Carosel Limited is a specialty motor vehicle parts supplier, procuring parts from a large

number of suppliers. As part of the interim audit work four weeks prior to the company

year$$s end, you are testing the procurement$/$purchases systems, attending the inventory count

and examining the sales and cash receipts.

Purchasing$/$Procurement System

$$ When the quantity of a specific part falls below re$-$order level, an e$-$mail is sent to the

procurement department detailing the part required and the quantity to order. Parts

inventory is monitored by the store$$s manager with a copy of the e$-$mail filed on the

store manager's computer.

$$ Procurement department staff check the e$-$mail, allocate the order to an authorised

supplier and send the order to that supplier using Electronic Data Interchange $($EDI$).$

The order is identified by a unique order number with a copy of the EDI order filed in

the order database by the computer system.

$$ When goods are received at Carosel, the stores clerk confirms that the inventory

agrees to the delivery note. The clerk also checks the order database to ensure that the

inventory were in fact ordered by Carosel since delivery is refused where goods do

not have a delivery note.

$$ The order in the order database is updated to confirm receipt of goods, and the

perpetual inventory system updated to show the receipt of inventory. The physical

goods are added to the parts store and the paper delivery note is stamped with the

order number and is filed in the goods inwards department.

$$ The supplier sends a purchase invoice to Carosel using EDI; invoices are

automatically routed to the accounts department. On receipt of the invoice, the

accounts clerk checks the order database, matches the invoice details with the

database and updates the database to confirm receipt of invoice. The invoice is added

to the purchases database, where the purchase day book $($PDB$)$ and suppliers

individual account in the payables ledger are automatically updated.

Attending the Inventory count

On the day of the inventory count, you attended site $4$ at Carosel. You observed the

following activities:

$$ Pre$-$numbered count sheets were being issued to client's staff carrying out the count.

The count sheets showed the inventory ledger balances for checking against physical

inventory.

$$ All count staff were drawn from the inventory warehouse and were counting in teams

of two.

$$ Three counting teams were allocated to each area of the stores to count, although the

teams were allowed to decide which pair of staff counted which inventory within each

area. Staff were warned that they had to remember which inventory had been counted.

$$ Information was recorded on the count sheets in pencil so amendments could be made

easily as required.

$$ Any inventory not located on the pre$-$numbered inventory sheets was recorded on

separate inventory sheets $$ which were numbered by staff as they were used.

$$ At the end of the count, all count sheets were collected and the numeric sequence of

the sheets checked; the sheets were not signed.

Sales and Cash Receipts

$$ Carosel has experienced substantial success, with customer numbers increasing by

approximately $15\%$ annually.

$$ Sales at Carosel are categorized as cash sales and credit card sales. All sales are

recorded on a computer, including the amount of each sale and the parts issued. This

information is electronically transferred to the accounts office.

$$ Cash collected from each office is counted by two accounts clerks and two security

guards before being banked daily. The total cash is reconciled with the sales

information transferred.

$$ The cash received is then recorded in the cash book and general ledger.

Required

$1.$ What are the audit procedures that an auditor would normally carry out on the

purchases system at Carosel, explaining the reason for each procedure?

$2.$ What are the audit procedures that an auditor will normally perform prior to attending

the client's premises on the day of the inventory count?

$3.$ What are the deficiencies in the control system for counting inventory at site $4$ and for

each deficiency, explain why it is a deficiency and state how that deficiency can be

overcome?

$4.$ State the aim of a test of control and the aim of a substantive procedure and in respect

of your attendance at Carosel$$s inventory count, state one test of control and one

substantive procedure that you should perform?

$5.$ For the cash sales system of Carosel, identify the risks that could affect the assertion

of completeness of sales and cash receipt.