AUDITING 288/388

Auditing Fundamentals Chapter 6:

REVENUE &
EXCLUDE:
• 6.3.3 Data basis and Master files
RECEIPT
• 6.5 What computer
technologies are used in the
CYCLE
cycle?

6.6.3 Link between the control

objectives in the cycle and
managements assertions will be
addressed in the 4th term

Auditing Fundamentals
Chapter 6
ISA 315 & 330
Lecture 1
 2

Learning outcomes
➢ Describe the nature of the cycle including the
applicable accounts and transaction types
and functions.
➢ Identify and formulate control objectives
applicable in the cycle.
➢ Explain what could go wrong (risks or
weaknesses) in the cycle including the
consequences there of.
➢ Make recommendations to improve
weaknesses.
➢ Design a suitable internal control system.
 3

Auditing Fundamentals
➢ Read Ntsimbi Piping in Auditing Fundamentals!
Section 6.8

➢ Table – 6.7.2 in Auditing Fundamentals 2nd edition

➢ Documents example
▪ Credit application form – Pg 699
▪ Order form – Pg 691
▪ Delivery note – Pg 695
▪ Invoice – Pg 696
▪ Sales Journal – Pg 703
 4

Framework Acquisitions &

Payments
Revenue & Receipts
Wages & Salaries
Transaction types and
Inventory&
functions Production
Bank & Cash

Controls
(Recommendations)

Weakness(es) and
consequences

Control Objectives
 5

Structure of the Textbook

1. Nature, purpose and accounting implicationsAud Fund p192-19
2. Functional areas Aud Fund p197-200
3. Information system Aud Fund p201-206
1. Documents, Journals, Statements, Ledgers,
Reconciliations
4. Risks → focus on Revenue, cash theft in bank and
cash Aud Fund p210-215 Bank and Cash : 6.4.2
5. Computer technologies Third year!!!

6. Control objectives Aud Fund p215-218 Assertions later

7. Control activities Aud Fund p221-222
8. Cycle illustration Aud Fund p224-245
 6

Information system for reporting

“Procedures and records established to initiate, record, process and report
entity transactions, events and conditions and to maintain accountability
for related assets, liabilities and equity.”
1. Transactions Order Form
Decision & approval
1. Initiate
Delivery
2. Implementation of the decision
Note
2. Execute

3. Document / record Invoice

3. Record

4. Accounting record Sales Journal

4. Process • Cash book Debtor’s
• Sub-ledger ledger
• Journal
5. Reporting
• General ledger

5. Financial statements
 AF 4.3.2.4
CONTROL ACTIVITIES p. 124 - 126
To ensure that identified risks are prevented, or should they
materialise, that they are timeously detected and addressed,
through:
S Segregation of duties SoD

C Access Control Acc

Cont

R Independent Review Indep

Rev

R Documentation and Records Record

A Authorisation and approval AUTH

R(M) Reconciliation Recon

7
CONTROL OBJECTIVES AF 4.4.2
Control objective Control ensures that:
p. 130
Validity (All transactions/events executed and recorded were…)
V
- Authorised (according to entity’s policy); AND
- Occurred (not fictional);
- During period; AND
- Supported by sufficient and appropriate documentation.
Completeness (All transactions/events that occurred during the period are…)
C - All recorded;
- In a timely manner; AND
- None omitted.

Accuracy (All transactions/events are…)

A - Recorded at correct amounts (quantity, price, and calculation);
- Correctly classified in the entity’s accounting records; AND
- Correctly summarised and posted to entity’s accounting records.
NOTE – the relationship between control objectives and assertions to be addressed later
(p133) 8
 9

TRANSACTION
TYPES AND FUNCTIONS
2.1 3.1, 3.2
Accept & process order
Sales division 1. Initiate
1.1, 1.2, 1.3,
3.1, 3.2 Granting of Credit

Warehouse
4.1, 5.1, 5.2,
5.3, 6.1
Dispatch goods 2. Execute

Accounting
Invoicing & recording 3. Record
6.1, 7.1
division
4. Process

SALES (Cash or on credit)

(Accounts: Sales & Trade receivables & Bank)
 10

Accept & process order

SALES
(Cash or on credit)

ORDER NOTE/REQUISITION
Sales division
INITIATE

In person/ telephonic/mail/fax/agent

Sales Order Clerk

Availability of
inventory?

