750 Words

2. You are in charge the audit of Purl1 Ltd's financial statements for the year ended 31 December 2021. Purl1 Ltd manufactures and sells a range of clothing products made from locally sourced wool. Most sales are to retail outlets and are made on credit but some customers prefer to pay in cash. The following describes the system for credit sales and cash sales. Credit sales Most customers settle their accounts by bank transfer. A few send a cheque by mail. The mail is opened by the secretary/receptionist who records the received cheques in a spreadsheet which is shared with the chief accountant. The cheques themselves are passed to the chief accountant at the end of the week. Until then the cheques sit in the secretary's in-tray. At the end of the week, the chief accountant makes the appropriate entries in the ledger accounts on the computer system and banks the cheques that day. The spreadsheet showing the details of the cheques received is shared with the sales department who can update their records concerning the performance of customer accounts. If a customer complains about the finish or quality the goods received, a credit note is automatically raised and the customer is asked to return the defective goods. Cash sales Some customers like to visit the factory where there is a small shop. O The customer selects the items they want to buy and pays the counter clerk by credit card, cheque or cash. The sales are recorded in a manual sales register by the counter clerk who banks any cheques or cash takings at the end of the week. The chief financial officer admits that the system may look a little 'casual' but that he has complete faith in the employees concerned, he reviews the figures being recorded and satisfies himself that the amounts look reasonable and, anyway, to institute a tighter system would cost more money than it would save. Required a) Identify the risks present in the current system and suggest what might be done to improve the system without employing extra staff or buying extra security equipment. (15 marks) b) What audit procedures could you undertake to gain assurance that the recorded amounts for revenue and accounts receivable are not materially mis-stated? (10 marks)