Audit Preliminaries - Programme, Sampling and Working Papers in a Small Firm
You are the auditor of Hill View Stores, a partnership firm with turnover ₹4.2 crore. It has 1,850 sales invoices, 620 purchase invoices, and cash sales of ₹18 lakh. There is no perpetual inventory; the owner approves all payments; the accountant also prepares the bank reconciliation. The audit fee is ₹85,000 and the report is due in 30 days. The prior-year audit programme lists 40 vouchers to be tested, selected as the first 40 invoices of each month. This year you find three purchase invoices without goods received notes, two sales invoices without e-way bills, and one supplier who is the owner's brother. The owner says the missing documents are 'office problems' and asks you to finish quickly. You have one assistant and no audit software.
1. Critically evaluate the existing audit programme and propose a revised programme for purchases and sales.
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The existing programme is not risk-based. Selecting the first 40 invoices of each month is a block sample, not a random or representative sample; it ignores value, month-end cut-off, supplier risk and the possibility of fictitious purchases. It also does not address the lack of perpetual inventory, the owner's control over payments, or the related-party supplier. A revised programme should:
- Understand the purchase and sales systems, including authorization, GRN, e-way bills and bank reconciliation.
- Identify risks: fictitious purchases, unrecorded liabilities, cut-off errors, related-party transactions, cash-sales skimming.
- Stratify the population by value and date. Use random or systematic selection, with higher coverage for high-value and related-party items.
- Test controls if they are reliable; otherwise use substantive procedures.
- Include analytical procedures, cut-off tests, supplier confirmations and review of after-date payments.
- Set out sample sizes, exception handling and review points. The programme should be flexible enough to expand when exceptions appear.
2. How should you respond to the three missing GRNs and two missing e-way bills? Discuss sampling risk and the evidence you need.
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Each missing GRN is an exception, not an 'office problem'. The auditor should investigate the cause: was the purchase genuine, was the GRN lost, or was the invoice fictitious? Evidence to obtain includes supplier statements, transport documents, e-way bills, payment records, weighbridge slips and confirmation from the supplier. For the two sales invoices without e-way bills, check the dispatch register, transporter's lorry receipt, customer confirmation and subsequent payment. If the exceptions are unexplained, treat them as control failures and increase the sample size. Sampling risk is the risk that the sample does not represent the population; it rises when the sample is small, block-selected and the population is heterogeneous. Use stratified sampling, give more weight to high-value and related-party items, and document the sample design, exceptions, follow-up and conclusion. Do not accept the owner's oral explanation without corroboration.
3. What working papers should you prepare and retain for the related-party supplier and the cash sales?
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Working papers should be sufficient to enable an experienced auditor with no previous connection to understand what was done and why. For the related-party supplier, file: the partnership deed and any related-party declaration; the supplier master and ownership details; quotations and price comparisons; approval by a partner other than the interested partner; invoices, GRNs and payment records; ledger extracts; confirmation or statement from the supplier; and a note on the audit conclusion. For cash sales, file: daily cash summaries, till rolls or cash memos, bank deposit slips, bank statements, cut-off tests around year-end, analytical review of gross profit, and the sample selection and results. Each paper should show the source, date, preparer, reviewer, cross-reference and any exception. Retain them confidentially for the period required by professional and legal rules.