jackson & Stent (2007: 11/3; 11/11 - 11/12; 8/34 8/37)
Risk 1: EFT payments transferred may be made by unauthorised persons
Reference: Jackson & Stent (2007:8/34)

Access to particular applications should be restricted, e.g. the internet bank

account may only be accessible from certain PCs.
Access is restricted in terms of user profiles or access tables to particular users.
User ID and nature of activity must be required and logged by the computer.

Risk 2: EFT payments may be made for fictitious or unauthorised purchases

Reference: Jackson & Stent (2007:8/36 8/37)

Verification checks validate data keyed in against the master file e.g. product code
or supplier account number.
The computer produces exception reports which provide a summary of purchases
and payments which fall outside the parameters set for control purposes.

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Risk 3: EFT payments may be for the wrong amount

Reference: Jackson & Stent (2007:8/36)

A reasonableness test during processing of the payment should take place where
the amount of the payment is compared to the amount per accounts payable
records.
The computer should perform an arithmetic accuracy test e.g. reverse multiplication
of goods on invoice.

Risk 4: EFT payments may be duplicated

Reference: Jackson & Stent (2007:8/35; 8/37)

The computer performs a programme check and produces and exception report of
duplicated payment amounts as well as payment amounts exceeding accounts
payable amounts.

NOTE: Link the audit objectives per accounting phase with the menu reference next to the
objectives on pg 8/28 to 8/31 (Jackson & Stent) to find the above application controls on
pg 8/32 to 8/38 (Jackson & Stent).
1.2

Completeness and accuracy of credit sales

15 marks

References: - Study guide (2007: 99)

- Jackson & Stent (2007: 10/34 10/35)
1. Draw a sample of credit sales invoices and compare each with the corresponding
order and delivery note in respect of the name of the client, the description and the
quantity of goods dispatched.
2. Inspect the orders selected for approval by a responsible person.
3. Select documented inventory issued in a case where reliable, continuous inventory
records have been kept, and follow them up by examining the corresponding delivery
notes and sales invoices.
4. Trace the sales invoices that you have checked to the credit sales journal and confirm
that the particulars agree and that the transaction was correctly allocated.
5. Recalculate the totals of the sales records for selected periods to make certain that
the postings totals are accurate.
6. Check the postings of total sales to the credit side of the sales account and individual
sales transactions to the debit side of the accounts receivables account.

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7. Perform cut-off tests on sales invoices and delivery notes to ensure that the
transactions were accounted for in the correct accounting period.
8. Calculate the gross profit percentage and compare with prior periods.
9. Reconcile the list of accounts receivables with the accounts receivable control account
and confirm the correctness of the reconciling items.
10. Check the number sequence of the delivery note for missing and duplicate numbers.
11. Compare the amount of the turnover in the income statement with the total of the trial
balance and the general ledger.
QUESTION 2
2.1

Internal controls during an inventory count

15 marks

Reference: Jackson & Stent (2007:12/7 12/10)

1. The inventory must be neatly stacked, like items brought together and the aisles kept
clear.
2. Inventory count forms must be pre-numbered.
3. A register must be used to record all the issued and returned pre-numbered inventory
count forms. All inventory count forms must be accounted for.
4. Persons receiving and returning the inventory count forms must sign the register for
such receipts and returns.
5. Segregation of duties must be maintained between the counting, recording and
controlling functions and the person in control of the inventory count forms. Reliable
personnel must be used to perform the inventory count.
6. The inventory count must be executed according to the inventory count instructions to
the counters, recorders and supervisors, and the inventory count forms must be
signed by all of them. There must be proper supervision during the inventory count.
7. If differences arise during the recounts by counters these must be reported to the
supervisors and such differences must be resolved by them.
8. The supervisors must conduct test counts and if differences occur they must be
rectified.
9. There must be no movement or minimum movement of inventory, during the inventory
count.

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10. Slow-moving, obsolete and damaged inventory must be identified, and must be
recorded as such.
11. All the counted inventory must be tagged according to the inventory count instructions.
12. The latest document numbers of purchases and sales must be recorded to control the
inventory that will be included or excluded from the inventory at year end.
13. Inventory in transit and inventory held on consignment at other premises must be
identified and must be taken into consideration.
2.2

Audit objectives for inventory

6 marks

Reference: Jackson & Stent (2007:12/15)

To obtain satisfaction that:
1. the company holds or controls the rights to all inventory reflected in the financial
statements (rights).
2. all inventory actually existed at the financial statement date and is not overstated
(existence).
3. all inventory to which the company has the rights of ownership is included. All
inventory that should have been recorded has been recorded (completeness).
4. inventory is reflected at an appropriate amount (the lower of cost and net realisable
value) (valuation and allocation).
5. inventory is presented and disclosed in terms of the 4th Schedule and International
Accounting Standards (presentation and disclosure).

