GROUP ASSIGNMENT 1

SUBJECT : AUDIT 2 50
CODE : EAB31103
Submission Date : 16 – 19 December 2024 @ Week 9.
** Please submit according to your class schedule.
Group Members : A maximum of 4 per group

QUESTION 1

(a) Auditing the sales and cash receipts cycle involves several procedures aimed at verifying
the accuracy, completeness, and validity of transactions, ensuring compliance with
internal controls, and detecting any instances of fraud or errors.
i. Distinguish among tests of controls, substantive tests of transactions and tests of
details of balances for the sales and collection cycle. Provide example for each
procedure.
(6 marks)

ii. Briefly explain how the tests of controls and substantive tests of transactions affect
the tests of details of balances.
(2 marks)

(b) The potential errors or frauds (1 to 5) pertaining to cash receipts and controls (a to g) that
could prevent or identify the fraud or errors are listed below:

Possible Errors or Fraud:

1. Customer cheques are properly credited to customer accounts and deposited, but errors
occur when recording receipts in the cash receipt journal.
2. Customer cheques are misappropriated before being forwarded to the cashier for
deposit.
3. Customer cheques are received for less than the full account balance, yet the
customers’ full account balances are credited.
4. Customer cheques are credited to the wrong customer accounts.
5. Multiple customer accounts are credited for the same cash receipt.

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Internal Controls:

a. Customer orders are cross-checked with an approved customer list.

b. Pre-numbered credit memos are issued for returns.

c. Remittance advices are separated from cheques in the mailroom and sent to the
accounting department.

d. The cashier checks each cheque for proper endorsement.

e. The total posted to the accounts receivable subsidiary records from remittance advices
is compared to the validated bank deposit slip.

f. Monthly statements are sent to customers with outstanding balances.

g. A staff member other than the bookkeeper prepares periodic bank reconciliations.

Required:

For each error or fraud listed, choose one (1) internal control that, if properly designed
and implemented, would most likely prevent or detect the error or fraud. Each internal
control may be used once, multiple times, or not at all.

(5 marks)
[13 Marks]

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QUESTION 2

The audit of Lessa Sdn Bhd for the year ended on 31 December 2023 is under your purview as
the lead auditor. You are assessing the results of 15 account receivables using a positive
confirmation letter. All confirmation responses were received, with five exception as follows:

Account Recorded Confirmation

Response Auditor follow-up
No. Value (RM)
(RM)
The RM61,800 shipment that was made on 1
6 121,800 60,000
January 2024, was recorded on 31 December 2023.
On December 30, 2023, some goods were returned,
23 4,700 3,200 however the receiving personnel forgot to make a
note.
The customer received less than the quantity
29 48,000 37,100
ordered.
Shipment made on 31 December 2023 worth
41 25,000 0
RM25,000 were received on 5 January 2024.

54 39,000 29,000 Customer was billed with incorrect selling price.

Below is information on the population and sample. A significant overstatement is one that
exceeds RM 100,000.

Sample Population
Stratum No. of Recorded No. of Recorded
accounts value (RM) accounts value (RM)
1 > RM 50,000 4 500,600 4 500,600
2 RM5,000 - RM49,999 6 490,000 31 1,180,300
3 < RM5,000 5 21,000 40 170,500
15 75

Required:
(a) Assess each confirmation exception to see if there have been any misstatements.

(b) Calculate total misstatement in the population.

[12 Marks]

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QUESTION 3

During your audit of Razin Sdn Bhd for the year ended 31 December 2024, several issues were
identified that may require adjustments to the company’s financial records. These potential
adjustments are as follows:

1. The allowance for uncollectible accounts appears to be understated by RM50,000.

2. Several credit memos, processed and recorded after the year-end, pertain to sales and
accounts receivable for the current year, amounting to RM30,000.
3. A RM600 discount given to Amalin Sdn Bhd has not been recorded in the company’s
books.
4. Inventory cut-off tests show that several sales invoices recorded in the current year's
books relate to goods shipped in early January 2025. These goods, valued at RM63,000,
were incorrectly included in inventory despite being set aside.
5. Expenses amounting to RM25,000 for equipment maintenance were mistakenly debited
to the equipment account.

