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hello Sir,
Regarding issue 1 part b (ii) i am not cleared why as per the suggested answer auditor is unable to obtain sufficient appropriate audit evidence regarding sales ?
Kind regardsI don’t have access to the BPP book. You’ll need to supply more details to have this question answered.
You are the audit manager in charge of the audit of MSV Co for the year ended 28 February 20X7. MSV Co is based in a seaside town and hires motor boats and yachts to individuals for amounts of time between one day and one week. The majority of receipts are in cash, with a few customers paying by debit card. Consequently, there are no trade receivables on the statement of financial position. The main non-current assets are the motor boats and yachts. The company is run by four directors who are also the major shareholders. Total income for the year was about $10 million
Issue 1Audit tests on sales indicate a deficiency in the internal control system, with a potential understatement of income in the region of $500,000. The deficiency occurred because sales invoices are not sequentially numbered, allowing one of the directors to remove cash sales prior to recording in the sales day book. This was identified during analytical procedures of sales, when the audit senior noted that on the days when this director was working, sales were always lower than on the days when the director was not working.
(Q) you have performed all the audit procedures that you can, but the issues are still unresolved, explain the potential effect (if any) on the audit report.
thanksCash sales are always more difficult to verify than credit sales. Just think about a shop. A sale could be made to a cuctomer and the cash pocketed bu the sales assistant. The only controls are:
(1) Supervision (eg closed circuit television) to ensure the assistant does not steal
(2) The customer might expect a till (cash register) receipt and the total of the till roll shold reconcile to the cash received.
(3) A lower than expected GP% implying that sales (and profit) are understated (analytical procedure)In the example you quote:
(1) There is unlikely to be a cash register. Indeed, the question states that there is no control over receipts/invoices/ The incoices could simply be made out on a note-book page that is torn out and given to the customer.
(2) The director is unlikely to be supervised by another person.
Under these circumstances it ill be very difficult to get sufficient appropriate audit evidence that sales are completely recorded and that all sales receipts are properly banked (rather than going straight into the director’s pocket). Suspicions are aroused because ot the pattern of low sales (coincided with director’s presence).
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