ACC 551

Group Assignment

AI LING ALIAS IRENE CHUNG (Student #: 108-388-158)

RICARDO BARRAGAN OROZCO (Student #: 128-566-155)

April 21, 2018

Professor: JOHN MORELLI
ACC 551 - NII (ACCOUNTING: AUDITING I)
PART 1: CHAPTER #10 (PAGE 392)

CLOUD 9 LTD
Balance Sheet
 As at December 31, 2016

Assets

Current Assets
Cash $ 246,965
Accounts Receivable 10,430,631
Inventory 5,824,136
Prepaids 1,112,028
Total Current Assets 17,613,760
Due from parent 482,306
Plant and Equipment 1,449,331
Deferred Tax Assets 278,074

TOTAL ASSETS 19,823,471

Liabilities and Shareholder’s Equity

Current Liabilities
Accounts Payable $ 2,179,603
Accrued Liabilities 3,737,444
Total Current Liabilities 5,917,047
Long Term Debt 8,872,482
Deferred Taxes 198,647
Total Liabilities 14,988,176

Equity
Share Capital $ 5,448,026
Retained Earnings (612,731)

TOTAL EQUITY AND

S/H’S EQUITY 19,823,471

The Draft Income Statement as December 31, 2016 shows a balance net loss of $1,988,618.
However, focus on the Trial Balance, the Income Statement should be $1,988,619. There is a
difference of $1-dollar amount (not material amount).

The amounts of the Balance Sheet, in overall, are correct and the Balance Sheet could lead
a Positive Opinion of the auditor (Reasonable Assurance). Finally, the company gained less
money than 2015 (loss).

PART 2: CHAPTER #7 (PAGE 277)

Part A (a): Flowchart

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Part A (b): Relevant Questions to Employees

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A) Carla Johnson (Financial Controller):
1. How are records of company’s performance reviews generated?
2. What is the procedure for the store regarding DAILY cash balance reconciliations to the
deposits in the operating bank account?
3. How does the company keep track of sales and inventory? Is it on a monthly/daily basis?
4. Does the company’s control system detect double entries or errors during data recording?
5. How many Sales Orders or Invoices are cancelled and rebilled? What are the primary
causes of such events? How many dollars are involved?
B) Sales Manager:
1. Why does the Sales Invoice #132811 NOT MATCH with the Shipping Document regard
the CUSTOMER ADDRESS? (the Sales Invoice shows the address “23 Main St, Shop
43” and the Shipping Document shows the address “123 Main St, Shop 43”)
2. How does the company keep track the customer orders and their credit limits if they are
eligible to purchase the footwear?
3. How does the company prevent problems with the Inventory Management Software
System (“Swift”) in case of any shutdown due to electrical storms or electrical issues? Do
you have any plan to handle the customer and shipping orders if that occurs?
4. How does the company’s internal system record the sales transactions? Does it have
specific procedures to be followed?
5. What tools or innovative systems are used to identify the causes of customer complaints
related to the service and the product quality assurance?
C) Warehouse Manager:
1. What is the average inventory turnover ratio of the company?
2. Is there a specific procedure to confirm the footwear coming in whether it is the right
footwear (product quality assurance)? If it is the case, what is the specific procedure that
the company takes?
3. What are the records of nonconforming shoes and actions taken on them?
4. What is the inventory counting procedure of the company?
5. How does the company eliminate obsolete inventory?

D) Shipping Supervisor:

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 1. Can whatever person receive the order at the final destination and sign the Shipping
Document? OR Does it have to be the manager or a specific person of the final
destination’s company?
2. How does the shipment get confirmed after it gets delivered to the customers OR if the
footwear does not reach the final destination?
3. Does the Shipping Supervisor keep track of the footwear that is coming in and coming
out by physically counting the footwear and recording it?
4. How is the process to arrange the footwear deliveries? What does the company focus on?
5. What is the process to follow if the orders are not delivered during the day? Does the
company deliver the remaining orders the next day?

Part B (TABLE 7.5):

Cloud 9 Controls Testing – Sales/Receivables as at December 31, 2016 (Page 279)

SALES SALE INVOICE SHIPPING

INVOICE DATE CUSTOMER AMOUNT MATCHES SHIPPING SUPERVISOR
# NAME (EXCL. SHIPPING NOTE # AUTHORIZATION
HST) NOTE (A)

20 132811 10/13/2016 David Jones $917.92 X D00132811 ✔

Address.
21 133410 10/27/2016 Rebel Sports – $723.72 ✔ D00133410 ✔
World Square
22 134063 11/04/2016 Myer-Burnaby $752.20 ✔ D00133410 ✔
23 134104 11/06/2016 Cross Country $229.48 ✔ D00134104 ✔
Sports
24 135215 12/12/2016 Wide Road $1,192.14 ✔ D00135215 ✔
Specialty
Retailer
25 135947 12/20/2016 Foot Locker – $1,021.60 ✔ D00135947 ✔
Pitt St. Mall

Part B (TABLE 7.6):

