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Tinkerbell is a manufacturer of children's building block toys. It has been in business for more than 35 years and sells to a wide variety

Tinkerbell is a manufacturer of children's building block toys. It has been in business for more than 35 years and sells to a wide variety of customers including large and small toy retailers across the country. The company's year-end is December 31, 2019.

The company has a large manufacturing plant, four large warehouses, and a head office. Upon manufacture, the toys are stored in one of the warehouses until they are shipped to customers. The company does not have an internal audit department.

Sales ordering, goods shipped, and invoicing

Each customerhas a unique customer account number used to enterthesales orders when receivedin writing from customers. A clerk enters the ordersinto the system. The system automatically checks that goods are available and that the order will not take the customer over theircredit limit.

For "new customers", a sales manager completes a credit application. A credit agency checks the application and a credit manager enters the credit limit into the system. The company has a price list, whichis updatedtwice a year. Larger customers are entitledto a discount. The sales manager determines the discount andsets up the discount termsin the customer Masterfile.

Once thesales orderis entered, an acceptance is automatically sent to the customer by e-mail confirming the goods ordered and a likely ship date. The orderis then sortedby customer address. The warehouse closest to the customer receivesa copy ofthesalesorder electronically and a shipping list.The warehouse team packs the goods from the shipping list(no prices showing)andthen generates a pre-numbered packing slip for thesalesorder. Before theorderis shippedthe head shipper checks that the items picked agrees to the packing slip.A copy of the packing slipaccompanies the goodsshipped to the customer.

Once shipped, a copy of thepacking slipis sentto the accounting team at head office and a sequentially numbered sales invoice is generated and compared to thepacking slip. Periodically, a computer sequence checkis performedfor any missing sales invoice numbers.

Fraud

During the year,a material fraud was uncovered. It involved cash and chequereceipts from customersbeing divertedinto two of the company's employee's personal bank accounts. In order to cover up the fraud, receipts from subsequent unrelated customers were then recorded against the earlier outstanding receivable balances and this cycle of fraud would continue.

Complicating the matter was the fact that the two employees that colludedwere also relatedto each other.One processed cash receipts and prepared the weekly bank reconciliation; the other employee recorded customer receipts in theaccounts receivable subledger.

An unrelated employeewas supposed to send out monthly customer statements but failed to do so.

The bank reconciliations had asmallunreconciledamount but no one reviewed the reconciliations after they were prepared.

The fraud was only uncovered when the two employees went on holiday at the same time and it was discovered that cash receipts from different customers were being applied to older receivable balances to hide the earlier sums stolen.

REQUIRED

A)Recommendsix (6) tests of controlsthe auditor would normally carry out on the sales system of Tinkerbell(as described above), and explain the purpose (objective) of each test.In order to organize your response make a grid in excel that has 2 columns as follows:

Test of Control- The auditor should:

Objectiveof test -To ensure that:

B)Describefive(5) substantive proceduresthe auditor should perform to confirm Tinkerbell's year-end receivables balance that address the assertions of existence, rights and obligations, completeness (include cut-off), valuation and allocation

C)Identify and explainfive(5)controls Tinkerbell should implement to reduce the risk of fraudoccurring again and, for each control, describe how it wouldreduce the risk (see below for format)

Control - The company should:

Reduce Risk -This control should reduce the risk of:

D)Describefour(4)substantive proceduresthe auditor should performto confirm Tinkerbell's revenue(net salesand discounts).

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