General description The Bonvoy Company has been trading for 25 years from its very large and only outlet in Dubai. The business is a retail store which sells haute couture shoes. It has a staff of approximately 20 salesclerks and 10 other administrative staff. Sales transaction are completed on either cash or credit, using the store's own invoicing system rather than credit cards. Most of the larger sales are on credit. Only one central cash register is used, controlled by the store supervisor, Mr Green. The cash register is physically positioned to monitor the entire store and the front door. Mr Green has been working for Mr Sharif, the store owner, for over 20 years and is well aware of almost every aspect of the business, including finance and logistics. Customer Ordering Process Each salesclerk has his/her own manual sales book with pre-numbered, three-copy, multi-colored sales slips attached that are perforated. All transactions are recorded in the salesclerks' sales books. When the sale is for cash, the customer pays the salesclerks, who marks all three copies "paid' and takes the money to the supervisor to process and complete the sales transaction. All transactions incur standard rate VAT. Errors in the Ordering Process The supervisor compares the clothing to the description on the invoice and the price on the sales tag. He also rechecks the clerk's calculations. Should there be any errors, then the corrections are approved by the salesclerk. The salesclerk amends his sales book at that time in front of the supervisor, and the items are packaged and given to the customer. Credit sales A credit sale must be approved by the supervisor from a list of approved credit customers after the salesclerk prepares the three-part invoice. Next, the supervisor enters the sale in his cash register as a credit (otherwise a cash sale is entered if credit facility is not granted to the customer). The second copy of the invoice, which has been validated by the cash register, is given to the customer. Mr Sharif must approve ALL credit sales that exceed US $1,500. Business banking procedure The cash is deposited in the bank the next morning by Mr Sharif. And he receives a deposit slip, which he gives to the accounts receivable clerk. If Mr Sharif is unable to deposit the money, the supervisor goes to the bank instead. Book-keeping At the end of each day, the salesclerks give their books to the supervisor, Mr Green, who compares the totals to the cash register tape and will then create a summary of the day's transactions. The cashier's copies of the invoices are also given to the accounts receivables clerk along with a summary of the day's receipts. Claire, the accounts receivable clerk, reviews the sales books and the register tape. He inputs all the sales invoice information into the company's computer, which provides a complete printout of all input and summaries. The accounting summary includes sales by the salesclerks, cash sales, credit sales and total sales. Claire compares this output with the summary and reconciles all differences. The computer updates account receivable, inventory and general ledger master files. After the update procedure has been run on the computer, Claire's assistant files all sales included in the printout. Claire uses these files to create transaction statements that are mailed to the customers. General Admin duties Mr Sharif's secretary opens the company mail each morning. She gives all correspondence to Mr Sharif and all payments to the supervisor. The supervisor totals the amounts and adds this cash to the register for later deposit. He gives the total to Claire to update customer accounts on the computer. Claire uses this list and all the remittances to record cash receipts and update accounts receivable, again by computer. He reconciles the total receipts on the pre-list to the deposit slip and to his printout. At the same time, Claire compares the deposit slip received from the bank for cash sales to the cash receipts journal. He has online access to the store's bank account, which he accesses monthly to pay the store's bills online The computer generates a weekly aged trial balance of the accounts receivable. A separate listing of all unpaid bills is also automatically prepared, and both are given to Mr Sharif. He approves all write-offs of uncollectible items and forwards the list to Claire, who writes them off. Invoicing Each month Claire mails computer-generated statements to customers. Any customer complaints and disagreements are resolved by Mr Sharif, who then informs Claire, in writing, of any write-downs or misstatements that require correction. The computer system also automatically totals the journals and posts the totals to the general ledger. A general ledger trial balance is printed out, from which Claire prepares financial statements. Reconciliations and other duties Claire also prepares monthly bank reconciliations and reconciles the general ledger to the aged accounts receivables trial balance. Because the importance of inventry control, Claire prints out the inventory perpetual totals monthly, on the last day of each moth. Salesclerks count all inventory after store hours on the last day of each month for comparison with the perpetuals. An inventory shortage report is provided to Mr Sharif. The perpetuals are adjusted by Claire after Mr Sharif has approved the adjustments. CLO 2.6: QUESTION 1 Define Audit documentations and explain its purpose during the course of an audit (5 Marks) Answer CLO 2.6: QUESTION 2 Provide four examples of audit documentation the auditor will gather and their purpose in the process of auditing Bonvoys financial reports (3 x 3 marks each = 21 Marks) Answer CLO 2.8: QUESTION 3 Much of the business environment of Bonvoy appears to be manual with some level of computerization that is limited to record keeping and recording of transaction and accounting. Required: Identify and explain TWO specific issues related to inherent risk that could lead to material misstatements (2 x 2 marks each = 8 Marks) Answer CLO 2.8: QUESTION 4 This question is related to Audit Risk and Materiality. Please answer the following questions: Define Audit Risk (3 Marks) Answer CLO 2: QUESTION 5 Explain the meaning of the concept of Control Risk in auditing (4 marks) Answer CLO2: QUESTION 6 From the case scenario, identify FOUR internal control weaknesses (4 marks) Answer Internal Control weakness 1: Intemal Control weakness 2: Internal Control weakness 3: Internal Control weakness 4: CLO 2: QUESTION 7 Discuss the four potential impact of internal control weaknesses that you identified in Question 6 (4 x 4 marks each = 16 Marks) Answer CLO 2.12: QUESTION 8 The salesclerks at Bonvoy use a Sales Daybook to process customer orders manually. Nevertheless, there are internal controls applied to the Sales Daybooks. Required: Identify and explain the THREE internal controls that relate to sales daybooks used by the salesclerks to process customer orders and explain their purpose (3 x 3 marks each = 9 Marks) Answer CLO 2.10: QUESTION 9 Having done due diligence prior to accepting the audit assignment for Bonvoy. the auditor has investigated the internal and external business environment and factored in the inherent weakness and weaknesses in internal control. He believes that Detection Risk may be a worrying factor and hence has decided that the following risk factors apply: Required: Calculate: Planned Detection Risk (column 5) and comment on the amount of audit evidence required (column 6) 16 x 2 marks each 12 Marks) Answer: Amour of Evidence Required re Audit R Ishers Risk Control Risk Detect Risk Sales and collections Low (1%) tigh (93%) High (90) Acquisitions and Irat High (39) Low 50% Low (204) Inventory High (Low SM Low 3) CLO 3.2: QUESTION 10 Suggest how credit control can be further improved from the following perspectives: 1. Customer payment options 2. Monitoring (2 x 2 marks each 4 Marks) Answer CLO 3.4: QUESTION 11 The case on Bonvoy suggest there are various control risks in the business. In considering control risk, briefly outline three steps an auditor should adopt in testing for control risk. (6 Marks) Answer: CLO 3.3: QUESTION 12 The coso framework consists of five elements of control: the control environment, risk assessment, control activities, information and communication, and monitoring. The graph below depicts the COSO internal control framework: The COSO framework FIGURE104 Five Components of Internal Control Catral Euront Am Co Art Mentor Required: Name the Internal Control Component of the COSO model in a following given situations: 14 x 2 marks each -8 Marks) Amner: Situation Control component The organization selects and develops general actions over technology to support the achievement of objectives 2 Management establishes, with bound oversight, structures reporting lines and appropriate authorities and responsibilities in the part of objectives 3 The organization selects, develops and performs going anda separate evaluations to ascertain whether the components of internal control are present and functioning 4 The organizaten demonstrates a commitment to integrity and ethicales