Higher Colleges of Technology
Course ACC 3113 AUDITING
Student Name HCT ID
Time allowed Classroom based Weighting 20%
Teacher Dr.
Learning Outcomes
Covered CLO 1: Explain the principles of auditing and professional standards of auditors
CLO 2: Assess audit risk and audit evidence while conducting an audit
CLO 3: Evaluate internal control policies and procedures adopted by organizations
Assessment Project – 2019-20
Instructions to Candidates
• This question paper: 5 pages (including this cover page)
• Calculator, Pen, pencil and a ruler
• This is an OPEN BOOK examination.
• You must attempt ALL questions.
Academic Honesty Statement
In accordance with HCT policy LP201- Academic Honesty
• Students are required to refrain from all forms of academic dishonesty as defined and explained in HCT procedures and directions from HCT personnel.
• A student found guilty of having committed acts of academic dishonesty may be subject to one or more of the disciplinary measures as outlined in Article 33 of the Student and Academic Regulations.
الأمانة الأكاديمية
وفقًا لسياسة كليات التقنية العليا – LP201 الأمانة الأكاديمية
• يُطلب من الطلبة الامتناع عن كافة أشكال سوء الأمانة الأكاديمية، كما هو مبيّن وموضح في السياسات والإجراءات الخاصة بكليات التقنية العليا، والتوجيهات الصادرة من موظفي الكليات.
• في حالة ارتكاب الطالب أي شكل من أشكال سوء الأمانة الأكاديمية سوف يتعرض الى واحد أو أكثر من التدابير التأديبية على النحو المبين في المادة 33 من الأنظمة الأكاديمية.
Signature: Date:
Section number Section One Section Two TOTAL
Marks Available 85 15 100
Marks Earned
SECTION 1: CASE STUDY: Audit of Sales and Collections Cycle (85 Marks)
Read the case below for Pylon LLC and answer the question that follow:
Brief company background
Pylon LLC has been in business since 1998 and has grown rapidly over the middle east. The company is a distributor of electronic parts and equipment to the IT industry in the GCC region. Pylon has some strong internal controls policies and procedures over its business environment both internally and externally. However, the business environment is semi-computerized.
Business transaction – Processing customer order
Orders may arrive by email, telephone, or from a field representative who visited the customer. These orders are processed, and orders are shipped to the customers. The customer order processing is computerized, and all bar-codes are selected from a drop-down menu in the order processing procedure. Prices for orders are automatically shown against each part selected.
Business transaction – Granting credit
The company has many customers both old and new. Some new customers have been in business for many years, however, have recently started to trade with Pylon. Other customers have been trading with Pylon for 4-7 years. Most existing customers are given credit facilities and payment period is between 1 – 3 months, depending on the background of the company and its trading history.
Credit facility provided to new customers is subject to vetting (checking) of the customer according to the company policy. Credit amounts range between AED 50,000 to AED I million. There is a hierarchy of credit approvers within Pylon who approve credit facilities for accepted customers ranging from senior managers to the Board of Directors. Policy requires that new customers applying for credit must:
1. Have been in business for at least past seven years with audit accounts as evidence
2. They should provide at least last 5 years bank statements to prove their existence
3. New customers must provide 5 references from existing suppliers with whom they have been trading
4. Existing suppliers must have traded with the new customers for at least 1 year
5. New customers must provide their business cash flow forecast for next three years if their credit application is for over AED 100,000
The due diligence for credit facility is carried out by a third-party company on behalf of Pylon LLC.
Existing customers that have credit facility are automatically granted time to pay based on their current outstanding amount. Presently there is no facility for discounts for customers that pay early. Occasionally a customer may go over the agreed credit amount on the approval of a senior manager.
Pylons policy states that customers must pay their outstanding amount on agreed credit facility basis. However, many customers take longer to pay beyond their agreed payment date. This is frequently overlooked by credit control and so cash flow is slow in Pylon. Recently a few important customers, with credit facilities have stopped ordering with Pylon, these include:
Customer Outstanding amount (AED)
Tanaco LLC
Franco Company
Saif LLC
Goodall Traders LLC
160,000
180,000
140,000
120,000
There is evidence that the above customers are out of business and no longer transacting. This means there is possibility of bad debts for Pylon which require correction to the accounts receivables. (This section relates to questions 8 and 9 below).
Business transaction – Shipping customer order
Workers at Pylon manually arrange the orders and deal directly with the customers for any queries and clarifications. There is no supervision of parts leaving the stock room. Furthermore, the company keeps manual records of goods-in and goods-out of the stock room. The records are frequently out of date. Order are occasionally lost to competitors due to absence of stock records and when an order comes in there may not be the parts available and so the customers go to another supplier. Some customers email their orders with attached purchase orders. These orders are processed and shipped to customers using local couriers. Once orders are prepared they are packaged and sent by local couriers. The sales team arranges for couriers and no authorization exists that monitors courier charges. Many deliveries are late to the customers who have complained about late deliveries.
