SEQ Supply Company Ltd (SEQ Ltd) is a medium-sized distributor of IT hardware supplies. It has been a client of yours for several years and has instituted excellent internal controls for sales at your recommendation.
In providing control over shipments, SEQ Ltd has pre-numbered “warehouse removal slips” that are used for every sale. It is company policy never to remove goods from the warehouse without an authorised warehouse removal slip. After shipment, two copies of the warehouse removal slip are sent to billing for the computerised preparation of a sales invoice. One copy is stapled to the duplicate copy of a pre-numbered sales invoice, and the other copy is filed numerically. In some cases, more than one warehouse removal slip is used for billing one sales invoice.
In the audit of sales, one of the main concerns is the effectiveness of the controls in ensuring that all shipments are billed. You have decided to use audit sampling in testing internal controls.
Required:
a) Describe what is meant by a “sampling unit”. (10 marks)
b) State an effective audit procedure for testing the possibility of omitted sales for SEQ Ltd. What is the sampling unit? (5 marks)
c) State an effective audit procedure for verifying the existence of recorded sales for SEQ Ltd. What is the sampling unit? (5 marks)
d) Explain why the sampling unit for testing the possibility of omitted sales might differ from the sampling unit for verifying the existence of recorded sales. (10 marks)
e) Margorie Smith, an accounting graduate and junior member of your audit team for SEQ Ltd, performed tests of controls and substantive tests of transactions of sales for the month of September in an audit of SEQ Ltd’s financial statements for the year ended 30 June 2015. Based on the excellent results of both the tests of controls and the substantve tests of transactions, she decided to significantly reduce her substantive tests of details of balances at year end. Evaluate this decision. (70 marks).
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