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ASSIGNMENT 03/2009
QUESTION 1
1.1

Jackson & Stent (2007:5/19)

1.2

Jackson & Stent (2007:17/25)

1.3

Jackson & Stent (2007:12/7 12/10)

1.4

Jackson & Stent (2007:4/22 4/26)

1.5

Jackson & Stent (2007:14/8)

1.6

Jackson & Stent (2007:10/31 10/32)

1.7

Jackson & Stent (2007:10/4)

1.8

Jackson & Stent (2007:11/24 11/29)

1.9

Jackson & Stent (2007:7/15 7/22)

1.10

Jackson & Stent (2007:7/23 7/29)

QUESTION 2
2.1 Internal controls for a good internal control system in respect of credit purchases
10 marks
References: - Jackson & Stent (2007:11/3)
- Study guide (2007:118 -120)
1.

Control environment

2.

Competent, trustworthy staff

3.

Management should monitor the internal controls for credit purchases regularly
to determine whether they are being applied.
Management should regularly compare the actual figures with the budgeted
figures and forecasts to expose possible weaknesses.

Only competent and trustworthy staff should be appointed in key control

positions.

Division of duties

The same person may not be responsible for completing the order, authorising
the order, purchasing goods and recording the transaction.

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Isolation of duties

5.

Access controls should be implemented, granting only authorised staff the

authority to process purchase orders.
Logical access controls should allow only authorised persons to effect changes
to the approved suppliers master file.
There should be only one exit/entrance through which goods that have been
purchased can be received.
The gatekeeper/receipts department receives the goods, inspects them and then
issues a goods received note.
Physical access to the store should be restricted to the storekeeper and his or
her assistants.

Source document design

7.

Orders may only be completed by the storekeeper.

The credit manager is responsible for authorising all orders by appending a
signature to the orders.
The purchaser may only use approved suppliers.
An independent (senior) person should review the transaction printouts and
exception reports for reasonableness.

Access / custody controls

6.

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The computer system should automatically prenumber all purchase orders

issued for later matching to goods received note and supplier invoice.
Unmatched orders are reflected on a printout.
The computer should generate a prenumbered goods received note when the
goods receiving store calls up the purchase order for checking against goods
received.

Comparison and reconciliation

Long-outstanding orders reflected on the printout should be followed up.

The computer should match unit prices on a supplier's invoice with those
recorded on purchase orders and produce exception reports which should be
reviewed and problems resolved.
Monthly reconciliations of accounts payable amounts with suppliers' statements
and remittance advices should be prepared and mailed to suppliers with
payment.
The total of the accounts payable ledger listing should be reconciled with the
general ledger accounts payable control account.
Printouts of general ledger balances and other detailed reports (accounts
payable ledger listing, transaction listing, etc), as well as all exception reports,
should be available at least monthly. This should be distributed to the various
departments for reconciliation.

-72.2 Audit of payments to trade payables

References:

AUE202M/202
12 marks

- Study guide (2007:134 135)

- Jackson & Stent (2007:11/22)

1.

Check whether there are cheque requisitions and supporting documentation for each
of the selected cheque payments.

2.

Check whether the cheque requisition has been approved for payment by the senior
accountant by scrutinising his signature on the cheque requisition.

3.

Compare the entries in the payments journal (cash book) with the details on the
relevant paid cheque and other relevant documentation, e.g. orders, delivery notes,
goods received notes, invoices and the trade payables statement.

4.

Compare the amounts of the discounts received as shown in the payments journal
(cash book) with those shown on the trade payables statements and test check the
calculations of discount and determine if they agree with the discount terms negotiated
with the supplier.

5.

Inspect that there is sufficient authority for the payment e.g. a signature of an
authorised person or two signatures of authorised cheque signatories on the paid
cheque.

6.

Inspect that the relevant documentation relating to each recorded payment has been
cancelled by the cheque signatory e.g. by a paid stamp.

7.

