Auditing Principles and Practices-II

Individual Assignment (15%)

Instructions:
 Students are appreciated working on their own also for submission of genuine
answers.
 Any similarities or copied answers will be strictly evaluated.
 Last submission date is on or before 23/9/2020.

Case-1
The Meyers Pharmaceutical Company, a drug manufacturer, has the following internal
controls for billing and recording accounts receivable:
1. An incoming customer’s purchase order is received in the order department by a clerk
who prepares a pre numbered company sales order form on which is inserted the
pertinent information, such as the customer’s name and address, customer’s account
number, quantity, and items ordered. After the sales order form has been prepared, the
customer’s purchase order is attached to it.
2. The sales order form is then passed to the credit department for credit approval. Rough
approximations of the billing values of the orders are made in the credit department for
those accounts on which credit limitations are imposed. After investigation, approval of
credit is noted on the form.

3. Next, the sales order form is passed to the billing department, where a clerk uses a
computer to generate the customer’s invoice. It automatically multiplies the number of
items times the unit price and adds the extended amounts for the total amount of the
invoice. The billing clerk determines the unit prices for the items from a list of billing
prices.
The invoice copies are designated as follows:
(a) Customer’s copy.
(b) Sales department copy, for information purposes.
(c) File copy.
(d) Shipping department copy, which serves as a shipping order. Bills of lading are also
prepared as carbon copy by-products of the invoicing procedure.

4. The shipping department copy of the invoice and the bills of lading are then sent to the
shipping department. After the order has been shipped, copies of the bill of lading are
returned to the billing department. The shipping department copy of the invoice is filed in
the shipping department.

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5. In the billing department, one copy of the bill of lading is attached to the customer’s
copy of the invoice and both are mailed to the customer. The other copy of the bill of
lading, together with the sales order form, is then attached to the invoice file copy and
filed in invoice numerical order.

6. As the computer generates invoices, it also stores the transactions in an electronic file
that is used to update the accounting records daily. A summary report is generated and all
journals and ledgers are printed for a hardcopy of the records.

7. Periodically, an internal auditor traces a sample of sales orders all the way through the
system to the journals and ledgers, testing both the procedures and dollar amounts. The
procedures include comparing control totals with output, recalculating invoices and re
footing journals, and tracing totals to the master file and general ledger.
Required: (5 Points)
a. Flowchart the billing function as a means of understanding the system.
b. List the internal controls over sales for each of the six transaction-related audit
objectives.
c. For each control, list a useful test of control to verify the effectiveness of the control.
d. For each transaction-related audit objective for sales, list appropriate substantive tests
of transactions audit procedures, considering internal controls.
e. Combine the audit procedures from parts c and d into an efficient audit program for
sales. (Hint: Sales –Collection cycle)

Case-2
The information systems (IS) department at Jacobsons Inc.consists of eight employees,
including the IS Manager, Melinda Cullen. Melinda is responsible for the day-to-day
oversight of the IS function and reports to Jacobsons’ chief operating officer (COO). The
COO is a senior vice president responsible for the overall retail operations who reports
directly to the president and chief executive officer. The COO attends board of director
meetings to provide an update of key operating performance issues. Because Melinda
takes an active role in managing the IS department, the COO rarely discusses IS issues
with the board or CEO. Melinda and the COO identify hardware and software needs and
are authorized to approve those purchases.

In addition to Melinda, the IS department is composed of seven other individuals:

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Melinda has developed a trust with each employee and, as a result, delegates extensively
to each individual. This is especially beneficial because Melinda spends most of her time
working with user departments in a systems analyst role, identifying changes needed to
existing applications. She conducts weekly IS departmental meetings on Tuesday
mornings. Each staff member attends, including night operators, to discuss issues
affecting the performance of the department.

The three programmers are responsible for maintaining and updating systems and
application software. The lead programmer is responsible for assigning duties among the
programming staff. All three programmers have extensive experience with the operating,
utility, security, and library software as well as all of Jacobsons’ application software
packages. Programming assignments are made based on who is least busy among the
programming staff at the time. This method of management keeps all programmers
familiar with most software packages in use at Jacobsons and keeps programmers excited
about the job tasks because of the variety of assignments they receive. Melinda
encourages each programmer to take continuing education courses to keep current with
the latest technical developments. In addition to programming responsibilities, the
programming staff maintains the library of programs and data tapes, which is located in a
locked room nearby. The programming staff maintains extensive logs of tape use and of
changes made to program files.

