Question 1

You are an audit senior in Rotstein & Swartz a public accounting firm. You are current working on the audit of one of its clients, Ontario Appliance Source. (OAS) which has a year-end of December 31, 2021. You are preparing the audit program for the sales and despatch system.

Audit documentation is available from the previous years audit, including internal control questionnaires and audit programmes for the and sales and despatch system. As far as you are aware, OASs system of internal control has not changed in the last year.

OAS is a retailer of kitchen appliances such as washing machines, fridges and microwaves. All sales are made via the companys Internet site with dispatch and delivery of goods to the customers house made using OASs vehicles. Appliances are purchased from many different manufacturers.

The process of making a sale is as follows:

Potential customers visit OASs website and select the kitchen appliance that they require. The website ordering system accesses the inventory specification file to obtain details of products OAS sells.

When the customer chooses an appliance, order information including price, item and quantity required are stored in the orders pending file.

Online authorization of credit card details is obtained from the customers credit card company automatically by OASs computer systems.

Following authorization, the sales amount is transferred to the computerized sales day book. At the end of each day the total from this ledger is transferred to the general ledger.

Reimbursement of the sales amount is obtained from each credit card company monthly, less the appropriate commission charged by the credit card company.

Following authorization of the credit card, order details are transferred to a goods awaiting dispatch file and allocated a unique order reference code. Order details are automatically transferred to the dispatch departments computer system.

In the dispatch department, goods are obtained from the physical inventory, placed on OAS vehicles and the computerized inventory system updated. Order information is downloaded on a hand held computer with a writable screen.

On delivery, the customer signs for the goods on the hand held computer. On return to OASs warehouse, images of the customer signature are uploaded to the orders file which is then flagged as order complete.

Required:

Using information from the scenario, list five tests of control that an auditor would normally carry out on the sales and dispatch system at OAS and explain the reason for each test.

Arrange your answer in a table as follows:

Test of control	Reason for Test

Question 2 ( 8 marks)

The following information relates to a non-statistical sample used for a price test of inventory conducted by an audit assistant:

	Population Information		Sample Information
	Number of items	Amount	Number of Items	Amount	Misstatement
Greater than $10,000	25	$1,200,000	25	$1,200,000	$710
Less than $10,000	160	$1,050,000	20	$ 95,000	$265
Total	185	$2,250,000	45	$1,295,000	$975

Required:

1. What is the best estimate of the total misstatement in inventory?

2. Assuming the results are not acceptable, what two possible courses of action can the auditor take?)

c) Which misstatement would be of a greater concern, items > $10,000 or items < $10,000?

Explain.

4. What can a public accounting firm do to reduce the sampling risk?

5. What can a public accounting firm do to reduce the nonsampling risk?