Inspect that the amount in the payments journal (cash book) is correctly allocated to
the trade payables column.

8.

Examine the correctness of the postings to the relevant trade payables accounts in the
trade payables ledger, and in total to the trade payables control account in the
general ledger.

9.

Ascertain the last cheque number drawn at the year-end and examine that no later
cheques have been recorded as current period transactions. Trace the payments to
subsequent bank statements to ascertain that they have been paid within a
reasonable period after year-end.

QUESTION 3
3.1 Internal controls that should be present over the payment preparation and payout of
wages.
14 marks
References:
1.

Jackson & Stent (2007:13/11)

Wage packets should be made up by two wage department members (physical

security over all aspects of cash handling should be extremely tight).

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2. On delivery of the payroll and pay packets to the respective wage section, the section
head should:

agree the number of pay packets to the payroll

agree control totals e.g. number of cards, total hours, on the payroll to the batch
register and
sign the payroll to acknowledge the receipt

3.

The pay packets and payroll should be locked away until payout.

4.

The wage payout should be conducted by at least two employees, e.g. an independent
paymaster and the section foreman, both to be present at all times.

5.

Employees should:

6.

present identification e.g. official staff card, prior to receiving their pay packets
acknowledge receipt of their wage packet by signing the payroll
count their cash and immediately report any discrepancies to the paymaster.
These should be recorded on the payroll.

In principle, employees should not be allowed to accept a pay packet on behalf of

another employee.

7. At the conclusion of the payout, the paymaster and foreman who have conducted the
payout, should:

agree all unclaimed pay packets to the payroll (unsigned entries)

identify clearly on the payroll, all employees for whom there is an unclaimed
packet
enter the details of unclaimed wages in an unclaimed wage register
sign the payroll to acknowledge this control procedure.

8.

The unclaimed pay packets and payroll should be retained by the paymaster who
should lock them away.

9.

When employees wish to collect their unclaimed wages, they must identify themselves
to the paymaster and acknowledge receipts of their pay packets by signing the
unclaimed wage register.

10. Regular independent reconciliations of unclaimed pay packets on hand and the
unclaimed wage register should be performed and the unclaimed wage register
reviewed for unusual occurrences, e.g. trend of more unclaimed wages in one section,
compared to others.
11. Any wages remaining unclaimed after two weeks should be banked and a copy of the
deposit slip attached to the register and cross-referenced to the relevant entries.

-93.2 Substantive procedures to be performed to audit unclaimed wages.

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6 marks

Reference: Jackson & Stent (2007: 13/21)

1.

Observe whether unclaimed wages are properly recorded on the payroll and in the
unclaimed wages register.

2.

Physically identify employees for whom wages were recorded as unclaimed.

3.

Investigate the authenticity of any employees whose names appear regularly in the
unclaimed wages register.

4.

Confirm that unclaimed wages are re-banked within a reasonable time, by inspection of
entries in the unclaimed wages register, bank records and deposit slips.

5.

Confirm that employees sign the unclaimed wages register when they subsequently
claim their wages.

6.

Select one month and reconcile the unclaimed wages as recorded in the payroll to the
unclaimed wage register.

QUESTION 4
4.1 The audit procedures you will conduct to confirm the existence of Land and Buildings
and Plant and Equipment
14 marks
Reference: Jackson & Stent (2007:14/21)
1.

Extract a sample of assets from the fixed asset register, which includes (all or some)
additions for the year. If the clients fixed asset register is computerised, audit software
can perform this task for you.

2.

Physically inspect the assets selected, matching them to the description (e.g. serial
numbers) obtained from the fixed asset register.

3.

Perform a deeds search at the deeds office and make certain that the property is
registered in the name of the company.

4.

Inspect the municipal accounts received by the company to make certain that the
accounts were in fact for the company.

5.

If an asset cannot be physically verified for existence e.g. it is a large piece of mobile
equipment being used in a remote area, seek corroborating evidence e.g. drivers
wages, license, correspondence with customer, repairs and maintenance records.

