Contents

• This report is based on the following case study -
• Task details:
• This isan individualassignment.
• Paul Hewsonwho has extensive interest in music and fashion has set up a fashion clothes
• business in July 2011, Music Fashion Ltd, with his two long term friends Larry Mullen and
• Adam Clayton, and have recently listed Music Fashion Ltd on the ASX.
• Larry Mullen was previously the marketing executive for a clothing manufacturer that
• distributed products through major department stores throughout Australian and the UK and
• has a sound network within the retail sector. Adam Clayton has worked as an accountant for
• a medium-sized family company in the furniture industry for many years.
• New fashion wholesalers often find it difficult to gain retail accounts, as many retailers are
• dismissive of new designers. However Paul has managed to get his garments into two
• major Australian retail store chains. The retail store require the goods to be supplied on
• consignment, with the stores entitled to return any unsold items within two weeks of the end
• of the season. In addition, the payment terms for store are 30-days after consignment sales.
• As a result cash is very tight as 60% of inventory is sold on consignment.
• Music Fashion Ltd has the following staff:
•  three directors, Paul, Larry and Adam
•  secretary/receptionist
•  warehouse manager
•  assistant to the warehouse manager
•  accounts receivable clerk
•  accounts payable clerk
• All operations are conducted from a central office/warehouse facility and during your interim
• audit you note the following processes for the purchases function.
• The warehouse manager orders fashion goods from the suppliers as identified by Paul.
• Price quotes are obtained by the warehouse manager usually via telephone contact with the
• suppliers. The warehouse manager then prepares an order form for fashion items,
• quantities and prices and then sends this order off via a facsimile and the only copy of the
• order is kept by the warehouse manager.
• The warehouse manager the completes a purchase order in the inventory program on the
• computer system and prints one copy of this form and sends a duplicate copy to the
• accounts payable clerk for filing in date order.
• When the ordered goods are received at the warehouse, the warehouse assistant, checks
• the content of the goods received to the suppliers delivery note attached to the goods and
• signs the delivery note as evidence of this check. The purchase order is then recorded for
• the inventory received in the inventory program. The supplier delivery note comprises of two
• copies, and one copy is returned to the person delivering the goods for returning to the
• supplier and the other copy of the delivery note is forwarded to the accounts payable clerk.
• The accounts payable clerk raises a journal entry in the general ledger accounts payable
• system to credit the supplier and debit inventory on hand. The delivery note is then filed
• alphabetically in a folder of supplier delivery notes awaiting receipt of the suppliers invoice.
• Supplier invoices received by the secretary/receptionist in the mail are forwarded to the
• accounts payable clerk for putting with the purchase order and supplier delivery note.
• Details of the invoice are matched to the purchase order and delivery note and calculations
• for supplier amounts confirmed. If the details of the invoice match to the purchase order and
• the invoice total is correct, the invoice is signed by the accounts payable clerk and then
• processed for payment. Any invoices which are not matched to the purchase order or
• delivery note are forwarded with the purchase order and delivery note to the warehouse
• manager for follow up. The warehouse manager is to contact the supplier for follow up
• and/or authorise the invoice for payment. The supplier invoice, purchase order and delivery
• note are returned to the accounts payable clerk for payment when the warehouse manager
• is happy for the supplier to be paid and this authorisation is noted on the suppliers invoice
• with the warehouse manager’s signature and date.
• A payment run is made every second Thursday with the accounts payable clerk selected the
• suppliers to be paid in the general ledger accounts payable system that interfaces with on-
• line Banking and all general ledger accounts. A report is generated for suppliers to be paid
• and this report listing each supplier, the invoice number and the amount is reviewed by the
• secretary who confirms copies of all invoices are attached to the report, and this review is
• evidenced by signature and dating the report. The report is then reviewed by one of the
• Directors (Paul, Larry or Adam) and this is also evidenced by signature and date. The
• reviewing director and the secretary both then both authorise the electronic payment via
• electronic banking. The authorised supplier payment report with attached invoices,
• purchase orders and delivery notes attached is then filed in payment date order.
• At the time of your final audit there had not been any changes to the purchases or payment
• of supplier functions from your interim review. In the end of year audit testing a sample of
• 100 supplier payments were tested and the following is a summary of this testing:
• Payments showing evidence that all control activities had been
• followed
• Payments that had no supporting documentation attached 3
• Payments that did not have approved purchase orders but all other
• documentation was attached
• Payments that did not bear evidence that the creditor invoice
• calculations had been checked
• Payments that did not bear evidence as being authorised for
• payment by the secretary
• Payments that did not bear evidence as being authorised for
• payment by a Director
• Review of the subsidiary supplier ledger noted debit entries for
• payment corrections and sundry entries
• The aged supplier balances reflected amounts outstanding for 90
• days
• REQUIRED
• 1. Identify the inherent risks for Music Fashion Ltd’s due to their relationship with the two
• major Australian retail store chains.
• 2. Identify two financial report items that will be affected by these risks and the assertions
• most at risk.
• 3. Note how the internal controls will impact on your audit approach for the year end audit
• of the purchasing function.
• 4. Explain the implications of the errors noted in the year end audit testing of controls.
• (Take into consideration any concerns with internal controls.)
• 5. Briefly discuss how CAATs could be applied to assist your testing in the year end audit.

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