Weaknesses In Stocktake Procedures, Bank Reconciliation Errors, And Tests Of Controls In Accounts Payable

Stocktake Procedures and Weaknesses

You ,the auditor, attended the inventory count (stocktake ) of your client Smith Equipment and observed the following during the count :

1. Warehouse staff counted specific areas of the stock as determined by the warehouse supervisor ; staff members ,including the warehouse supervisor , were allocated their own area to count on their own.

2. Several blank sheets of paper were issued to each member of staff doing the counting.

3. Staff were instructed to write down the stock description and number counted .

4. Staff were told to write the stock quantities in pencil on the sheets to ensure errors can be corrected .

5. Any staff that completed a section early were allocated to another area to help out one of the other staff .

6. The supervisor collected all sheets at the end of the count to finalise the stock count .

Required :

Identify the weaknesses in the stocktake procedures above and identify how they could be improved.

Question 2

You , the auditor , have spent 5 years as an auditor . In this time you have come across numerous errors in performing bank reconciliations . The following are some of these errors:

1. An unreconciled item of $340 was on the final bank reconciliation of the client and was deemed by the client to be immaterial.

2. Two deposits totalling 70 relating to accounts receivable were collected on 3July ( 30 June year end) but recorded as cash receipts on 30 June.

3. An amount from an associate company of $40,000 was banked 2 days before the end of the year in the client’s bank account and then paid back 1 week after the end of the year .

4. A cheque for $6,000 was omitted from the outstanding cheque list on the bank reconciliation at 30 June . It cleared the bank on the 14 August .

5. A bank transfer of $20,000 was included as a deposit in transit at 30 June in the accounting records.

Required :

(a) What control should be implemented to reduce the likelihood of each of the above?
(b) What is an audit procedure to detect or prevent each of the above? 
    
Question 3

The following is an extract from a working paper containing the results of the tests of controls in the accounts payable area:

Test	Result	Conclusion
Selected a number of supplier   invoices and checked that the  pricing and discounts have been reviewed and authorised by the purchasing manager	Six out of 50 invoices tested had not been authorised .Incorrect discounts were recorded for these invoices.A follow up of the four incorrect invoices did not  not highlight a pattern or specific reason for the errors.	Accepted as the errors in the discounts claimed  were immaterial.

Required:

(a) Identify the key assertion addressed by the test procedure .
(b) Provide an explanation as to why the conclusion reached is appropriate or inappropriate.
(c) Outline the key control procedure that you believe needs to be performed.

1. While audit of the balance sheet of the company there are few items those needs to be looked and audited with better applied analytical and substantive procedures of the same. The responsibility of Inventory control lies with the manager of the warehouse of the location. The Manager must ensure that the staff members who are involved in stocktaking must aware of the established procedure which needs to be followed in stock taking.  He is responsible for proper co-ordination between the staff member and also have the responsibility to complete the stock audit. However, it is duty of the auditor to visit the stocktaking site to determine the effectiveness of the stock taking.

Bank Reconciliation Errors and Controls to Prevent Them

The slow moving inventory in a company. There are many cash dealings which get interrupted due to delay in stock being converted back into cash.

The main intension and objective of Stocktaking is as follows:

a) To verify the accuracy of stock

b) The Stock valuation as stated in the financial statement must be supported by the physical verification of stock.

c) To verify the weakness in the control and custody of stock.

d) To disclose the possibility of Stock, theft or loss.(Smith 2013)

In the given case auditor has attended the stock taking of Smith Equipment and certain discrepancies has been found by them which is described as follows:

SI.No.	Weakness	Improvement Recommendation
1.	Warehouse Staff Counted specific area of the warehouse for physical verification	However, it is duty of the Warehouse manager to check all the area has been covered and no area has been left and physical verification of every item has been done properly
2.	Issuance of blank sheet to each member of staff doing the count	Instead of Issuing blank sheet to the stocktaking staff stock take scanner should be allocated to stock taker which will be used by them in stock taking along with the stock taking instruction. This brings better internal control and chances of error and loosing blank sheet is also low.
3.	Staff Were Instructed to Write down the stock description and number counted	Instead of giving this type of Instructor stock scanner as stated above should be given to each staff so that there is less chances of error and it will bring more accuracy.

