a. Based on the above sales system of Adel & Co, suggest SIX tests of controls the auditor could perform to check the effectiveness on controls, and explain the purpose of each test. b. Describe TWO methods the auditor could use to record the internal control system of Adel & Co and the advantage or disadvantage of each method.
Adel & Co is a company manufacturing various types of mini bar refrigerators for hotels. The company does not have an internal control department. Below is the company’s sale and receivables system:
i. Sales staff will carry out credit references checks for all new customers.
ii. These references will be submitted to the finance department, where the finance manager will approve on accepting a new customer if the customer has a good credit rating.
iii. Once this is completed, an appropriate credit limit is set for each customer by the financial controller.
iv. Customers must use a standard sales order form when placing orders.
v. Sales clerks will enter details of the sales order into the system which then check if the goods ordered are available and if the customer has sufficient credit limit available for this order.
vi. All forms are pre numbered sequentially.
vii. Prices for all products are stored in the system’s master file.
viii. These details can only be amended by the Financial Controller.
ix. Customers who place bulk orders will be granted trade discounts ranging from 5% to 15% which have been approved by the Sales Director and included in the system.
x. Once the order is entered into the system, the system sends the order electronically to the warehouse.
xi. The staff then pack the goods based on the order and then generate a sequentially numbered goods despatch note (GDNs) from the system.
xii. Goods packed are checked by another warehouse staff to ensure the goods sent matches the GDN.
xiii. A copy of the GDN is sent to the accounts department. An accounts clerk will issue the invoice which is pre-numbered sequentially and checks this to the GDN and sales order.
xiv. Every two weeks the systems performs an automatic sequence check to check for any missing sales invoice numbers.
a. Based on the above sales system of Adel & Co, suggest SIX tests of controls the auditor could perform to check the effectiveness on controls, and explain the
purpose of each test.
b. Describe TWO methods the auditor could use to record the internal
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