ASSIGNMENT 7 –MODEL ANSWER

QUESTION 2
A. Strengths not of Audit Significance
Control
 The optimal timing of payment is monitored by the financial controller.
Explanation
 The auditor is only concerned with the financial position at the end of the
financial year and the results of the operations at that date.
 The timing of a payment is not in self a transaction
 Gains or losses due to efficient or inefficient working capital management is
not directly the concern of the auditor (unless the inefficiency threatens the
existence of the company.
Purpose
 The purpose of this control is to take maximum benefit of terms offered by
the suppliers.
 The consequent benefit to the clerk is minimising of working capital
financing costs.
B. Strengths of Audit Significance
Control
 Payments are properly supported by valid documentation.
Explanation
 The auditor is concerned that the figure at the year-end for purchases
represents bona fide purchases.
 By ensuring that all payments are for goods properly ordered and received, at
correct prices, the control assists the auditor in obtaining assurance in respect
of validity of purchases.
Control
 Systematic adjustment of fixed assets records to reflect the true value of assets
and depreciation.
Explanation
 The auditor is concerned that financial statements accurately reflect the value
of assets and depreciation expense.
 This control will help the auditor in assessing the reasonableness of these two
amounts.
Control
 Segregation of duties – i.e. authorisation of purchases between the sales and
marketing and purchasing department; also the keeping of stock records and
storage of stock.
Explanation
 The auditor will gain some comfort as the validity of stock purchases.
Control
 Stock purchase requisitions are authorised by the marketing manager and all
orders are supported by typed, signed requisitions from the marketing
department and orders are authorised by the purchases department.
Explanation
 Stock purchases are properly authorised by a senior official.
C. Compliance Procedures
Payments are properly supported by valid documentation
 Select a sample of payments for purchases (entries in the cash book) and inspect
supporting invoice, goods received note and order to establish the validity
thereof
 Reperform the creditor’s clerk’s checks i.e. comparison of quantities,
description and terms and arithmetical accuracy checks of the documents.
 Inspect invoice for signature of creditor’s clerk.
Enquire of cheque signatories as to the consent application of this control.
 Ensure cheque signatories have signed the supporting documentation.

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Systematic adjustments to fixed assets records to reflect the true value of fixed assts and
depreciation
 Enquire of the financial controller as to the consistent application of this
control.
 Enquire of the factory manager as to the exact nature of his checks.
 Inspect the documentation produced and the adjustments made of this
process.
Segregation of duties
 Ensure that the person carrying out the control does not have incompatible
functions
 Enquire as to who sets the minimum order quanties.
 Enquire into what happens when any of the persons carrying out the controls
are on leave.
 Enquire as to whether a physical count is done before the requisition is
prepared
 Ascertain how often the counts are carried out.
Stock purchase requisitions are authorised by the marketing manager.
 Inspect requisitions and confirm that the marketing manager signs them.
 On a random basis check that selected orders are supported by a requisition
signed by the marketing manager.
 Enquire as to the procurement procedures- are quotations obtained and if
obtained who approves the selected suppliers.
QUESTION 1
Although it could be recommended that there should be two staff member per kiosk to
facilitate segregation of duties, it would not be a cost effective recommendation to the client.
Internal Control Procedures that would provide Adequate Control Over Cash Sales and Stock.
1. Cash sales should be controlled using retail price accounting. Stock on hand,
at sales value plus cash receipts for the period (banked and on hand),plus the
sales value of work of guarantee ,should add up to a specific predetermined
fixed amount for each kiosk. This will help prevent misappropriation of
money, stock being sold to competitors and repairs for friends at lower prices
or free of charge. Stock that has disappeared is therefore easily identified.
2. At the end of the month/week (period will depend on size of kiosk) each
kiosk should prepare the following reconciliation statement
Opening balance (beginning of week/month) xxx
Stock on hand at sales value xx
Cash on hand (receipt numbers 1…20) xx
Add
Sales value of stock received during the week /month
(Predetermined fixed amount for each kiosk)
Less
Stock on hand at the end of month/week (actual)
Theoretical value of sales for month/week
Actual value of sales for month/week
Sales value of work done under guarantee (rec. No 25)
Cash banked
Cash on hand at the end of month/week
Surplus/Shortage

3. At the end of each month/week the kiosk should be supplied with new stock
with a sales value equal to the amount banked, plus the sales value of work
done under guarantee in accordance with their reconciliation (as described in
(b) above).
Additional internal control procedures that would Provide Adequate Control over Cash Sales

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 a. The sales prices of shoes and keys should be indicated at each kiosk on a notice board
to enable customers to predetermine the cost of repairs and keys. This will prevent the
kiosk staff member from overcharging customers and pocketing the difference.
b. A prenumbered receipt should be issued for every cash sale to:
 Facilitate the reconciliation of total deposits of each kiosk for the month/week to the
applicable copies of receipts by head office.
 Facilitate the reconciliation of receipts and deposits of each kiosk to the relevant
reconciliation statement (recommended in 2 (b) above) by head office
 Serves as the customer’s proof of payment
 Serves as proof of the three month guarantee (from the date of issue)
 Facilitate the comparison by head office of prices charged with the approved price
list.
c. All cash receipts should be banked on the first work day after receipt to prevent the
rolling cash. Head office should assign a staff member to check that every kiosk
deposits money daily.
d. Kiosk staff members should not have signing powers on any of the company’s bank
accounts. This will prevent temptation to abscond with a large some of money.
e. Kiosk expenses should never be paid out from cash sales. The head office should pay
expenses.
Additional Internal Control Procedures that would Provide Adequate Control Over Stock.
1. Head Office should assign a staff member to visit kiosks on a surprise basis to:
 Verify that all the prescribed internal control procedures are compiled with
 Verify that predetermined float of the kiosks still intact (stock on hand plus cash on
hand plus cash banked since the beginning of the month/week plus sales value of
work done under guarantee)
If any discrepancies are found the reasons should be reported to head office for investigation.

2. Head Office should assign an employee to calculate the optimum stock levels of keys and
shoe repair parts for each kiosk and oversee that the kiosks are supplied accordingly.

3. A “no charge” receipt should be issued for all repairs done under guarantee. The original
receipts should be attached to the hard copy of the “no charge” receipt.

4. Head Office should assign an employee to monitor repairs done under guarantee for each
kiosk, as an increased incidence of this type of work at any kiosk may indicate that the kiosk
staff member is inefficient and/or there is possibility of fraud

5. Daily/monthly/weekly stock takers should be performed by the kiosk staff members for the
purpose of reconciliation statement (see 2(b) above). Head office should investigate the
reasons for any differences brought to light by the reconcilliations. Analytical review
procedures should also be performed on variances per kiosk on gross profit percentages and
turnover levels.

6. Kiosk staff members should agree stock receipts to relevant invoice issued by Head Office
and sign the invoice as evidence.