SALES SYSTEM
Sales Order Department
Objectives
→ To avoid bad debts
→ To avoid unnecessary discounts and sales at unauthorized prices
→ To avoid unauthorized Inventory Outward
→ To track orders
CONTROLS AND TEST OF CONTROLS
Controls
✓ Segregation of duties: There should be segregation of duties between person
who prepares sales orders and person who approves credit limit.
Test of Control
➢ Auditor should check whether segregation of duties exist between person
who prepares sales invoice and person who approves credit limit.
Business Implication in absence of control
➢ Increased Risk of fraud:
1. Create fictitious sales to non- existent customers.
2. By-pass credit policies to favor certain customers in exchange for bribes or
personal relationships.
3. Cover up unauthorized or fraudulent transactions without detection.
➢ Financial Loss
1. Extending Credit to high-risk or insolvent customers, resulting in bad debts.
2. Over exposure to certain clients or industries, making the business vulnerable
during downturns.
➢ Lack of segregation may lead to audit findings or penalties.
➢ Mistakes or fraud may go unnoticed because no one else is reviewing or
approving decisions.
Control
✓ Set Credit Limit: A separate credit dept. Should set credit limit of new customers
after investigation.
Test of Control
➢ Select a sample of new customers and check approval of credit limits.
Business Implication
➢ Customers may not pay on time or at all.
➢ Company can lose money due to unpaid bills.
➢ Cashflow problems may occur.
➢ Increases the risk of fraud or mistakes.
Control
✓ Check Credit Limit: Order dept. should check credit limit before approving order.
Test of Controls
➢ Select a sample of customers and compare their outstanding balance with
their credit limits.
➢ Use TEST DATA to check that an order above authorized limit is not
processed.
Business Implications
➢ Customers might get goods even if they can’t pay.
➢ Co. Could lose money from unpaid sales.
➢ Cashflows can be affected if payments are delayed or missed.
➢ It increases the risk of fraud or financial mistakes.
Control
✓ Pre-numbered sales orders: Sa les orders should be sequentially pre-numbered.
Test of Control
➢ Auditor should inspect numerical sequence of sales orders.
➢ Use TEST DATA to check that a sales order is allocated next number in the
sequence.
Business Implications
➢ Hard to track orders.
➢ Customer dissatisfaction due to delayed orders.
➢ Issues during audit or tax rules (tax authorities or regulators may require clear traceable
sales data. Without proper numbering, auditors may suspect fraud or poor controls which
can lead to fines or penalties)
➢ Noncompliance with laws (in some countries or industries it's a legal requirement to
maintain sequential records. Not following this can result in legal violations)
Control
✓ Use Authorized rates: Order department should approve sales orders only aT authorized
rates and discounts.
Test of Control
➢ Select a sample of sales orders and compare with authorized rate lists and
discounts.
➢ Use TEST DATA to check that an order at unauthorized rate and discount
is not processed.
Business Implications
➢ Loss of money (selling products at so cheap price can reduce profits or even caused
losses)
➢ Unfair treatment (some customers may get better deals than others leading to
complaints or loss of trust)
➢ Damage Brand image (frequent unauthorized discounts can make the brand look cheap or
unprofessional)
DISPATCH DEPARTMENT
Objectives
→ To ensure appropriate quality and quantity has been dispatched.
→ To avoid claims from customers that goods or appropriate quantity has not been received.
→ To ensure that all orders received have been fulfilled/dispatched.
CONTROLS AND TEST OF CONTROLS
Control
➢ Pre-numbered GDN: Sequentially prenumbered GDN are prepared for every dispatch
and sequentially prenumbered sales orders are attached.
Test of Control
➢ Auditor should inspect the numerical sequence of GDN and should also check
that related sales order is attached.
Business Implications
➢ Hard to track deliveries (Missing or duplicate GDNs make it difficult to know what was
delivered and when.)
➢ Inventory mistakes (Without clear tracking stock records may be wrong or incomplete)
➢ Risk of fraud or loss (goods might be stolen or wrongly delivered without anyone noticing)
➢ audit and legal problems (poor delivery reports can cause trouble during audits or with
compliance checks)
Control
✓ Cross check and sign GDN: Goods should be cross checked with sales order before
dispatch. GDN should be signed by authorized member.
Test of Control
➢ Observe the dispatch process to ensure that goods are dispatched as per
sales order and GDN is prepared as per goods dispatched.
➢ Select a sample of GDN and inspect for signature of authorized member.
