AC404 - Exam Practice Question

(Tests of Control)
Case Study
Background Information
You are a third year trainee accountant at XYZ Inc (XYZ), an international audit firm that has
branches worldwide. XYZ is well known for its auditing companies in the manufacturing and
retail sector.

You are currently allocated to the audit of Yellow Ltd (Yellow), a company listed on the
Zimbabwe Stock Exchange. Yellow has a 31 June 2021 year end. The audit report is required
on 15 July 2021. Yellow’s audit will be led by Mr Zuze, a director at XYZ. Mr Zuze is a CA(Z).

Yellow has 12 stores in 6 cities around Zimbabwe. Yellow designs and sells ready-to-
assemble furniture (such as beds, chairs, and desks), appliances and home accessories.
Yellow is known for its modern architectural designs for various types of appliances and
furniture, and its interior designs work is often associated with eco-friendly simplicity.

Preliminary assessment of the controls implemented in the inventory cycle

Based on your preliminary assessment of the design and implementation of the controls
over the inventory system, you concluded that the controls were adequate. You are
therefore planning to rely on these controls.

Working paper
Annexure A System description – sales

Annexure A
You documented the following information in relation to Yellow‘s sales system description
Client: Yellow Prepared by: Third Year Date: 20/06/21 PO1/20
trainee
Year End: 30 June 2021 Reviewed by: Manager Date: 28/06/21
Subject: System description - Sales

Most of Yellow’s products are transported in flat packs and then assembled at customers’
homes. These products are creatively designed using eco-friendly raw materials and
manufacturing processes to create functional products. Raw materials are purchased in bulk
to obtain discounts and reduce costs. Each customer of Yellow is issued with a customer
identification card, which the customer needs to present before making a payment.

To encourage the customer to see the store in its entirety, Yellow stores are often designed
in a one-way layout, leading customers counter clockwise along what Yellow calls, “the long
natural way. At the entrance to the store, customers receive a pre-printed, pre-numbered
item selection sheet that has details of all the items in the store as well as their product
codes. The customers enter the furniture showrooms where they tick off the items and
indicate how many they want on the item selection sheet received at the entrance. The
showrooms contain only display furniture and no products may be taken from the
showroom.

The customers then collect a shopping cart and proceed to the in-store furniture warehouse
where the sock is kept. At the in-store furniture warehouse, a picker uses each customer’s
item selection sheet to collect items picked in flat pack form and puts these in the
customer’s shopping cart. The picker then uses a red marker to tick off the items that he
puts into the cart, signs the item selection sheet and hands the item selection sheet back to
the customer. Sometimes, customers are directed to collect the bigger stock items from an
external warehouse situated at the back of the store.

Customers then proceed to the cash register where they have to present their customer
identification cards to be able to pay for their products. The cashier obtains the item
selection sheet from the customer and enters the items selected on the sheet, together
with their product codes onto the “three pointer” sales system. The product code is
automatically linked to the authorised price list on the “three pointer” sales system. The
product manager updates this list monthly. Customers pay for the items using cash or a
credit card and a sequentially numbered proof of payment receipt is printed. The proof of
payment receipt reflects the date, item code, item description, number of items sold, price
per item, the VAT on the transaction and the total of the transaction. Yellow retains a copy
of the proof of payment receipt. The customers and the cashier sign the item selection
sheet as proof that they received the goods; this sheet is then retained by Yellow. The
transactions are automatically updated to the sales journal. Those customers who were
directed to collect products from an external warehouse are issued with a proof of payment
receipt from the “three pointer” sales system as well as a photocopy of their item selection
sheet.

Customers, who were directed to collect products from the external warehouse, present
their customer identification cards before gaining access to the external warehouse. They
then present their proof of payment receipt from the “three pointer” sales system and the
photocopy of the item selection sheet to the picker at the warehouse. The picker uses each
customer’s proof of payment receipt to collect items and helps load the items into the
customer’s vehicle. At the exit of Yellow’s premises, the security guard agrees the proof of
payment receipt with the goods in the customers’ cars and stamps the proof of payment
receipt as proof that he performed the check. At the end of each month, the accounting
clerk uses the information that was automatically updated to the sales journal of the ‘three
pointer” sales system to update the sales account in the general ledger. The sales account in
the general ledger is used to compile the sales amount on the balance and financial
statements.

Required
Based on the information provided in the scenario, formulate the tests of controls you
would perform to establish the operating effectiveness of the controls relevant to the audit
of Yellow’ sales for the year ended 31 October 2021,

Solution
 On a surprise basis, observe a picker ticking off the items, loaded in the customer’s
hopping card, on the customer’s item selection sheet to ensure that the picker ticks the
items on the item section sheet once they are loaded onto the customer’s shopping cart.
 Observe on a surprise basis, that customers are requested to provide the cashiers with
their customer identification card and/or confirm through enquiry with the cashiers that
the customers are not allowed to pay without a valid identification card to ensure that
only customers with valid identification cards are able to purchase products
 Also observe on a surprise basis that the picker signs the customer’s item selection sheet
and select a sample of these customer item selection sheets to inspect these sheets for
the signature of a picker in order to ensure that the pickers do indeed sign the selection
sheets
 Obtain and inspect the authorised price list to ensure that the authorised prise list exists
 Generate test data transactions of valid product codes and enter them onto the “three
pointer” sales system. Compare the price on the sales system to the price on the
authorised price list to ensure that the correct product code is linked to the price on the
price list.
 Inspect the date on the authorised price list to ensure that it is updated monthly by the
product manager
 Through enquiry with the product manager, obtain an understanding of how the prices
are obtained form him to update the price lists and what supporting documents the
product managers uses to support these changes
 Agree the updated prices on a sample of the monthly authorised price lists to supporting
documentation in order to ensure that the prices are valid and have been accurately
updated
 Select a sample of printed proof of payment receipts and inspect the numbers on the
proof of payment receipts to ensure that they are sequentially numbered
 Select a sample of item selection sheets retained by Yellow after the customer has paid
for the goods, and inspect the item selection sheets for the signature of the customer to
ensure the customer signs the item selection sheet as proof that they received their
goods
 Generate a test data transaction and follow this transaction through to the sales journal
to ensure that the sales journal is automatically updated with the sales transactions
 Observe that customers present their customer identification cards before gaining
access to the external warehouse to ensure that access to the external warehouse is
restricted to customers who present their customer identification cards
 Attempt to gain access to the external warehouse without a customer identification card
to ensure that access to the external warehouse is restricted to customers who present
their customer identification cards
 Observe that the picker at the warehouse uses the proof of payment receipt and the
item selection sheet to pick the stock from the warehouse in order to ensure that the
picker at the warehouse uses these documents to pick the stock from the warehouse.
 Observe the security guard at the gate agreeing the goods in the customer’s cart to the
proof of payment receipt to ensure that the security guard agrees the proof of receipt
with the goods in the customer’s car
 Select a sample of proof of payment receipts and inspect the stamp of the security guard
to ensure that he has agreed the goods in the customer’s car to the proof of payment
receipt,
 Through discussions with the security guard, enquire what he/she does in circumstances
where differences are noted between the proof of payment receipt and the actual
number of inventory items in the customer’s car to obtain an understanding of how/if
differences are identified.
 Discuss all exceptions with regard to the above tests of controls with management
and/or investigate all exceptions to obtain an understanding with regard to these
exceptions