Describe substantive procedures the auditor should perform-Case study
Big & Large Ltd (B&L) is a nationwide company making storage rack and accessories; it is long established company with its production plant and regional distribution warehouse in each state (VIC, NSW, WA and QLD) with head quarter in Victoria. They sell to a large diversified base of customers through wholesaler and corporate customers. The company’s financial year is 30 June 2014.
Upon manufacture, the products are stored in one of the warehouses until they are despatched to customers. Sales ordering, goods despatched and invoicing (centralised in Head Quarter in VIC)
Each customer was assigned with a unique customer account number and the number will be linked to written sales orders from customer. The orders are entered by an order clerk and the system automatically checks that the goods are available and that the order will only be taken if customer does not exceed their credit limit. Credit check procedure is in place for taking of new customers whereas a sales manager completes a credit application; this is checked through a credit agency and a credit limit entered into the system by the credit controller. Only large customers are allowed for a discount agreed by sales director and set up in customer master file, all other customers should follow the price as updated twice a year.
After order is being entered, an acceptance is auto-generated and sent to the customer by mail/email confirming the goods ordered and a likely despatch date. The order is then sorted by address of customer. Customer order will be sent to the customer’s nearby distribution warehouse arranging delivery and the acceptance will be delivered to the customer and a despatch list and sequentially numbered Goods Despatch Notes (GDNs) are automatically generated. The warehouse team pack the goods from the despatch list and, before they are sent out, a second member of the team double checks the despatch list to the GDN, which accompanies the goods.
Sooner after delivery, a copy of the GDN is sent to the accounts team at HQ and invoice with a sequentially numbered is raised and checked to the GDN. Periodically a computer sequence check is performed for any missing sales invoice numbers.
Required
(a) Suggest tests of controls that the auditor would normally carry out on the sales system of B&L, and explain the objective for each test.
(b) Describe substantive procedures the auditor should perform to confirm B&L’s year-end receivables balance.