Cloud 9 Controls Testing – Cash Receipts process as at December 31, 2016 (Page 280)

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 DATE TOTAL POSTED TO TOTAL BANK EVIDENCE OF
TRADE DEPOSIT REVIEW
RECEIVABLES

20 09/19/2016 $10,577.23 $10,577.23 ✔

21 10/08/2016 $8,765.49 $8,765.49 ✔
22 10/23/2016 $5,490.61 $5,490.61 ✔
23 11/12/2016 $9,302.20 $9,302.20 ✔
24 12/03/2016 $12,567.33 $12,567.33 ✔
25 12/19/2016 $13,874.85 $13,874.85 ✔

CONCLUSION OF THE CONTROLS TESTING

Based on the Controls Testing performed, the Sales/Receivables process and the Bank
Reconciliation of the Cash Receipts process appears to have designed, implemented, and
operating effectively for the 12 months ended December 31, 2016.

Thus, the intended reliance on Controls Tested can be increased, the Controls Tested can
be relied on for the purposes of reducing overall Audit Risk assessment (reduces Control
Risk) for a particular significant Account and Assertion, and the Detection Risk can be
increased by designing less extensive Substantive Audit Procedures (which are NOT intended
to detect and estimate the effect of error in the related significant Account Balances) or a
reduced level of additional Substantive Testing of Transactions and Account Balances.

Finally, the best Audit Strategy for this case is taking a Combined Strategy (strategy used
when the auditor obtains a detailed understanding of their client’s system of internal controls
and plans to rely on that system to identify, prevent, and detect material misstatements).

Part B (TABLE 7.7):

Cloud 9 Controls Testing Conclusions (Page 281)

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 ACCOUNT CONTROL EXPLANATION
ASSERTION RISK

– Sales have been made to authorized customers and

Sales – Occurrence Low have been delivered.
– Sales Invoices have been issued to the customers.

– Sales match with ALL evidence of pre-numbered

Sales – Completeness Low Sales Orders, Shipping Documents signed by the
customers and their Sales Invoices.

– Shipping Documents match with the Sales Invoices

items, quantities, prices and total amounts.
Sales – Measurement Low
– Sales are recorded in the proper quantities, prices
and total amounts.

– Shipping Documents have been signed by the

Trade Receivables – Low customers in order to record the transaction in the
Existence Subledger AR account.

– ALL Shipping Documents, signed by customers,

Trade Receivables – Low and the Sales Invoices match with the AR Subledger
Completeness account (total amounts).

Trade Receivables – Low – AR are recorded in the proper amount in the Sales
Valuation Invoices and the AR Subledger account.

– Sales Invoices have been paid by the customers and

Cash – Existence Low the Bank Reconciliation shows the payment amounts
(deposits) with the customer Sales Invoice data.

– ALL the total amounts of Sales Invoices match

Cash – Completeness Low with the total bank deposits/payments of customers
and the AR Subledger account balances.

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 PART 3: CHAPTER #11 (PAGE 430)

4 OR 5 Procedures that were Done Properly

1. The warehouse staff perform physical counts of the running shoes at regular and continuous
intervals on a weekly basis.
2. The warehouse is closed on the counting date to ensure the count would not be affected by
incoming or outgoing orders.
3. Count teams consist of two different employees. One person counts, while the other records
the item. This can help to avoid modifying quantities of the inventory by only one person.
4. All footwear boxes are marked with labels that describe the shoe style and type (model, size)
and all of the shoes are arranged such that these labels are facing outward and can therefore
be read by the counters. The warehouse is well organized by arranging the inventory with all
footwear stacked on shelves by type.
5. Count tags are used for all the running shoes counted. The count tags can help to avoid
double counting of the inventory.

4 OR 5 Procedures that were either Not Done OR Not Documented Properly

1. The inventory count is supervised by Carla Johnson (Financial Controller) and the
Warehouse Manager. This is a wrong procedure since the company’s Segregation of Duties
Principle has been broken, which it means that each person is not working in their own area
and the risk of collusion against the company is high in case of a close relationship between
the Financial Controller and the Warehouse Manager. Thus, Carla Johnson should not be
present supervising the inventory count as she is the Financial Controller of the company; the
only one that must be present supervising the inventory count is the Warehouse Manager.
2. The company waits until the last day of the year-end to count the inventory instead of
counting the year-end inventory at the beginning of December. December is a peak season of
many transactions and so much customer demand for shoes, so it should be better to start the
inventory count at the beginning of December.
3. The count team is provided with only a plain paper for items that may not have been listed on
the count sheets. The count team needs also the records of the system’s last inventory balance
in order to compare the inventory discrepancies if it is the case.
4. The footwear excess of one shoe type is stacked in different shelves. It could be better to
have a bigger shelf for a specific type of shoes, and thus be able to avoid confusions and
incorrect shoe locations. Although footwear has tags, it is better to have different places for
each one type of shoes.

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5. The count team does not re-check the inventory count (the memo does not mention if it was
done). All counting must be double checked and all discrepancies recounted.

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