Business transaction – Invoicing customers
Invoices are generated from the computer once parts are shipped to customers. Each invoice has a unique invoice number and every customer order is references on to the invoice. Three-part invoices are generated by the computer, white, red and green. The white invoice goes to the customer, the red invoice to the accounts department and the green to the purchasing department.
Cash Transaction Cycle – Processing cash receipts
The sales cycle is complete upon receipt of cash from the customers. Once cash is received from customers the relevant records and updated and accounts receivable is also updated. Some customers send cash or deposit cash in Pylons bank account directly. The company’s normal practice is to demand cheque payment which means customers cannot pay by other means such as bank transfers and credit cards which is a factor in late customer payments. The cheques are received by post and banked the next day by the cashier who handles all cash receipts and payments. He makes a list of all cheques and hands then over to the credit clerk who then updates customer accounts. The cashier attends to some cash paying customers personally at their business premises to collect the cash.
GROUP TASK:
TRANSACTION RELATED QUESTIONS
1. Draw a graphic representation of Sales and Collection Cycle for Pylon LLC showing/using all the relevant accounts/transaction entries listed below.
a. Sales
b. Cash in bank
c. Cash Discounts Taken
d. Accounts Receivable
e. Sales return and Allowances
f. Bad debt expense
You graph representation should show all the relevant T-Accounts with book-keeping entries relating to:
I. Tandy LLC – a cash-paying customer who has purchased goods for AED 10,000 on 13th January 2019
II. Revalo LLC – Credit facility customer who has purchased goods for AED 20,000 on 15th January 2019 and paid in full by 15th March 2019 (the due date)
III. Tandy returns some faulty goods back to Pylon AED 2,000 15th January 2019 – a cheque for reimbursement was sent to Tandy the same day
NOTE:
1. You MUST show all relevant T-Accounts even if they are empty.
2. There is no need to show the adjustment to the Cost of Goods Sold
(10 marks)
2. Simons is a trader in the UAE and a long-standing customer of Pylon. He has AED 60,000 credit facility at his disposal. Simon currently has AED 24,000 outstanding payable on 28th February 2019 and has occasionally missed the deadline for payments. Simon recently made the following transactions with Pylon:
Customer AED
1st Jan 2019 – Previous balance outstanding
1st Jan 2019 – 0rdered electronic parts on purchase order 1123
1st Jan 2019 – order processed by workers and packaged
2nd Jan 2019 – order dispatched by a courier to Simons
2nd Jan 2019 – invoice raised and sent to Simon with purchase order 1123 24,000
50,000
A junior manager approved the extended credit to Simons as they are close friends and the Junior manger trust Simons as they have known each other for past ten years.
Company policy on exceeded credit limit
Company policy is that a customer may occasionally go over the credit limit by no more than 10% of the total credit limit facility afforded to that customer. For example, if a customer has total credit facility of AED 40,000, they can be allowed to go over by no more than AED 4,000. However, two conditions are attached to this facility:
1. The customer must not have previously missed any payment deadlines
2. The increase over the credit limit is approved by a senior manager
Required:
a. Calculate the new balance outstanding at 2nd January 2019
b. Identify and explain the weakness in credit control over Simons case from the scenario.
c. Discuss the internal control procedures that should have been applied to Simons case and why there is a failure in respect of Simon
d. Suggest three methods how Simons can be encouraged to pay his debt either early or within his credit facility timeframe
(15 marks)
INTERNAL CONTROL RELATED QUESTIONS
3. Discuss the robustness of the credit granting procedure in Pylon identifying any strengths and weaknesses that exist
4. Identify and discuss the audit evidence for sales in Pylon
(6 marks)
5. Identify and explain the internal controls that currently exist in Pylon
(6 marks)
6. Identify the weaknesses in internal controls that currently exist in the company
(7 marks)
7. Identify and explain how internal control system could be improved in Pylon
(7 marks)
8. Identify and explain how you would apply a Substantive test to Accounts Receivables
(7 marks)
9. Identify and explain how you would apply a Test of control to Accounts Receivables
(7 marks)
10. Discuss if any matters are of serious or material that could impact upon audit opinion
(7 marks)
11. Identify and explain any issues of concern in the Cash transaction cycle and how this can be improved
(6 Marks)
Please pay particular attention to style, grammar and presentation of your report
SECTION 2 – CASE STUDY: Audit of Purchase and Payments Cycle (15 Marks)
Required:
Explain the Purchase and Payments cycle and discuss the typical audit procedures employed in this area of audit
(between 150 – 300 words)
(15 marks)
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