However, there is certain more recommendation which helps smith Equipment in better stock undertaking. This is as follows:

1. Before starting Stock date all the possible area and the product must be identified.

2. Meeting must be held with the staff member who will help in stock taking to ensure that they should know exactly what they have to do and how to do.

3. Any Question or confusion of the Staff member must be resolved and any suggestion which helps in better stock taking must be implemented.

4. Whenever any discrepancies noticed the same product must be recount for reconfirming the said discrepancies.

5. All the staff member engaged in the stock take must be properly guided by the stores manager during stock taking.

6. Stock Scanner must be provided to every staff member for better and more accurate stock taking.

7. Any obsolete , damaged or expired product which has been noticed during the physical verification must be reported.

8. Stores Manager must ensure that the obsolete material must be removed from the store and proper recording has been done.

9. Physical verification report should be made and it need to be submitted to the external auditor.

10. Before submitting the report to the External Auditor report must be discussed internally with the management so that there will be less changes of error.(Jacob october, 2012)

2. Control over the bank reconciliation ensures that all the cash transaction has been properly recorded in the books of accounts for a given period of time. Bank reconciliation also ensures the accuracy of the Financial Statement.  However to ensure less changes of error in the Bank reconciliation one should implement the following procedure to reduce the chance of Error. This are described as follows:

1) Even a small amount of un reconciled items create a doubt in the mind of the auditor regarding the accuracy of accounts and existence of fraud in the company. In the given situation Item of $340 remain un reconciled which are treated by the as immaterial.

2) To reduce the chances of incorrect recording of account receivable, client should ensures that the entire credit voucher must be signed along with the supporting and then entry will be done in accounting system.

3) The Company may adopt the policy not to deposit the associate company money in own account in order to reduce complexity.

4) The omission of certain items from Bank reconciliation is serious issues. This even creates doubt about the correctness of bank reconciliation. In order to reduce such type of situation, the client may increase the frequency of reconciliation in order to ensure correct reconciliation process.

5) Recording of bank transfer as deposit is also an serious issue, this shows that accounting clerk is completely irresponsible and he must be warned that if the same continue, then he may be fired from the company.(Team n.d.)

b) Audit procedure to detect and prevent each of the above case is as follows;

            1)  Auditor should compare the bank cancellation date with bank reconciliation.

            2)  Bank Confirmation should be taken from each bank with whom the client transit.

3. a) Key Assertion Addressed by the Test Procedure is as follows:

i) Authorization of Purchase Manager in the Invoices is not taken seriously by the client. It may lead to fraud & Error. As per the Test conducted by the auditor more than 10% of the invoices were not authorized which shows lack of effectiveness and Internal control in the company.

ii) Incorrect Discount was also noted. This may be intentional or un- intentional. It might be possible that the billing personnel may give incorrect discount and it has been also noted that the bill in which incorrect discount was given was not sent for authorization.

iii) However, the incorrect discount given was not in some pattern. This means that the discount given was not due to system fault or change in discount policy. The company should ask the billing personnel reason for such error, though the amount of discount given is immaterial but it shows lack of control in the organization.

b) The Conclusion reached by the Client is not appropriate as it lacks control in the organization. Better policy is to identify the reasons for such mistake that why such error has been occurred whether the error is un-intentional or due to some fraud. With increase in volume of work in the organization, there is more chances that the error will also increase and more unnecessary discount will be given to the customer which results to financial loss of the company..(James n.d.)

c) The Key Control procedure that need to be performed by the company is as follows:

1. If the company has manual billing system then that need to be computerized.

2. Discount for each and every item needs to be properly updated in the system and the same should be properly checked.

3. Dual checking of invoice should be done for some time once the invoice is generated from the system and second at the cash counter by the cash personnel.

General, OOA 2015, Office of Auditor General, <https://audit.wa.gov.au/reports-and-publications/reports/across-government-benchmarking-audits/timely-payment-invoices/>.

Jacob, M october, 2012, ‘Stocktake of Rgional Research’, p. 30.

James, ‘Substantive Tests of Transcation and balance’, p. 60, <https://novellaqalive2.mhhe.com/sites/dl/free/0074711709/90089/sample_ch10.pdf>.

Smith, H 2013, myob.com.au, <https://myob.com.au/blog/7-steps-to-a-successful-stock-take/>.

Team, O, Opentution.com, <https://opentuition.com/wp-content/blogs.dir/1/files/group-documents/15/1289882056-E.AuditEvidence.pdf>.