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Chapter 10
Case Study 5
INTERNAL CONTROL QUESTIONNAIRE
Client name Sweetie Ltd Prepared by JRT
Date 21 May 20×8
Period to 31 March 20×8 Reviewed byAM
Date
29 May 20×8
WAGES SYSTEM
Control procedures
Process Y
e
s
N
o N
/
A
Comments
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Case Study 6
a) Materiality is generally defined as being about 5% of gross profit or
10% of net profit
b) Audit sampling depends on the level of materiality – the higher the
level the less work you need to do
c) Vouching is a test of transactions between books of original entry
d) Analytical procedures should be used as a final procedure at the end of
the audit just to check the figures look OK
e) Auditors need to select samples which represent the population as a
whole
f) providing the financial statements comply with the law auditors have
to accept them
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Examination question
1. Performance
(i) The company has increased its revenues by 12% and its gross profit by
16% which in a competitive market is very good (if not entirely credible)
however, increased operating expenses have resulted in a reduction in
operating profits of 20%.
(b) Higher risk areas and audit procedures
Gross margin and operating expenses
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(i) I would obtain a detailed schedule of revenue and cost of sales showing
the opening and closing inventory figures for both software and hardware
and I would perform a detailed review of changes on, say, a monthly,
quarterly and half yearly basis.
(v) Audit evidence provided by statement of financial position work on the
inventory figures (such as analytical procedures performed on the inventory
levels and attendance at the inventory count) will also provide evidence in
relation to cost of sales.
(vi) It is possible that some reclassifications or even errors have been made
– some costs appearing as operating expenses might properly belong in cost
of sales. It certainly seems odd that whilst sales have increased by 12%, the
cost of sales figure has hardly increased at all. The reduction in
administrative expenses should also be investigated.
(viii) Because of the possibility of errors, I would increase my sample sizes
during tests of controls over the recording, processing and posting of
transactions that are posted to revenue, cost of sales and operating expense
accounts.
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(x) The extent of substantive procedures will depend on the extent to which
controls are shown to be effective and I would be particularly careful to
follow up any errors discovered in both tests of controls and substantive
testing. I would also pay particular attention to any unauthorised, substantial
or late adjustments.
Interest receivable
(xi) I would ask for a breakdown of, and explanation for, the increase in net
Taxation
(xii) It seems strange that the tax figure has increased so dramatically. I
would ask for copies of the tax calculations for detailed review, and to
corroborate explanations provided by management.
Dividends and earnings per share
(xiii) I would enquire as to why dividends had increased, despite the lower
(ACCA)