Required: Please determine the necessary adjustments to ensure that Razin Sdn Bhd’s financial
statements are fairly presented. For each adjustment, include the amounts and the accounts
affected using the format provided below.

Example :Inventory cut-off tests indicate that RM45,000 of inventory received on 29 December
2023 was recorded as purchases and accounts payable for following accounting period. These
items were included in the inventory count at year end.

Possible Adjustments - Dr (CR)

Non- Non-
A/C Dr. Total Current Current Current Current
Description A/C Cr. Amount Assets Assets Liabilities Liabilities Income Expenses

Unrecorded Purchases √ 45,000 45,000 √

inventory A/P √ √ (45,000)
purchases √ √

1.

2.

Total

[10 marks]

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QUESTION 4

A strong Sales and Cash Receipts System not only facilitates accurate and efficient processing
of transactions but also plays a vital role in enhancing customer satisfaction and supporting
strategic business decisions. Implementing a system with these strengths can lead to improved
financial management, better compliance, and ultimately, greater business success.

Zam Fashion Sdn Bhd. has asked your company to assess its sales and collection system. The
brand offers a large selection of clothing, purses, and footwear to both national and regional
retailers in Malaysia. Concerns regarding its effectiveness are shared by the management and
those in charge of governance. You have to evaluate the client's sales and collection system in
your capacity as senior auditor.

The sales team must give the credit department the customer's details before a new customer
may place an order. After receiving approval from the credit manager, they can place an order,
which will be handled by sales personnel in line with the credit limit that the credit department has
set. Every quarter, a credit officer will check the credit limits of existing customers to make sure
they are still eligible for credit.

The company website, which integrates the inventory and sales systems, is the main avenue for
making sales orders. Inventory availability can be checked prior to customers placing their orders.
Before enabling delivery, the credit officer will receive a copy of the sales order that has been
consecutively pre-numbered and will need to confirm the customer's credit limit. The accounts
and shipping departments will get a copy of the authorised sales order from the sales staff.

To prevent shipping out the incorrect items in the wrong amounts, the warehouse personnel will
ensure that all product descriptions and quantities are accurate. A pre-numbered shipping
document is included with the items, and a copy must be signed by each customer. The shipment
documentation are signed and returned to the warehouse personnel for filing. The authorised
sales prices are produced by the invoicing system, and the sales quantities are input from the
shipping document. After receiving approval from the sales manager, the sales clerk must
manually input any discounts that have been granted into the sales invoice. To be filed, a copy of
the pre-numbered sales invoice will be sent to the accounting department.

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A sales ledger clerk is responsible for recording sales and managing accounts receivable, while
the senior sales ledger clerk handles the recording of cash receipts in the sales ledger. Customers
are required to pay their invoices via bank transfer and are given a 30-day credit period for
payment. The senior sales ledger clerk also posts daily bank transfer receipts from the bank
statements to the cash book. The account officer reviews the clerks' work and prepares monthly
bank reconciliations, as well as the reconciliation of the sales ledger control account. Both
reconciliations are reviewed by the accountant on a monthly basis. The accountant generates a
monthly aging report and submits it to the credit collection department. The credit collection team
follows up by sending monthly statements to all overdue accounts and reaching out to those with
significantly overdue balances via phone and email.

Required:
(a) Sate FIVE (5) internal control strengths in sales and collection system Zam Fashion Sdn
Bhd.
(5 marks)

(b) Briefly explain potential misstatement or inefficiency that might occur if each of the controls
stated in (a) were absent.
(10 marks)
[15 marks]

End of question paper

Good luck!