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a) Manual operations and controls that might have been applied to this invoice are:
1. A proper system for the preparation of invoices:
- Independent preparation - invoices should have been prepared and sales journals entered up (or invoices summarized, where journals were not kept) by a section separate from the sales ledger sections. This section should also have been separate from the dispatch of goods and cash collection.
- Sales prices of goods should be authorized in writing. A responsible official, who should have been independent of the accounts department, should authorize discount and special terms.
i. Controls to ensure that all invoices and credit notes are entered in the books.
- Pre numbering invoices – invoices and credit notes should have been pre-numbered and filed, after entry in the books in numerical order.
- The processed invoice should have been received and any missing numbers investigated. A responsible official independent of the sales ledger & cash receipts personnel should have authorized any spoilt, cancelled or altered invoice.
ii. A control to ensure that all authorized transactions are recorded in the sales ledger.
- Authorized invoices should be pre-listed determining a total for posting to an independent control account, before the ledger personnel process them. The totals of the ledger posting runs (both nominal and personal account) should have been agreed back to the control account
b) Input controls serve to ensure the completeness, accuracy and authorization of input. To ensure completeness the following controls can be set up:
i. One for one checks i.e. each input is checked to output.
ii. Batch control totals and hash totals. These controls are often used where documents (e.g. invoices) are grouped together and processed in a single block.
- A batch total is the sum of one of the numerical fields on the documents in the batch e.g. gross amount of the purchase invoice. This total is calculated normally and the documents are then input into the computer. The computer then calculates the batch total and this is compared with the manually calculated total. If they are different, then an error has occurred, perhaps an invoice value has been mis-keyed or a document may have been omitted from input altogether
- A hash total works in exactly the same way as a batch total but a different type of field is used e.g. the supplier code number. Unlike the batch total, the value of the hash total is meaningless but is still used for control purposes to detect errors on input or omissions.
To ensure accuracy, the following controls can be set up:
i. Check digits: These are a means of control in that they ascertain whether or not a number is valid. A formula is used to calculate the number itself. The computer will then detect if the number is ever input correctly.
ii. Reasonableness: Checks to ensure data is within certain ranges.
iii. Existence checks: e.g. to check that the supplier account exists.
iv. Manual controls e.g. batch and arithmetic checks.
To ensure input is properly authorized, the following controls can be set up.
- Manual authorization
- Clerical review of transactions.
- One for one checking of amendments to standing data.
- Programmed checks on authorization limits.
c) Audit Tests
1. The auditor should inspect the invoice for the date to ensure that it relates to the client‘s financial period.
2. The auditor should consider whether the supplier‘s name appears on the list for authorized suppliers of the company to determine whether orders to such supplier are authorized.
3. The auditor should recompute the value of the invoice and compare with that on the invoice to ensure arithmetic accuracy of the invoice.
4. The auditor should compare the goods inward note content with the stock records to ensure that goods were infact received by the company.
Wilfykil answered the question on February 21, 2019 at 12:17
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