You have been asked to perform the audit of the sales and collection cycle of Montgomery Limited. Which is a medium-sized manufacturer and wholesaler of stationery items to different bookstores in Kowloon. All of their sales are made on credit. The company has the following policies:

1. Members of staff who are related are not allowed to work in the same team (accounts receivable, accounts payable, treasury, payroll) within the accounting department.

2. Cash receipts should be dealt with by two staff with specific responsibility.

3. Monthly customer statements should be sent out before the 3rd day of the next month after being reviewed by a responsible supervisor.

4. Bank reconciliation statements should be prepared and reviewed monthly.

(1) Explain the overall purpose of the above four policies in the prevention of potential fraud or financial statement misstatement.

(2) State the objective(s) of each of the policy in the prevention of fraud.

(3) Suggest an additional policy which strengthens the existing control environment on cash collection

Question 2

Describe the two types of accounts receivable confirmations that are used by auditors and detail under what circumstances each of these would be used.