Q1.

(a) The primary audit procedure used in testing cash balances is confirmation. In order to test confirmation, auditors ask the company's bankers to verify the balance of the bank accounts directly and the responses are sent solely to the auditors. As a part of cash testing, auditors also test the bank reconciliation process. By examining cash confirmations, auditors gain assurance over the bank balance.

Required:

(i) Explain any TWO (2) types of cash accounts. (5 marks)

(ii) Identify any FIVE (5) key pieces of information which should be contained on a bank confirmation letter. (5 marks)

(iii) Explain why it is important to check outstanding cheques at the year end. (2 marks)

(b) You are the audit engagement partner and you noted the following during the review of the audit files of your clients: For each situation, describe with reason(s) the form of audit report that you should issue.

(i) The audit team for 1st client could not observe the inventory count that was held at the year-end since the firms appointment as auditors was made after the companys year-end and no alternative procedures could be used to confirm the inventory balance. (3 marks)

(ii) Your 2nd client is currently building a distribution centre using its own employees on its own premises. In total, the company recorded a net profit of RM 40 million. The cost of direct labour amounted to RM 4 million, based on the cost records kept. This direct labour cost was included in the distribution center's cost. However, it is discovered that the direct labour costs are not supported as the related costing record have been accidentally destroyed. (4 marks)

(c) You are an audit senior in Checkers & Co. and are currently reviewing documentation for Goldy Bhd (Goldy) sales system in preparation for the interim audit. Goldy is a small company that produces and sells high-quality knitwear. Its customers are principally fashion boutiques. Goldy has two directors, one of whom manages the day-to-day administration of the business. The other is a non-executive director. A senior employee, Ricky, is responsible for processing revenue and receivables. The company has one sales representative, who visits customers boutiques and is responsible for finding new customers and for generating and taking orders from all customers. Orders are recorded on an order form which is referenced with the date and time the order was placed and the customers initials. The sales representative passes the completed forms to the warehouse. The completed order is dispatched from the warehouse by courier, accompanied by a copy of a dispatch note.

A second copy of the dispatch note is sent to Ricky, who prepares an invoice using its details and the companys authorized price list. He sends one copy of the invoice to the customer and retains a second copy. Each Friday, Ricky inputs the weeks invoices into the computerized sales and nominal ledger. He then files them alphabetically by customer name. Dispatch notes are not retained because filing space is limited. Ricky opens the post daily and lists remittances received from customers. Each Friday, he inputs the information listed to the receivables ledger. He passes the cheques to the managing director who is responsible for their lodgement. Ricky reviews the computerized accounts receivables ledger balances every month and writes to customers who have not paid within 90 days of receiving goods. The receivables ledger is printed out annually for year-end purposes. Otherwise, no hard copy is printed and Ricky reviews the receivables ledger on the computer screen. The companys computer software includes the facility to produce a day book and an accounts receivables ledger control account. These are not used because Ricky considers that the low volume of transactions (10 to 15 invoices per week) renders them unnecessary.

Required:

(i) Discuss SEVEN (7) significant deficiencies in the sales and receivables system. (7 marks)

(ii) For each significant deficiency in the sales and receivables system, assess the possible implications of each deficiency for the financial statements. (7 marks)

(iii) Justify a recommendation to address each deficiency. (7 marks)