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Conducts a search of unrecorded disposals (mainly for plant and equipment)

analyse the sundry revenue account/cash receipts journal for cash receipts from
disposals of fixed assets; confirm that the item for which the cash has been
received, is included on the list of disposals.
during physical inspection of assets, take note of any evidence of fixed
equipment which has obviously been removed and follow up to determine
whether a disposal has taken place and is recorded.
enquire of senior personnel (factory manager) whether major equipment acquired
has replaced old equipment; if so follow up to determine whether old equipment
was disposed of and recorded as a disposal.
Inspect correspondence with insurance company to identify any fixed assets,
which have been removed from the list of insured items. Follow up to determine
whether such items have been disposed of and if so that they appear on the list
of disposals.
Look for evidence of expenses related to property, plant and equipment which are
no longer being paid or are significantly reduced, e.g. rates on a property,
significant decline in plant and equipment costs. Confirm that the asset to which
the expense relates has been treated as a disposal if it no longer exists.

7.

Reconcile disposals per the capital budget with clients list of disposals.

8.

Obtain a management representation letter regarding the existence of property, plant

and equipment.

4.2 The audit procedures you will conduct to confirm the completeness of Land and
Buildings, and Plant and Equipment
6 marks
Reference: Jackson & Stent (2007:14/22)
1.

Inspect the minutes of meetings for the authorisation for the acquisition or disposal of
property, plant and equipment.

2.

Inspect repairs and maintenance and similar accounts for material items which may
represent acquisitions of plant and equipment, but which may have been erroneously
charged as an expense.

3.

Examine municipal accounts and insurance contracts giving particulars for the assets.

4.

Obtain a letter from the companys bank to establish if any bonds or loans were
granted for the purchase of any land and buildings, or plant and equipment.

5.

When physically verifying the assets for existence, select a sample of fixed assets and
trace to the fixed asset register agreeing description, asset number etc.

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6.

Review creditors and cash payments for fixed asset purchases and confirm that they
are recorded as fixed assets.

7.

Review lease agreements and enquire of senior personnel for evidence of any assets,
which have been leased in terms of finance leases, but which have not been
capitalised.

8.

Obtain a management representation letter regarding the completeness of property,

plant and equipment.

QUESTION 5
Reference: Jackson & Stent (2007:12/20 12/21)
5.1 Audit procedures for the attendance of the inventory count, prior to the inventory
count.
6 marks
1.

Liaise with the client about date and times of the inventory count.

2.

Confirm all locations at which the client holds inventory (by enquiry, reference to prior
year work papers) and if necessary visit the locations.

3.

Perform administrative planning e.g. organize audit staff to attend.

4.

Obtain and review a copy of the written instructions given to the clients count teams
(see inventory counts page 8 earlier in the chapter).

5.

Enquire as to whether the client has any inventory which should not be included in the
count e.g. consignment inventory, inventory already invoiced but not yet delivered or
collected. Establish how this inventory is physically identified.

6.

Brief the audit staff allocated to the count on their responsibilities.

5.2 Audit procedures for the attendance of the inventory count, during the inventory
count
9 marks
1.

Observe inventory taking procedures to ensure that the clients written instructions are
adhered to.

2.

Walk through the store and identify inventory which is obsolete or damaged or appears
to be slow moving e.g. dusty, old packaging etc. The inventory number, description,
location and quantity should be recorded on a work paper and traced to the inventory
sheets to confirm that these items have been marked as damaged/obsolete.

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Conduct test counts on the inventory in the warehouse in both directions, making sure
all sections and categories are tested:

from inventory sheets to physical inventory (existence).

from physical inventory to inventory sheets (completeness).

4.

Resolve discrepancies in test counts before conclusion of the count by recounting with
the client staff and confirming that amendments are made to the inventory sheets
where necessary.

5.

Test the numerical sequence of the inventory sheets both before and at the conclusion
of the count to ensure that all inventory sheets are accounted for.

6.

Confirm by enquiry of inventory counters and inspection of the inventory sheets that
inventory which should not be included in the clients inventory, has been excluded.

5.3 Audit procedures for the attendance of the inventory count, at the conclusion of the
count.
10 marks
1.

Inspect inventory sheets to confirm that:

2.

lines have been drawn through blank spaces (so that items cannot be added),
alterations/corrections have been signed, and
inventory sheets have been sighed by the counters responsible.

Create audit records in respect of the inventory count attendance by:

taking copies of all inventory sheets (hardcopy or digital)

recording observations as to the clients count procedures
recording results of all test counts performed by the audit team
recording any damages/obsolete inventory identified, slow moving.

3.

Record cut-off numbers for all documents used in the inventory and production cycle.

4.

Compile a list of goods received notes which have not been matched to supplier
invoices (goods in transit).
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