Audit: What is the Starting Point?

[chuotbeo]

Hi,
It's the first time i've posted in this forum. Currently preparing for F8,9 and P1 in June 2008 exam. the paper i'm worried most is F8, as it has got notoriously low pass rate compared to others.
I already read the whole book of F8, got rough idea of the auditing process, but still find it hard when it comes to scenario questions. Could anyone tell me what to do with the logicality of choosing the starting point for an audit process.
Says, a Question asked you to apply substantive tests to ensure that the sales figure in the IS is complete, accurate and genuine. According to the text book, the correct starting point is to look at the Goods Despatch Notes, select a sample of(say) 20 GDNs to agree it with Invoices, Sales ledger and then subsequent postings on Nominal ledger. Please tell me why we dont start with the Invoices, as it is the evidence that a sales have been made? Is it because it is easily to reproduce invoices, but the same can happen to GDNs as well?
However, when it comes to cash audit, says cash payment, the text book suggests the common approach would be the bank documentation, i.e. payments for beef, lamb in a restaurant and trace them back to invoices, purchase orders, etc?
Is there any idea how the starting point to be chosen? Any what is the logicality under such choice?

Please help, i'm so confused!

[Acid]

Wow . This questions makes me see birds while going half a way through it..

I think what you say is also true , we can start from the invoice as well but may be say that the invoices said that sales is of 20 units and GDN says 18 units and then think that you first see GDN which says 19 unit and Sales say 20 unit so it gives you the same confirmation.

But to see the GDN first is more appropriate rather then sales invoice bcoz you have to compare the sale invoce with GDN bcoz it may be that employees disptached more goods then the requested ! So the attention should first go to this area.

I am not sure of what I said is correct but the subject specialise would help us with this one!

Regards
Acid

[chuotbeo]

Hi,
I think the rationale behind choosing the starting point is GDNs is because it is the most obvious reason that goods have been despatched. The point that sales is made is when goods delivered to customers/services performed(Revenue Recognition), so I think they must be right when choosing the starting point is GDNs. I did read the text more carefully and understand what they are trying to express. Before choosing GDNs as the starting point then select a sample of 20 and match to sales invoices, they do take steps to ensure that those GDNs are accurate, complete and genuine. By:
1. Checking the order forms, as genuine GDNs must come from real order bearing the authorized signatures. The order forms must be pre numbered to allow them to carry out sequence check as to the completeness of orders form. Authorized signatures do prove that those are genuine. Then They traced 20 of order forms to GDNs to see all details matched.
2. Checking the stock issues, marrying them with GDNs to check the validity of the good despatched notes as when a sale is made, it will cause a movement in stock.

However, I still not understand the cash systems audit, no matter how many times i read the text book. They say objectives must be set out at the beginning to help to set out appropriate tests. I dont think it's too difficuit to set out objectives, i.e. the simpliest is to prove the accuracy, completeness and genuiness of sales/purchases/payroll but confused about what test to use for what(what test to use to prove completeness, etc?)

Moreover, is the substantive testing to prove the completeness, genuine and accuracy for sales systems(transactions) and sales figures(balances) in the BS the same or not? Or the latter will require much more tests to do than the former?

All confused, probably try to study too much at a time. But if i dont, i will be over worried.
Anyone please help!

[Annie]

HI,

I think that cash is a very sensitive area and stands for misappropriation easily. For this the auditor should verify the control system of the organisation regarding cash. The percentage of checking as test checking should be more. The auditor should see that the cashier does not have more responsibilities or contorls with him so that he could conceal any fraud. If the auditor sees that the controls are weak then he should go for intensive checking. If the controls are good then he could go in for a substantive testing.

The starting point of cash cannot be standardised, as different kind of transactions of different nature come into the cash book. There can be trade bills settled in cash and some purchases of stationary or miscellaneous items paid in cash. Here the auditor can see that each payment made is authorised by teh relevant authority it has enough supporting bill to provide as evidence. The receipts are to be checked with the invoices raised by the organisation whether full payment has been received, if part payment received then to see that the payment track is kept. Whether intensive testing or substantive testing is done a auditor must do a physical verification of cash and check bank reconciliation statements, which will give him adequate assurance.

The sales and purchases if verified has a starting point. Where Sales would start from when a order is booked, so the sale order no. then, the goods dispatch note, then the invoice raised and later the payments settled either by cash or credit. Goods dispatched should again be linked to the inventory count.

Similarly Purchases if verified would start from the purchase order then receiveing the goods and payment released. All this process are documentated by prenumbered receipts of bills. Therefore there is a proper check. This too can be linked to the inventory.

I hope this is what you are looking for.

Annie

[krishna3898]

Hi,
In pratical following method am doing,

1) sales order to GDN,if no difference then
2) GDN to Invoice if no difference then
3)counter check with GDN against stock,so if any mismatch of stock can find very easily,in logic if first 2 verification correct third step should be correct.
then payment against invoice,
amount need to credit (cash or bank) against invoice with Sales order and GDN reference so that can track any time with reference.
even end of the day I use to check the stock,so I can get sales figure,counter check once again.
Thanks.
krishna