Contents
- This report is based on the following case study -
- Task details:
- This isan individualassignment.
- Paul Hewsonwho has extensive interest in music and fashion has set up a fashion clothes
- business in July 2011, Music Fashion Ltd, with his two long term friends Larry Mullen and
- Adam Clayton, and have recently listed Music Fashion Ltd on the ASX.
- Larry Mullen was previously the marketing executive for a clothing manufacturer that
- distributed products through major department stores throughout Australian and the UK and
- has a sound network within the retail sector. Adam Clayton has worked as an accountant for
- a medium-sized family company in the furniture industry for many years.
- New fashion wholesalers often find it difficult to gain retail accounts, as many retailers are
- dismissive of new designers. However Paul has managed to get his garments into two
- major Australian retail store chains. The retail store require the goods to be supplied on
- consignment, with the stores entitled to return any unsold items within two weeks of the end
- of the season. In addition, the payment terms for store are 30-days after consignment sales.
- As a result cash is very tight as 60% of inventory is sold on consignment.
- Music Fashion Ltd has the following staff:
- three directors, Paul, Larry and Adam
- secretary/receptionist
- warehouse manager
- assistant to the warehouse manager
- accounts receivable clerk
- accounts payable clerk
- All operations are conducted from a central office/warehouse facility and during your interim
- audit you note the following processes for the purchases function.
- The warehouse manager orders fashion goods from the suppliers as identified by Paul.
- Price quotes are obtained by the warehouse manager usually via telephone contact with the
- suppliers. The warehouse manager then prepares an order form for fashion items,
- quantities and prices and then sends this order off via a facsimile and the only copy of the
- order is kept by the warehouse manager.
- The warehouse manager the completes a purchase order in the inventory program on the
- computer system and prints one copy of this form and sends a duplicate copy to the
- accounts payable clerk for filing in date order.
- When the ordered goods are received at the warehouse, the warehouse assistant, checks
- the content of the goods received to the suppliers delivery note attached to the goods and
- signs the delivery note as evidence of this check. The purchase order is then recorded for
- the inventory received in the inventory program. The supplier delivery note comprises of two
- copies, and one copy is returned to the person delivering the goods for returning to the
- supplier and the other copy of the delivery note is forwarded to the accounts payable clerk.
- The accounts payable clerk raises a journal entry in the general ledger accounts payable
- system to credit the supplier and debit inventory on hand. The delivery note is then filed
- alphabetically in a folder of supplier delivery notes awaiting receipt of the suppliers invoice.
- Supplier invoices received by the secretary/receptionist in the mail are forwarded to the
- accounts payable clerk for putting with the purchase order and supplier delivery note.
- Details of the invoice are matched to the purchase order and delivery note and calculations
- for supplier amounts confirmed. If the details of the invoice match to the purchase order and
- the invoice total is correct, the invoice is signed by the accounts payable clerk and then
- processed for payment. Any invoices which are not matched to the purchase order or
- delivery note are forwarded with the purchase order and delivery note to the warehouse
- manager for follow up. The warehouse manager is to contact the supplier for follow up
- and/or authorise the invoice for payment. The supplier invoice, purchase order and delivery
- note are returned to the accounts payable clerk for payment when the warehouse manager
- is happy for the supplier to be paid and this authorisation is noted on the suppliers invoice
- with the warehouse manager’s signature and date.
- A payment run is made every second Thursday with the accounts payable clerk selected the
- suppliers to be paid in the general ledger accounts payable system that interfaces with on-
- line Banking and all general ledger accounts. A report is generated for suppliers to be paid
- and this report listing each supplier, the invoice number and the amount is reviewed by the
- secretary who confirms copies of all invoices are attached to the report, and this review is
- evidenced by signature and dating the report. The report is then reviewed by one of the
- Directors (Paul, Larry or Adam) and this is also evidenced by signature and date. The
- reviewing director and the secretary both then both authorise the electronic payment via
- electronic banking. The authorised supplier payment report with attached invoices,
- purchase orders and delivery notes attached is then filed in payment date order.
- At the time of your final audit there had not been any changes to the purchases or payment
- of supplier functions from your interim review. In the end of year audit testing a sample of
- 100 supplier payments were tested and the following is a summary of this testing:
- Payments showing evidence that all control activities had been
- followed
- Payments that had no supporting documentation attached 3
- Payments that did not have approved purchase orders but all other
- documentation was attached
- Payments that did not bear evidence that the creditor invoice
- calculations had been checked
- Payments that did not bear evidence as being authorised for
- payment by the secretary
- Payments that did not bear evidence as being authorised for
- payment by a Director
- Review of the subsidiary supplier ledger noted debit entries for
- payment corrections and sundry entries
- The aged supplier balances reflected amounts outstanding for 90
- days
- REQUIRED
- 1. Identify the inherent risks for Music Fashion Ltd’s due to their relationship with the two
- major Australian retail store chains.
- 2. Identify two financial report items that will be affected by these risks and the assertions
- most at risk.
- 3. Note how the internal controls will impact on your audit approach for the year end audit
- of the purchasing function.
- 4. Explain the implications of the errors noted in the year end audit testing of controls.
- (Take into consideration any concerns with internal controls.)
- 5. Briefly discuss how CAATs could be applied to assist your testing in the year end audit.
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