Credit worthiness
check ?
1. Customer
Authorised price?
2. Warehouse
Reperform
calculations Date 3. Invoicing(Accounting)
#
SALES ORDER 4. Sales division
details of purchaser,
description & amount

XXXX
Sales/Credit manager
 11

Granting of Credit

Credit ➢ Existing client

➢ New client application  Available credit
INITIATE

 Credit
vs outstanding
application and
balance
approval
 Additional
 Credit checks --
credit--→ credit
→credit limit
checks

Sales/ Credit
manager

Finance
manager
 12
Despatch goods
SALES
(Cash or on credit)
1. Sales division

2& 3 Client sign 1 copy &

sent back
EXECUTE

QQD of physical
goods
Date 4. Inventory records
Match documents #
(SO and DN)
DELIVERY NOTE 5. Warehouse
date of dispatch, purchaser, address
description quantity Head storeman
QUALITY QUANTITY
DESCRIPTION XXXX

Driver Security

Access control–
Warehouse and Storeman Picking slip or
dispatch sales order
get inventory ready

Warehouse
 13
Invoicing & recording
SALES (Cash or on credit)

Signed customer
Invoice clerk
RECORD/DOCUMENT

delivery note

Date
1.Customer
#
Accounting
division 2. Accounting
SALES INVOICE
details of purchaser, sales transaction, 3. Sales division
amount owing (Px Q), payment conditions

XXX
Senior Invoice clerk
• authorised price list
• quantity agrees to signed delivery note
• check accuracy + (VAT)
• compare invoice, signed delivery note & sales order
sales journal (posted to debtors & general ledger)
 14

Invoicing & recording SALES

(Cash or on credit)
Debtor clerk
1. Customer

Date
#
ACCOUNT/ MONTHLY STATEMENT 2. Accounting
Accounting (summary of invoices, payments & discounts
division
PROCESS

for the month & month end balance)

SOD – Invoicing,
posting to ledgers and
PAYMENT ADVICE monthly statement

Debtor manager (Auth)

Reconciliation
• Reconcile debtors ledger to trade
receivables
• End of month
• Activity : Complete the risk for the following (Ordering,
Granting of credit, Dispatch of goods , Invoicing,
Recording

15
 Invoicing Granting Accept &
& Dispatch process
goods of Credit
recording order
Risks - Sales

What Could Go Wrong (WCGW)

16
 AUDITING 288/388

Auditing Fundamentals Chapter 6:

REVENUE &
EXCLUDE:
• 6.3.3 Data basis and Master files
RECEIPT
• 6.5 What computer
technologies are used in the
CYCLE
cycle?

6.6.3 Link between the control

objectives in the cycle and
managements assertions will be
addressed in the 4th term

Auditing Fundamentals
Chapter 6
Lecture 2
 18

TRANSACTION TYPES AND

FUNCTIONS
Receive money 1. Initiate
8.1

8.1
Deposit receipts 2. Execute

3. Record

9.1 Recording 4. Process

CASH RECEIPTS
(Accounts: Bank&cash/debtors)
 19
Receive money
CASH RECEIPTS
Cash register/payment advice and
cash/cheque/credit card in person

1. Customer

Cashier RECEIPT 2. Cashier, CRR

(details of payee, date & amount)

INITIATE

3.
Accounting
Date
division –
# Either
receipt or
CRR

Security

Chief cashier/controller review cash

up and completes deposit slip
 20

Deposit receipts
CASH RECEIPTS
EXECUTE/RECORD

1. Bank
Also refer to the Bank Datum/
Date
and cash slides DEPOSIT SLIP
2. Accounting
date of deposit,
amount cash , total amount
XXX

Deposit cash preferably on daily basis

Cash receipts journal posted to GL & Deb Ledger

PROCESS

Monthly reconciliations
• bank reconciliation
• debtors reconciliation (debtors control vs debtors ledger balance)
 Activity:
Identify & Formulate the control 21
objectives for cash receipts

Risk’s-Cash receipts
Receive
money
receipts
Deposit
Record-
ing

What Could Go Wrong (WCGW)

 22

TRANSACTION TYPES AND

FUNCTIONS
1. Initiate
Receive goods back or grant
a discount
10.1 2. Execute

3. Record

Issue credit note & recording

4. Process
10.2

RETURNS & DISCOUNTS

(Accounts: Sales & Discount allowed/ Debtors)
 23
Receive goods back or grant a
discount

receive goods + proof of purchase

INITIATE/EXECUTE

QUALITY QUANTITY
DESCRIPTION
Storeman
check goods 1. Customer

2. Inventory
Date warehouse
GOODS RETURN VOUCHER
#
(customer details,
Description & Quantity of received back, 3. Inventory
records
reason for return)
XXX

• inventory to warehouse
• store man compares inventory with Head storeman
GRV
• Update inventory records
 24
Issue credit note and recording