The three operators consist of a day operator and two night operators. Most of the
applications are based on online inputting from various user departments for batch
processing overnight. Thus, the heaviest volume of processing occurs during the night
shift, although there is some daytime processing of payroll and general ledger
applications. All operators are responsible for monitoring the operation of the equipment
and correcting system caused errors. In addition, they do routine monthly backup
procedures. The computer operators have programming experience with the program
language used in application programs. Occasionally, when a small change is identified
for an application program, Melinda asks the day shift operator to implement that change
to avoid overburdening the programming staff.

Operators follow the production schedule prepared by Melinda, who consults with user
departments to develop the schedule. The day shift operator reviews the job processed log
(which chronologically details the jobs processed) generated at the end of the previous
night shift for deviations from the schedule, and the lead night shift operator reviews the
job processed log generated at the end of the previous day shift for deviations from the
schedule. If jobs processed reconcile to the job schedule, the job processed log is
discarded. When there are deviations, the operator doing the review leaves a copy for
Melinda, highlighting the deviation. Before doing batch processing jobs, the operators
generate an input listing report that summarizes the number of online input entries
submitted during the day for processing. This number is recorded and then later
compared by the operators with the computer output generated after batch processing and

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file updating occur. This provides a check figure of the number of transactions processed.
When the numbers agree, the output is submitted to the data control clerk. When the
numbers disagree, the operators identify the error and resubmit the application for
processing.

The data control clerk collates all computer output, including output reports and
exception listings. The data control clerk reviews exception reports and prepares
correction forms for reprocessing. Examples of changes that the data control clerk might
make include correcting inputting errors (for example, amounts accidentally transposed)
and preparing change request forms for changes to existing master files (examples
include revising sales price lists and inventory product numbers in the sales master file
and adding new employee names, addresses, and Social Security numbers to the payroll
master file). After all corrections are made, the data control clerk distributes all computer
output to the various user departments. User departments have high regard for the IS
staff. Output reports are reconciled to input reports by users on a test basis quarterly.

Required: (6 Points)
You are the senior auditor assigned to the audit of Jacobsons. The audit partner has asked
you to assist in doing the IS general controls review. The partner has asked you to review
this narrative information and respond to the following questions:

1. What controls and deficiencies exist in the lines of reporting from IS to senior
management? If you note any deficiencies, provide recommendations that can be
included in the management letter?

2. What is your assessment of how Melinda Cullen fulfills her IS management

3. What is your assessment of the programming function at Jacobsons? What are the
strengths? What are the deficiencies? Make recommendations for improvement.

4. What is your assessment of the IS operations function at Jacobsons? What are the
strengths? What are the deficiencies? Make recommendations for improvement.

5. What is your assessment of the data control function at Jacobsons? What are the
strengths? What are the deficiencies? Make recommendations for improvement.

6. Make recommendations for improving controls over the involvement of users

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Case-3
You are reviewing your audit assistant’s work for Orange Pty Ltd for the year ended 30
June 2019, and note the following matters:

 Your audit assistant undertook a test of controls for 50 sales transactions. This test
resulted in three errors. When planning the test, a tolerable error of 5 per cent had
been established. The audit assistant’s working papers noted that none of the errors
found were materials, either individually or in aggregate, and she therefore
concluded that the controls were reliable.
 Your audit assistant’s working papers on the accounts payable testing contain the
following notes and conclusion: 

1. In order to test accounts payable, I selected all balances over $100,000 and
vouched these to supporting invoices. The sample selected comprised $2,565,650
of total accounts payable of $5,168,000. One invoice for $102,500 had been
incorrectly recorded on the accounts payable listing, as the goods were not actually
received until after year end.
2. Given the error relates to only 4% of accounts payable tested, which would be a
total error of $206,702 of the overall accounts payable balance, it is not material as
this is less than the materiality level set for this audit and, therefore, no further
work has been performed. I am satisfied that the accounts payable balance of
Orange is fairly stated.

Required: (4 Points)
Comment on the appropriateness of your audit assistant’s conclusions in each of the
above situations. 

Good Luck