Question

Aman & Afdal is the auditor of Warisan Sdn Bhd. He is in charge of auditing the sales

and collection cycle for the company which is a small fish distributor in East Malaysia.

The company is respected for its high quality fish products, but their accounting office is

perpetually neglected, and the sales department frequently makes errors in billing

clients. In previous years, Aman & Afdal has found quite a few misstatements in billings,

cash receipts, and accounts receivable. Like many companies, the largest assets are

accounts receivable, inventory and fixed assets.

The company is also slow at improving its identified internal control weaknesses in

previous year audit. Among those weaknesses are shipment is made immediately

whenever orders are received, no screening of credit approval is made by Warisan

before shipping. Besides, a copy of the shipping document is filed with the sales invoice

and sales order, but there is no thorough review done on the documents by supervisors.

The accounts receivable general ledger account and the subsidiary ledger accounts are

posted by the same person, and there is no independent periodic reconciliation between

the control account and subsidiary ledger accounts.Warisan has several large loans payable to local banks, and two banks have told

management that they are reluctant to extend more credit, especially considering that a

bigger and well known fish distributor is moving into the area. In previous years, the

response from clients of Warisan to confirmation requests has been frustrating at best.

The response rate has been extremely low, and those who did respond did not know

the purpose of the confirmations or their correct outstanding balance. Aman & Afdal

have had the same experience in confirming receivables with other, similar

organisations. Aman & Afdal concludes that control over cash is excellent and the

likelihood of fraud is extremely small.

Required:

I) Identify the major factors affecting audit risk of Warisan Sdn Bhd.

(6 Marks)

II) For each of the internal control weaknesses in Warisan Sdn Bhd, describe

the potential misstatements and audit procedures (both tests of controls &

substantive tests) that must be performed to minimize the control risk.

(6 Marks)

III) Since the response rate for external confirmations of accounts receivable

balance is extremely low, what alternative procedures would you suggest

the auditor do?

(3 Marks)

Answer 1

1) Following are the factors affecting the audit risk of warisan sdn bhd:

• The sales and collections cycle in a business refers to the set of processes that begin when a customer purchases goods or services and ends when your business receives payment in full. In this case they are not preparing sales invoices properly, so they dont have any record of all the sales transactions.
• Error in billing shows the irresponsible behaviour of management towards the business as revenues are the main growth stone for any business. Billing error directly effects the balance in customers account and likewise the mistakes pertain in accounts receivables too.
• As the account receivables pertains to the main assets in their business.
• Account confirmations are at all not posible when our billing system is not properly maintained.
• Firstly they need to check all the transactions , bills and recorded entries in account book to find the mis match.
• There are ingerent risk in the business regarding invoices that can be resolve by management by appointing a efficient and capable accountant.

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