Sales return clerk Sales return manager

1. Customer
RECORD

2. Inventory
Date warehouse
CREDIT NOTE #

(details of person returning goods, 3. Inventory

records
description, amount received back) 4. Accounting
XXX

Sales return journal (posted to Deb ledger & GL)

PROCESS

• inventory to warehouse
• store man compares
Accountant Finance manager inventory with
credit note
• Update inventory records
 Activity:
Identify & Formulate the control 25
objectives for returns

Risk’s -Returns
goods or

discount
Receive

grant a
Issue credit note
& recording

What Could Go Wrong (WCGW)

 AUDITING 288/388

Auditing Fundamentals Chapter 6:

REVENUE &
EXCLUDE:
• 6.3.3 Data basis and Master files
RECEIPT
• 6.5 What computer
technologies are used in the
CYCLE
cycle?

6.6.3 Link between the control

objectives in the cycle and
managements assertions will be
addressed in the 4th term

Auditing Fundamentals
Chapter 6
Lecture 3
 27

Class question S1.24

 AUDITING 288/388

Auditing Fundamentals Chapter 6:

REVENUE &
EXCLUDE:
• 6.3.3 Data basis and Master files
RECEIPT
• 6.5 What computer
technologies are used in the
CYCLE
cycle?

6.6.3 Link between the control

objectives in the cycle and
managements assertions will be
addressed in the 4th term

Auditing Fundamentals
Chapter 6
Lecture 4
 29

TRANSACTION 1.4, 1.5

TYPES AND FUNCTIONS

Allowance for credit losses

(Accounts: Allowance for credit losses [ SCI & SFP]

➢ Authorisation
➢ Calculation
➢ Adjustment of the allowance

Write-off of bad debts

(Accounts : Bad debts (SOI), Debtors, Movement in allowance

for credit losses [SOI & SFP])
➢ Authorisation
➢ Write off of bad debts (recording)
 30

ALLOWANCE FOR CREDIT LOSSES

(Accounts: Allowance for credit losses [ SOCI & SFP])

Debtors clerk

Accounting DEBTORS AGE ANALYSIS

Recording details of debtor, date & amount, days overdue

Finance manager

allowance
authorisation by
management
Credit collection process for overdue account
% of debtors balance provided as doubtful debts based on policy) ( or
increase or decrease )
Post allowance in the general ledger account
 31

WRITE-OFF OF BAD DEBTS

(Accounts : Bad debts (SOCI), Debtors,
Movement in allowance for credit losses [SOCI & SFP])

Sales clerk

# 1. Accounting
Recording
Either list or minutes
BAD DEBT AUTHORISATION FORM 2. Senior
of meeting
details of debtor, date & amount Management

XXX

Senior management
Post bad debt write off in the general ledger
account
 Activity:
Identify & Formulate the control
32
objectives for allowances
Risk’s – Allowance
for credit losses
ALLOWANCE FOR
CREDIT LOSSES
WRITE-OFF OF
BAD DEBTS

What Could Go Wrong (WCGW)

 AUDITING 288/388

Auditing Fundamentals Chapter 6:

REVENUE &
EXCLUDE:
• 6.3.3 Data basis and Master files
RECEIPT
• 6.5 What computer
technologies are used in the
CYCLE
cycle?

6.6.3 Link between the control

objectives in the cycle and
managements assertions will be
addressed in the 4th term

Auditing Fundamentals
Chapter 6
Lecture 5
 35

Difference between Internal control

objectives and Internal controls
Control objectives Internal controls (Recommendation)

Orders are pre-numbered and matched with the •Who?

All approved orders are delivery note. •What?
carried out.
The credit manager checks the sequence of the
•Document?
orders and follows up on outstanding order
Completeness numbers and orders without delivery notes.
 Formulate Control Objectives 36

Orders from customers No people, actions or

documents
Which part of
transaction?

Validity
Specific control
objective?
EXAM Technique

Risks linked to
control objectives

To ensure that…

• To ensure that orders are from valid customers (real customers/not

fictitious)
• To ensure that orders are only accepted when there is inventory
available to sell..
• To ensure that order are only accepted from credit worthy customers
• To ensure that credit is approved in terms of the policy
Type of questions for cycles 37

Perfect system → Documents drive the process

1. Design a system Compared to perfect system

What is the
2) Weaknesses, impact if this
is not done?
Consequences, (Control
Control objectives objectives can
Recommendations assist)
1) Identify or name
SCRRAR
2) Formulate VAC
To ensure that…
38

Question Pack

Progress questions

For the week ending:

8 March 2023 Question S1.30

 39

AF