George Limited imports and sells car parts, island wide. The companys accounting system is manual and includes
Question:
George Limited imports and sells car parts, island wide. The company’s accounting system is manual and includes the sales day books, a cash book and trade receivables and generalledgers. The books of prime entry are maintained by Paul, who is one of the shareholders of the company but he does not do the trade receivables and general ledgers. These ledgers are outsourced to a qualified independent qualified accountant.
Wholesale customers are the main objective for George Ltd. Consequently, during the year ended 31 May 2020, there were only 52 sales invoice transactions. All sales are made on credit terms and invoices are priced from a standard product price list authorised by the Directors. The control procedures employed over sales, include the use of pre-numbered
multi-part despatch notes and sales invoice stationery.
The Audit Manager has explained why a direct verification (vouching) approach to the audit will be adopted, as opposed to a systems based approach and the Junior Auditor’s first task will be to work on the area of sales.
An analysis of the recorded value of George Ltd. accounts receivable as at 31 May 2020,was $12,530,000. Out of the 5,350 accounts receivable, 120 accounts were selected for confirmation as part of the external audit of the company. In selecting accounts for confirmation,the 10 largest accounts totalling $205,000 and 110 other accounts were selected haphazardly. The policy of the audit firm was to reject accounts with balances less than $1,000, as these customers will not respond to the confirmation.
Required:
a) Summarise the system based and direct verification approaches and explain which method would be appropriate in auditing financial statements.
b) In order to select items from the population of invoices, list and explain FOUR (4) methods of selecting a sample of items.
c) The Directors of George Limited are planning to computerise the Accounts Department, in order to reduce the number of staff complement.
Advise the Directors on the risks with accounting systems that rely heavily on IT functions.
Expert Answer:
a The systemsbased approach requires auditors to assess the effectiveness of the internal controls of an entity and then to direct substantive procedu... View the full answer
