Auditing plays a crucial role in strengthening the internal process of the organization. Through auditing, the activities of Henrico Retail can be traced from the start to the final check. Auditing is made possible as various level of information flow requires different handling by different people.
Question 1: Sales Transaction Audit Trail of Henrico Inc.
While making the purchase, the customer receives a receipt which is in paper form, and this indicates transactions made. Ideally, the receipt is produced in duplicate and the organization gives the client one while at the same time retaining one. Each transaction of the customer is then kept electronically in a designated hard drive in the store by the cashier. The cashier in addition backups the data on a daily basis on the server which is on computer-based in the store. The electronic data captured indicate critical information relating to the transactions carried out during the day, and the information can be used by the respective managers who want to know the SKUs sold their prices and their quantities.
During the closure of the cash register, which takes place every day, all the transactions are automatically updated on the hard drive and store on the store's server computer. At this point, a printout of the summary paper is generated indicating the amounts of cash sales, and the credit sales. This is crucial for the management and accounts department to follow up for credit sales. The clerk then prepares a deposit slip, which is done on a daily basis and it indicates the total amount of the credit and the cash slips. The slips are crucial for audit and tracking of each store's register, and the clerks then present to the cashier the collected cash, and the credit card slips from which the cashier verifies the receipts. From here, the accounts come in place for the reconciliation of the total amount of the deposit slips and the amount that is deposited as indicated on the bank statement. The accounts department then files all the receipts and deposit slips by date to make it easy for reference.
At the end of the month, a detailed stock listing is generated to show each SKU information by quantity. Additionally, a monthly sales report for each store is generated, the general ledgers which show all the receipts and allocation made are also produced from the computer. The sales per store are then transmitted to the main office electronically. This information is crucial to track the performance of the organization and in knowing the loopholes that can lead to losses.
Question 2: What difference between Preventive Control and Detective Control and their Examples as Present in Henrico's Sales System
Preventive controls are measure aimed at ensuring that any form of inaccuracy does not take place. On the other hand, detective control is mainly aimed at establishing the problematic points within the company's system. Additionally, preventive controls do not require continued substantial investment whereas, detective controls require substantial investment outlay to help in identification of the arising problems. Ideally, the preventive controls are embedded into the interior control process and structures while detective controls are posted implementation requirements.
In Henrico's system, a good example of preventive control is evident where the clerks are only allowed to read data such as unit prices but they are not authorized to change the prices hence prices cannot be manipulated. In terms of detective control, an example can be found where the clerks have to count cash on their drawers while recording on the deposit slips. At this point, human errors can arise. This can perform as a signal point for tracking errors.
Question 3: Proposed Strategy for Auditing the Occurrence Assertion for Sales Transactions
According to AU 339, which relates to audit documentation, in which audit documentation is required to have sufficient and the appropriate evidential matter to give a reasonable basis for a qualified opinion. Additionally, the audit documentation needs to be sufficient for the engagement team members who have review and supervision responsibilities in order to understand the timing, nature, results, and extent of auditing procedures performed together with the evidence obtained. To test the assertion of sales occurrence, general ledger posting could be selected by the auditor and consequently trace them to daily reports, that are randomly selected for specific stores.
In testing the assertion that sales transaction indeed took place, auditor aims at determining that an exchange took place between the store and the client with the client paying in cash or giving assurance to make payment later. In auditing to establish this, auditor selects a few transactions as indicated on the daily sales summary as this will show the sales made and cash paid. The auditor looks at the confirmation of deposit into the bank for proof that indeed sales took place and ensure the amounts in the sales report appear on the general ledger.
To verify the assertion of sales taking place, the auditor will sort the help of an IT specialist who majors in auditing to every the accuracy all the transactions made by Henrico since the transactions made by the customers are in electronic form (Beasley, Buckless, Glover & Prawitt, 2019). Additionally, the auditor will look into whether the price charged matches the approved prices and the provided discount structure of the organization. However given the retail nature of the organization, the risk of prices being charged examined to be wrong is very low. The auditor then looks at the consolidated sales account to ascertain whether the transactions have been summarized correctly. The adequate paper trail also exist to help in testing the assertion, for instance, the duplicated receipts copy and the deposit slips exist and can be checked against the total in the accumulated sales ledger. Finally, the assertion must be made by the auditor to ensure that the monthly sales totals are posted into the sales general ledger.
Question 6: Test of Occurrence and Accuracy Assertion
In texting the occurrence, the aim to establish whether the transaction took place or not. In testing the accuracy, the aim is to establish how close the result of the measurement is to the accurate result. In this case, the auditor can use the same sample used for the testing occurrence to examine how accurate the data is. The daily sales report, which is the recorded document for the accounting of all sales transactions and the vouch of each transaction conducted. To ascertain their accuracy, the auditor can tie the amount on the daily report to the confirmation from the bank. Additionally, the auditor must ensure that the amounts are the same as the amount recorded on sales general ledger.
Question 7: Testing for Completeness Assertion for Sales
Testing for completeness involves establishing whether the transaction indeed took place and was concluded. It also entails the establishment by the auditor that the recorded transactions recorded are included. A document such as the daily sales report is presented to prove that indeed the transaction took place and all the transactions which should have been recorded are all recorded. Additionally, the auditor should check to ensure that all cash transactions are reported from the transaction summary to the general ledger.
Question 8: The difference between Manual Control Risks and the Automated Control Risks
Manual control refers to the systems that are operated and controlled by human hence they can be manipulated. Automated controls, on the other hand, are automatically manipulated and they are powered by sources that are animated. In addition, manual controls are human-oriented while automated controls are machine oriented. In Henrico retail, manual control is evident since all the sales clerks are supposed to count the cash present in their drawers at the end of the day and list them on the deposit slip for the day. Here different clerks operate from the same register of cash making it risky since accountability for cash at hand is not adequately factored in. Automated risk exists since, in case of failure, there is no evidence of system backing up.
Question 9: Portion in the Accounting system that will likely require IT system auditor assistance
Computerized transactions would require the help of an IT specialist since the inventory records are updated continuously and automatically, and are consequently kept in the magnetic field. The auditor will encounter difficulty since the system does not produce the paper audit trail indicating the inventory updates hence become difficult for verification to be conducted by the auditor. Through involving the IT audit specialist, it becomes possible to establish the trail. Ideally, the IT specialist might deploy the data test approach to enable the auditor to audit the system. The auditor, in addition, must ensure adequate planning with the IT team of the client to enhance corporation between the client and the auditor.
Question 10: Control Deficiencies in the Existing Sales System
The control system of Henrico has various deficiencies as highlighted below:
- Various sales clerk are allowed to handle cash stored in the same drawer hence reducing the desired level of responsibility the position requires. Additionally, they are given permission to use any of the cash registers within the store.
- Sharing of the employee identification numbers in order to access the system can lead to unauthorised transactions that can result in a loss to the company. Hence the regular change in the passwords should be done by the company and ensure only authorised personnel gains access to the cash register.
- Adequate training is being offered to the sales clerks for the operation of the sales terminals/cash registers since the management believes the acquisition of the on-job experience is enough for the clerks. Ideally, this leads to inappropriate sales and wrong entries being made before the clerks get used to how the systems operate. Adequate training is essential for efficiency and accuracy in operations of the machines by the clerks.
- There is no contingency plan in case of system failure. All the process of sales is tied to the operation of the machines.
- There is no sufficient evidence if there are perpetual inventories are being pegged on the inventory quantity on hand.
Beasley, Mark S., Frank, Buckless A., Steven, Glover M., & Douglas, Prawitt F. Auditing cases An interactive learning approach. 2019.
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