Question

You are currently working as a Senior Auditor at an auditing firm called Assurance Auditors and plan to remain in auditing as you really enjoy it. The Audit Partner gave you a new task and assigned you to a client called Sheen (Pty) Ltd ("Sheen") which was incorporated five years ago and has grown considerably since its incorporation Sheen’s financial year-end is April 2023. Sheen is located in Cape Town, South Africa, and manufactures clothing. The company has a large manufacturing plant, four large warehouses, and a Head Office in Stellenbosch. Once manufacturing is completed, the clothes are stored in one of the warehouses until they are despatched to customers. The company’s main customer base is the general public, with a great deal of inventory also being sold to wholesalers and retailers. Clothing is directly delivered to clients. For orders exceeding R700, the delivery is free, but for orders less than R700, a tariff of R5 per kilometer is charged

Ordering of goods, goods despatched, and invoicing When a customer places an order, a unique customer account number is given to the customer. The account number is used to enter sales orders when they are received in writing from customers. The orders are entered by an Order Clerk and the system automatically checks that the goods are available and that the order will not take the customer over their credit limit.
For new customers, a Sales Manager completes a credit application; this is checked through a credit agency and a credit limit is entered into the system by the Credit Controller. The company has a price list, which is updated twice a year. Larger customers are entitled to a discount; this is agreed upon by the Sales Director and set up within the customer master file. Once the order is accepted, it is automatically sent to the customer by mail/email confirming the goods ordered and the possible despatch date. The order is then sorted by the address of the customer. The warehouse closest to the customer receives the order electronically and a despatch list and sequentially numbered goods despatch notes ("GDNs") are automatically generated. The Warehouse Team packs the clothes ordered from the despatch list and, before it is sent out, a second member of the team double-checks the despatch list to the GDN, which accompanies the goods. Once despatched, a copy of the GDN is sent to the Accounting Department at the Head Office and a sequentially numbered sales invoice is raised and checked to the GDN. Once a month a computer sequence check is performed for any missing sales invoice numbers.
Other income: Rent Sheen rents out a portion of its warehouse to local entrepreneurs in the Western Cape. These entrepreneurs manufacture small items such as shoes for toddlers, headbands, etc. Each of them pays different rental amounts per month and the rental is based on the square meters they use. In terms of the rental agreement, if an entrepreneur pays their rent on time by the 1st of the month, the entrepreneur receives a 5% discount. Accounts receivable: Foreign debtor Included in the accounts receivable of Sheen is a foreign debtor. This foreign debtor normally purchases two huge bulk orders a year. During the prior financial year, there were rumours of this debtor being bankrupt. Sheen did not adjust their provision for doubtful debtors. During the December holiday, Sheen received formal notification that the foreign debtor is being liquidated.
REQUIRED:
Formulate the test of controls that you would carry out on the Ordering of goods, goods despatched and invoicing. For each test of control, explain the control objective

Answer 1

To conduct the test of controls on the ordering of goods, goods dispatched, and invoicing, several procedures can be performed: reviewing the credit application process, reviewing the order entry process, reviewing the goods dispatch process, and reviewing the invoicing process.

Step-by-step explanation:

To conduct the test of controls on the ordering of goods, goods dispatched, and invoicing, several procedures can be performed:

Review the credit application process: This involves examining the credit application forms, checking credit checks conducted by the credit agency, and verifying the setting of credit limits by the Credit Controller. The control objective is to ensure that credit limits are properly set and new customers are vetted for creditworthiness.

Review the order entry process: This involves checking the system's validation of order quantities against available stock and the customer's credit limit. The control objective is to ensure that orders are accurately entered and do not exceed credit limits or deplete available stock.

Review the goods despatch process: This involves assessing the accuracy of the despatch list, the double-checking process by the Warehouse Team, and the matching of goods despatch notes (GDNs) to the actual goods. The control objective is to ensure that the correct goods are despatched and documentation is accurately checked.

Review the invoicing process: This involves examining the sequential numbering of sales invoices, the matching of sales invoices to GDNs, and checking for missing invoice numbers. The control objective is to ensure that sales invoices are correctly raised and accounted for.