Question

ABC Ltd. is a distributor of ski equipment. The company’s records includes sales and purchase orders,

purchasing invoices, a sales journal, a purchases journal, and sub ledgers for both payables and receivables. There is a Canadian and a U.S. bank account.

All customers have a pre-determined credit limit that is noted in their files. If a customer’s order exceeds the authorized credit limit, the credit manager must approve the sale; otherwise, the sales clerk enters and approves the order for processing.

The allowance for doubtful accounts shows that $75,000 worth of receivables are greater than 90 days past due. There are no past due accounts payable. ABC has 4 U.S. suppliers. An allowance for doubtful accounts is prepared by management and done on a case by case basis based on past payment history and management judgment.

The accounting department receives a report each day of goods shipped and purchased goods received. All shipments are invoiced within one day of shipment.

All liabilities are paid within 30 days. An accrual listing is prepared from unmatched receiving reports each month.

Required

Write 4 complete substantive procedures for ABC. For each audit procedure, be clear in the type of procedure e.g. tracing, vouching, observing, scanning, and so on and state the related key management assertion.

Answer 1

Page 1 Substantive polocedusjer to be followed dusjing the Audit of ABC LTD & gelated Key Managment Amsestions: Substantive proceduses: Substantive payocedusje is on Audit technique that helps an Auditos to cleate a conclusive evidence regarding the "existence ", " completnems' "disclo suse" & "slights and obligation" selating to an Ameott 09 account on financial statments. Substantive paroceduses asje quantitative in Natuse and asje distectly yelated to Risk of material mistatments, mogle of substantive procedusje- Requished While pestfog ming Substantive tests Auditos Should vegify the existence , completness , validity Valuation , Rights & obligations which asje often teamed af managment Assestions. Substantive psyoceduses to be followed dusjing the Audit of ABC LTD

1) Audit of scale Transaction → The Auditoy should vegify Es confism that i) The Auditoy company user pole numbes sale invoices. pole numbesjed (printed) sale invoices helps to trace missing invoices which aste kept out of accounting @) Whethes the sale Toyans action hos actually occusled & Should configm that is not fictitour Tsjansaction (existence) 3) The sale is propeally accounted in cospect Accounting peziod (cutoff) 4) The sale Tojansaction is slecosyded for cognject Amount (valuation) 5) The sale Toyansaction is posted Appeopgiate Jousinal & thesje is no mistake in posting Toyan saction 6) Whethey all the sales occused dusting pesyiod undest audit has been Accounted (completnem) 2) Coledit sales with pove detesimined Covedit limit i) The Auditos should verify that whethegy Cojedit limit which is pojedetegmined is appsto paliate Ġ Reasonable & whethesy the spedit limit is

detesmined based on the seedit worthines of customes. 2) If the odesy size has exceeded the pare determined coedit limit , whether propesy Appsoval from capedit manager ham Taken 3) Whethesy sales clesik appstoved & enter the siden food processing aften obtaining appsoval of coedit Managey 4) Whethem the accounts yeceivable balance geflects all the cogedit sales made dusjing cosent pesiod (completnem) 5) Whethey all espedit sale Tsjansactions has been Accounted and they ase not dummy Transactions (existence). 11! Allowence fosy doubtful Accounts: D) Whether people gecovesty Mechanism is in Place & it is effectively working to specovery $ 45,000 syeceivable evhich asye every due foy mogle than 90 days Q) Vesify whethey coedit limit is geduced to those pestaona /customests who has

Page 4 defaulted in payment 3) Obtain an extesnal configmation dispectly from the customegle to confilm the existence of liability Amount due & sepayment schedule. Accounts payables : 1) Whet hegy all the persschases asje made by ABC LTD only aftesy obtaining palopean Appojoval foom puschase depastment a) pestchase Tajansaction is executed only based on paropea puschase 09/des abe is on coledit , vestify whethes the Teams & conditions agje seasonable Ej agje not detegmental to ABC Ltd. 4) Vestify whethes liability is paid on time as pesy qe payment schedule Qi Genesyal Managment Amesitions spelating to Tajansactions & Account balances age: 1) Existence a) Cut off 3) Completness 4) Right and obligations

page 5 5) Valuation 6) Accuracy While Auditing each Eg evenly Toyansaction, Auditosy should vesity all those Assestions