Business Implications
➢ Wrong deliveries (customers may get the wrong items or wrong quantities leading to
complaints or returns)
➢ Loss of goods (items could be stolen or notched if no one verifies the delivery properly)
➢ Payment issues (customers may refuse to pay for incorrect or unauthorized deliveries)
➢ No proof of delivery (without signatures there is no record that goods were sent or
approved which can cause disputes)
Control
✓ Acknowledgement of customers: Customer should sign a copy of GDN.
Test of Control
➢ Select a sample of GDN and inspect for signature of customer.
Business Implications
➢ No proof of delivery (you can't prove the customer received the goods which may lead to
disputes)
➢ Payment delays (customers might delay or refuse payments claiming they didn't get the
goods)
➢ Trust issues (it's harder to resolve complaints if there is no signed confirmation)
➢ Audit problems missing signatures can raise red flags during audits or reviews)
FINANCE DEPARTMENT
Objectives
→ To ensure proper invoicing with correct amount and for correct quantity.
→ Invoicing should be made for all the goods dispatched.
→ All invoices made should be recorded in the ledger.
CONTROLS AND TEST OF CONTROLS
Control
✓ Segregation of duties: There should be segregation of duties between person who
prepares invoices and person who dispatches goods.
Test of Control
➢ Observe whether segregation of duties exist between person who prepares
invoices and person who dispatches goods.
Control
✓ Pre-numbered Invoice: Sequentially pre numbered invoices are made and attached
with sequentially prenumbered GDNS.
Test of Control
➢ Auditor should inspect the numerical sequence of invoices and should inspect
that related GDN is attached.
Control
✓ Recheck sales invoices: Sales invoices should be rechecked by an independent person.
Alternatively, there should be strong IT controls to ensure unauthorized rates are not
processed.
Test of Control
➢ Auditor should select a sample of sales invoices and inspect evidence of
accuracy of invoices.
➢ Auditor should check controls over IT system to ensure accuracy of invoices
if IT system is used.
Control
✓ Pre-numbered credit notes are authorized: In case of sales return, sequentially pre-
numbered credit notes are issued containing reference of relevant sales invoice.
✓ Credit note should be issued only by authorized staff member.
Test of Control
➢ Select a sample of credit notes and inspect for numerical sequence,
authorization signature, and cross reference to relevant sales invoice.
GL/ACCOUNTS DEPARTMENT
Objectives
→ Accurate revenue recognition. (All sales are recorded, matching revenue with appropriate
period.)
→ Monitoring of receivables. (Timely collections and minimization of bad debts)
→ Compliance with tax laws and IFRSs.
→ Internal controls to prevent fraud, errors or unauthorized transactions related to sales.
CONTROLS AND TEST OF CONTROLS
Control
✓ Segregation of duties: There should be segregation of duties between person who
prepares sales, collects payments and follow-up late payments.
Test of Control
➢ Auditor should observe whether segregation of duties exist between person
who prepares sales, collects payments and follow-up late payments.
Control
✓ Accounts statement: Accounts statements are sent to customers monthly, and
exceptions are followed up.
Test of Control
➢ Select a sample of accounts statements sent to customers and inspect
evidence of its preparation, review, and follow-up of exceptions.
Control
✓ Control Account Reconciliation: Debtors control accounts and sales ledger are
reconciled monthly.
Test of Control
➢ Select a sample of Reconciliation statements between debtors control
accounts and sales ledger and inspect evidence of its preparation, review and
follow-up of exceptions.
Control
✓ Aging analysis: Aging report of debtors should be prepared, and overdue debts should be
followed up.
Test of Control
➢ Select aging report of some months and inspect evidence of its preparation,
review and follow ups.
Control
✓ Authorization of write off of bad debts: An appropriate authority should give approval for
write off of bad debts.
Test of Control
➢ Select a sample of write offs during the year and inspect approval of write
off by appropriate authority.
PAYROLL SYSTEM
Objectives
→ Amount should only be paid to the employees of the company.
→ Worker or employee should be paid only for the work he has performed.
→ Calculation should be appropriate.
→ Deductions should be appropriate.
→ Payment should be appropriate.
Calculating gross wages and salaries
Control
✓ Segregation of duties: There should be segregation of duties between person who
prepares payroll and person who pays salaries.
Test of control
➢ Auditor should observe whether segregation of duties exist between
person who prepares payroll and person who pays salaries.
Control
✓ Authorization of new employees: New employees should be authorized by HRD.
