Audit Team Deliverable 2 Audit Manager Sharon Gallagher and Audit Senior Josh Thomas previously met with the Alpine Bags Ltd. Finance Director, Andrew Jones, to gain an understanding of the internal controls at the entity level. Based on their interview, they have assessed those controls as being effective. Therefore, at a high level, the company demonstrates an environment where potential misstatements are prevented or detected. You have been assigned the task of documenting the understanding of the process for recording sales, accounts receivable, and cash receipts for wholesale customers. In your absence, Josh met with the Alpine Bags Ltd. Financial Controller, Debbie Smith, and received permission to tape the interview, which is provided as a transcript (see Appendix 1). Your audit manager and senior ask you to prepare the section of the audit file to document the sales to cash receipts process for wholesale sales. Make sure your working includes proper headings. If you have any follow-up questions on the parts of the process that are not clear those can be documented in a memo to the audit manager so they can follow-up with the client. Based on your knowledge of the wholesale sales to cash receipts  Identify the potential misstatements that could occur in each part of the sales and cash receipts process; for example, receiving orders, obtaining inventory, and processing payments.  For those misstatements, identify the financial statement assertions that are affected. Document your findings in a working paper (see sample format in Appendix 2) The audit manager also asks you to test controls over the sales to cash receipts process. It is expected that there will be no deficiencies in the transaction-level internal controls. Josh has partially completed the testing for selected controls over the sales / accounts receivable and cash receipt processes. Josh is being pulled to a different client and the audit manager asks you to complete Josh's testing. All information has been provided by the client. Complete Josh's working papers (see appendix 3 and 4) based on the information in client records (appendix 5 and 6). Note: for the purposes of this case study, sample tests 9 to 19 have been removed. There were no exceptions noted in the results. Based on your work, determine the risk of material misstatement and acceptable detection risk (e.g. has DR been assessed as low, medium or high). There is a sample working paper in Appendix 7 to help you with documenting your results. Then design substantive audit procedures that would address the assessed detection risk for each of the three accounts (1) Cash (2) Accounts receivable (gross - not considering allowance for doubtful accounts) and (3) Sales. When determining testing thresholds for the detailed procedures, consider the performance materiality you calculated in assignment 1. Write a memo to the file documenting: 1. The section you are testing 2. A description of the procedure(s) 3. For each procedure identified, the assertion(s) it tests Appendix 1 TRANSCRIPT OF MEETING WITH DEBBIE SMITH Present: Debbie Smith, Financial Controller, Alpine Bags Ltd. Josh Thomas, Audit Senior, W&S Partners JT: Thanks for seeing me, Debbie. DS: You're welcome, Josh. What can I do for you? JT: I need to ask you some questions around Alpine Bags' process for recording wholesale revenue transactions, including the trade receivables and cash receipts aspects. After I understand the process, I'll need to select a sample transaction to confirm my understanding of the process as you have explained. DS: Well, I can tell you what should be happening, but you may want to go and speak to the sales manager or warehouse managers to confirm they do what the company policy and procedures say. JT: Good point, I'll make appointments to see them. Thanks. So let's start at the beginning how does a sale transaction get initiated? DS: We've got a pretty complex inventory management software system called Swift. It was designed by some of our tech guys. It tracks and does everything! JT: Sounds impressive! DS: Anyway, the customers let's say the Myer store in Toronto complete a purchase order online through a site that is linked to Swift. JT: How do the customers decide the quantity and know the price? DS: Swift is linked (don't ask me how) to their store inventory records and sends them an alert when their inventory balance of our products gets below the predetermined limit they set with us. They can select the quantity based on their needs, but the prices are set in the system. They get sent price lists from the sales manager so they know the current prices. JT: How often are prices changed? DS: Depends on the market, really. There is a new artificial intelligence pricing tool that the company purchased to integrate with our enterprise software. It uses a complex algorithm that considers both internal factors, such as our inventory on hand, as well as external data. It was implemented in May 2023 but hasn't really changed prices. Likely if there are significant changes based on the data it bases the pricing on in future, we will see an impact. We haven't seen that yet. JT: What