Aman & Afdal is the auditor of Warisan Sdn Bhd. He is in charge of auditing the
Question:
Aman & Afdal is the auditor of Warisan Sdn Bhd. He is in charge of auditing the sales and collection cycle for the company which is a small fish distributor in East Malaysia.
The company is respected for its high quality fish products, but their accounting office is perpetually neglected, and the sales department frequently makes errors in billing clients. In previous years, Aman & Afdal has found quite a few misstatements in billings, cash receipts, and accounts receivable. Like many companies, the largest assets are accounts receivable, inventory and fixed assets.
The company is also slow at improving its identified internal control weaknesses in previous year audit. Among those weaknesses are shipment is made immediately whenever orders are received, no screening of credit approval is made by Warisan before shipping. Besides, a copy of the shipping document is filed with the sales invoice and sales order, but there is no thorough review done on the documents by supervisors. The accounts receivable general ledger account and the subsidiary ledger accounts are posted by the same person, and there is no independent periodic reconciliation between the control account and subsidiary ledger accounts.Warisan has several large loans payable to local banks, and two banks have told management that they are reluctant to extend more credit, especially considering that a bigger and well known fish distributor is moving into the area. In previous years, the response from clients of Warisan to confirmation requests has been frustrating at best.
The response rate has been extremely low, and those who did respond did not know the purpose of the confirmations or their correct outstanding balance. Aman & Afdal have had the same experience in confirming receivables with other, similar organisations. Aman & Afdal concludes that control over cash is excellent and the likelihood of fraud is extremely small.
Required:
I) Identify the major factors affecting audit risk of Warisan Sdn Bhd.
II) For each of the internal control weaknesses in Warisan Sdn Bhd, describe the potential misstatements and audit procedures (both tests of controls & substantive tests) that must be performed to minimize the control risk.
III) Since the response rate for external confirmations of accounts receivable balance is extremely low, what alternative procedures would you suggest the auditor do?
Auditing and Assurance services an integrated approach
ISBN: 978-0132575959
14th Edition
Authors: Alvin a. arens, Randal j. elder, Mark s. Beasley