Test of control
➢ Select a sample of joiners during the year and check documentation for
authorization of new place.
Control
✓ Communication of resigned employees: Employees who resigned should be promptly
communicated to the payroll department.
Test of control
➢ Select a sample of leavers during the year and check that they do not exist
on the payroll after the month they left.
Control
✓ Timesheets or clock card system: Supervisor should maintain sequentially
prenumbered timesheets for each employee working on hourly based and should
authorize all timesheets.
✓ Alternatively. clock card system should be maintained and monitored.
Test of control
➢ Select a sample of timesheets and check for signature or initial of
supervisor as evidence of approval for hours worked.
➢ Observe whether clocking in process is being monitored so that a worker
cannot clock in for multiple workers.
Control
✓ Approval of bonuses and over time: All our times and bonuses should be approved by
appropriate authority.
Test of control
➢ Select a sample of overtimes/bonus payments and inspect that they are
properly calculated and authorized.
Control
✓ Use authorized timesheet and rates: Payroll preparation department should use
authorized timesheet and approved rates of pay to calculate payroll.
Test of control
➢ Select a sample of employees from payroll and inspect that hours worked
and rates are in accordance with timesheet and approve rates.
Control
✓ Preset limits: If an IT system is used, an exception report should be generated for wages
beyond preset limits, and it should be followed up by an independent person.
Test of control
➢ Use TEST DATA to check that exception report is generated for wages
beyond Preset limits.
Control
✓ Approval of payroll: A senior member should ensure that payroll expense is not
excessive and should approve payroll sheet.
Test of control
➢ Select a sample of payroll sheets and inspect for signature/initial of
appropriate authority as evidence of payroll.
Business Implications
➢ Incorrect payments. (Staff may be overpaid or underpaid, leading to money loss or
complaints)
➢ Higher risk of fraud. (people could claim extra hours or wrong rates without approval)
➢ Audit issues. (Missing proper records can cause problems during audits or legal checks)
Calculation of tax and other deductions
Control
✓ Use latest rates of tax: Payroll procedures should provide deduction of texts using up to
date rates of tax
Test of control
➢ Auditor should review manual procedures to ensure that tax deduction is
correctly made.
➢ Use TEST DATA for calculation of tax and compare results with
independently calculated amount if IT system is used.
Control
✓ Authorization of voluntary deductions: All entry deductions should be authorized by
employee in writing and this consent should be kept in the file of Employee.
Test of control
➢ Select a sample of employees and inspect for consent of employees regarding voluntary
deductions and their amount.
Control
✓ Approval of deductions: A senior member should check that amount of total deductions
is reasonable and should approve it.
Test of control
➢ Select a sample of payroll sheet and inspect signature of appropriate
authority as evidence of approval of deductions.
PAYMENT OF WAGES AND SALARIES
Control
✓ Authorization of payments: Cheques and bank transfer list should be prepared, matched
with payroll and authorized by appropriate Authority.
Test of control
➢ Inspect cheques and bank transfer lists for authorization
Control
✓ Reconciliation between paid and payable: A reconciliation should be prepared.
Between total salaries payable and total salaries paid.
Test of control
➢ Amounts can be checked to ensure that a reconciliation between total
salaries paid and payable is made.
Control
✓ Confirmation of identity: Payroll Distributor should confirm the identity of employee
before payment.
Test of control
➢ Observe payroll distribution process to ensure that identification of
employee is confirmed before making payment.
Control
✓ Timely payment of deductions: There should be formal procedures and timetable for
payment of deductions.
Test of control
➢ Auditor should inspect whether formal procedures and timetable for
payment of deductions are followed.
RECORDING PAYROLL IN ACCOUNTS
Control
✓ Use authorized payroll: Authorized payroll should be used to record wages in accounts.
Test of control
➢ Auditor should inspect whether authorized payroll has been used to record
veggies in accounts.
Control
✓ Timely recording: Payroll should be recorded within strict timeline.
Test of control
➢ Review whether payroll is being recorded within time scale.
Control
✓ Reconciliation: Payroll file should be reconciled with amounts in general Ledger.
Test of control
➢ Review reconciliation of payroll file to general Ledger. Confirm whether
discrepancies are followed up and resolved.
FIXED ASSET CYCLE
Objectives
→ Entity makes sure that there is no Unnecessary PPE.
→ PPE is of good quality and available at appropriate price.
→ Safeguarding of PPE.
PURCHASE SYSTEM
Purchase process
→ In warehouse department , purchase requisition is raised.
