Canadian Appliance Ltd.
Module/Session 9 Due: Monday June 29 ( 18 marks)
Question 1 (10 marks)
You are an audit senior in Segal & Fisher a public accounting firm. You are current working on the audit of one of its clients, Canadian Appliance Ltd. (CAL) which has a year-end of December 31, 2020. You are preparing the audit program for the sales and despatch system.
Audit documentation is available from the previous year’s audit, including internal control questionnaires and audit programmes for the and sales and despatch system. As far as you are aware, CAL’s system of internal control has not changed in the last year.
CAL is a retailer of kitchen appliances such as washing machines, fridges and microwaves. All sales are made via the company’s Internet site with dispatch and delivery of goods to the customer’s house made using CAL’s vehicles. Appliances are purchased from many different manufacturers.
The process of making a sale is as follows:
- Potential customers visit CAL’s website and select the kitchen appliance that they require. The website ordering system accesses the inventory specification file to obtain details of products CAL sells.
- When the customer chooses an appliance, order information including price, item and quantity required are stored in the orders pending file.
- Online authorisation of credit card details is obtained from the customer’s credit card company automatically by CAL’s computer systems.
- Following authorisation, the sales amount is transferred to the computerised sales day book. At the end of each day the total from this ledger is transferred to the general ledger.
- Reimbursement of the sales amount is obtained from each credit card company monthly, less the appropriate commission charged by the credit card company.
- Following authorisation of the credit card, order details are transferred to a goods awaiting despatch file and allocated a unique order reference code. Order details are automatically transferred to the dispatch department’s computer system.
- In the despatch department, goods are obtained from the physical inventory, placed on CAL vehicles and the computerised inventory system updated. Order information is downloaded on a hand held computer with a writable screen.
- On delivery, the customer signs for the goods on the hand held computer. On return to CAL’s warehouse, images of the customer signature are uploaded to the orders file which is then flagged as ‘order complete’.
Required:
Using information from the scenario, list five tests of control that an auditor would normally carry out on the sales and despatch system at CAL and explain the reason for each test.
Arrange your answer in a table as follows:
| Test of control | Reason for Test |
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Question 2 ( 8 marks)
The following information relates to a non-statistical sample used for a price test of inventory conducted by an audit assistant:
| Population Information
| Sample Information | ||||
| Number of items | Amount | Number of Items | Amount | Misstatement | |
| Greater than $15,000 | 20 | $1,100,000 | 20 | $1,100,000 | $600 |
| Less than $15,000 | 200 | $1,250,000 | 20 | $ 145,000 | $475 |
| Total | 220 | $2,350,000 | 40 | $1,245,000 | $1,075 |
Required:
- What is the best estimate of the total misstatement in inventory?
- Assuming the results are not acceptable, what two possible courses of action can the auditor take?)
- c) Which misstatement would be of a greater concern, items > $15,000 or items < $15,000?
Explain.
- What can a public accounting firm do to reduce the sampling risk?
- What can a public accounting firm do to reduce the nonsampling risk?