if you don't have the products? DS: The system doesn't allow them to place an order greater than our current inventory levels. If they need more, they need to fill out a separate request form that gets emailed to our warehouse manager so he can place the order with China. JT: OK, so they complete a purchase order, then what? DS: The submitted purchase order goes through a credit check and then becomes a sales order. The sales order documents the quantity required, the selling price, and the shipping terms. That's all done behind the scenes in the system. We really don't see anything on our side until the sales order stage. JT: Guess that saves a lot of time and trees! DS: Yeah, there's so much that we rely on the system to do for us, it's scary. If we were hit by an electrical storm, we'd be in trouble. JT: What happens to the sales order show do they get filled? DS: Every day, the warehouse manager downloads the outstanding sales orders to these little hand-held computer/scanner thingies. It's very Star Trek. Warehouse personnel use these to select the items off the shelves onto pallets. The pallets are taken to a staging area where each product is then scanned. This establishes the shipping in Swift, which then gets printed for the delivery. JT: Are the shipping documents approved before the goods go out the door? How do you know that what got sent is what was ordered? DS: Swift matches the quantities and products on the shipping document to the sales order. Once they match, the approval box is activated and the shipping supervisor can enter his pass code. This officially approves the shipping document and it gets printed. JT: How many orders do you fill in a day? It sounds like a lot for one person to do. DS: We probably complete about 50 orders a day. Backpacks aren't perishable items, you know, so it's not like we are sending products to every store, every day. We're trying out the "pit crew" concept where there are two shipping supervisors with about four to five warehouse employees in their crew team. So they are in the staging area with them and do it right there with the hand-held devices. They like to have little contests on who can do it the fastest. You should go down there; it's quite a lively group. Bill encourages it and it's been great for productivity and morale. JT: Sounds like a great working environment. Better than being stuck in a broom closet sifting through invoices! DS: Ah, the life of an auditor. I remember the good old days... JT: And the goods are sent out on your own trucks? DS: That's right. We've bought our own trucks and vans rather than rely on couriers. The drivers pick up their loads in the morning and bring back anything undelivered. Because backpacks are an easy product to off-load, we have to be careful about theft. So nothing can be left in the back of a truck at the end of the day. It comes back here and gets locked up in the shipping cage till it can be delivered again. JT: Why would goods be undelivered? DS: Sometimes the drivers get behind or the store is closed unexpectedly. So there are occasions when all the goods won't get delivered in the day. JT: OK, so now the goods are delivered to the customer, how do you bill them? DS: The drivers have the customers sign for the goods upon receipt and then give us the signed copy of the shipping document. We go in to the billing system and pull up the draft invoice that was generated when the shipping document was approved. We match the quantities in the invoice against the signed shipping document and confirm the customer sign-off. This way, we only bill for those goods that were actually received by the customer. At 4 p.m., we do a batch run of the day's invoices, which are printed in duplicate, and mailed out. The copy is stapled to the signed shipping document and put on file. The running of the batch posts the invoices to the sales journal and accounts receivable subledger. JT: Does finance ever go back to the sales order? DS: No. Since the shipping document can't get generated unless it agrees to the sales order, we don't go back that far into the process. Why, do you think we have to? JT: I wouldn't say so at this stage. But you'd have to be sure to have some tight controls around Swift, given that it seems to do everything. DS: Like I said, it does everything. JT: What is the cash receipts process? DS: We get most payments via EFT, so my AR clerk downloads the previous day's receipts from online banking. She then goes into the sub-ledger to post the receipts against the customer accounts. When she's finished posting each entry, she runs a batch report of all postings and reconciles it back to the bank statement. I review that reconciliation and signoff. JT: Are bank reconciliations done in a timely manner? DS: I do bank recs each month for the operating and savings accounts. Bill reviews and approves them. Keep in mind what I just explained is for the wholesale transactions. We have separate procedures for the store regarding daily cash balance reconciliations to the deposits in the operating bank account. JT: Yes, our graduate will be handling the store side of the sales to cash receipts process.