Purchase acquisition consists of three documents.
Doc 1: demands.
Doc 2 : buffer stock
Doc 3: Approval of warehouse head.
Now purchase requisition reaches procurement department.
Here the purchase manager will release Quotations from approved list of
suppliers.
Suppliers with good quality and lowest price will be selected.
Objectives
→ To avoid unnecessary inventory.
→ No stock out.
→ Customer satisfaction.
→ To avoid unauthorized purchases.
PURCHASE ORDER DEPARTMENT
Control
✓ Segregation of duties: There should be segregation of duties between person w
ho make requisition and person who places order with supplier.
Test of control
➢ Auditor should observe whether segregation of duties exists between
person who makes requisition and person who places order with supplier.
Control
✓ Pre numbered orders: Purchase orders should be sequentially pre numbered.
Test of control
➢ Auditor should inspect the numerical sequence of sales orders.
➢ Use test data to check that a purchase order is allocated next
number in the sequence.
Control
✓ List of approved suppliers: Company should have standard operating procedures
to approve a supplier and should maintain a list of approved suppliers. Access rights
to this list should be restricted.
Test of control
➢ Select a sample of approved suppliers and inspect documentation to
ensure that standard operating procedures to approve suppliers are
working as intended.
➢ Test controls over master file of approved suppliers.
Control
✓ Order only to approved suppliers at lowest rates: Quotation/bids should be
obtained for all the Purchase orders.
✓ Purchase orders should include approved supplier reference numbers.
Test of control
➢ Select a sample of purchase orders and check quotations and rates.
➢ Select a sample of purchase orders and inspect for approved supplier
reference number and compare with list of approved suppliers.
Control
✓ Authorization of Purchase Order: All Purchase orders must be approved by an
appropriate authority in purchase department.
Test of control
➢ Select a sample of large purchase orders and inspect for approval by
appropriate authority.
WAREHOUSE DEPARTMENT
Control
✓ Segregation of duties: There should be segregation of duties between persons
who orders goods and person who receives goods and who prepares invoices.
Test of control
➢ Auditor should observe whether segregation of duties exist between
person who orders goods, person who receives goods and person who
prepares invoices.
Control
✓ Pre numbered GRN: For each receipt of goods, there should be pre numbered
GRN and matched with sequentially prenumbered purchase orders.
Test of control:
➢ Auditor should inspect numerical sequence of GRN.
Control
✓ Cross check & GRN: Quantity and specification of goods received should be
physically inspected and checked with purchase orders before acceptance.
✓ GRN should be signed by an authorized officer of receiving department.
Test of control
➢ Observe the receiving process to assess whether goods are cross
checked with purchase order before acceptance.
➢ Select a sample of GRN and inspect signature of receiving staff. Also
compare it with PO.
FINANCE DEPARTMENT
Control
✓ Receive invoice: Suppliers invoices should be compared with sequentially
prenumbered GRN and purchase orders to ensure correct quantity, price and
applicable discounts are used by suppliers.
Test of control:
➢ Select a sample of suppliers' invoices and inspect for evidence that they
are checked with relevant GRN and purchase order.
Control
✓ Check discounts.: A responsible officer or employee should be responsible for
checking Discounts allowed by suppliers.
Test of control
➢ Auditor should look for documentary evidence that discounts are checked
and claimed from suppliers when available.
GL/ACCOUNTS DEPARTMENT
Control.
✓ Match invoice with records: Before recording in accounts, purchase invoices must be
checked against Purchase Order and GRN. Purchase order number should be printed on
purchase invoice.
Test of control.
➢ Select a sample of purchase invoices and inspect for relevant purchase
number on the purchase invoice and signature of individual who checked
with purchase order.
Control:
Account statements: Account statements are sent to suppliers monthly and exceptions
are followed up.
Test of control
➢ Select a sample of account statements sent to suppliers and inspect
evidence of its preparation, Review and follow up of exceptions.
Control
✓ Control account reconciliations: Creditor control accounts and purchase Ledger are
reconciled monthly.
Test of control.
➢ Select a sample of reconciliation statements. Between creditors control
account and purchase Ledger and inspect evidence of its preparation,
review and follow up of exceptions.
Control
✓ Debit notes are sequentially prenumbered and authorized: A debit note should be
issued for all purchase returns which should be sequentially prenumbered and
matched with supplier's credit note when it is received.
Test of control
➢ Select a sample of debit notes and inspect 4 numerical sequence and
cross reference proof suppliers credit note.