Reference no: EM133137648

Question - Habib Co (Habib) manufactures and sells luxury toiletries; they have been trading for over 20 years and the company's year- end is 30 September 2019. Habib sells products to trade customers via its own website; this represents 60% of revenue. Remaining revenue is generated by contracts to supply toiletries to hotels. Below is a description of the sales system. Hotel revenue The hotel revenue is made up of four key customers. Habib has one sales clerk, Zancoh, who maintains all aspects of this revenue stream; Zancoh receives customer orders, raises sales invoices and processes payments. In raising invoices, the sales system automatically inserts the online trade customer prices for products. However, each hotel customer has contracted prices which are lower than the online prices and hence Zancoh manually edits the invoices prior to despatch. Online revenue New trade customers are set up in the sales ledger master file upon passing suitable credit checks, and a credit limit is set at this stage by the finance director. Customers place online orders up to their pre-set credit limit; they receive an email confirmation and the sales order interfaces into the despatch system. The order number is linked to the customer account number. Goods are despatched daily with a goods despatched note which is referenced to the sales order number but are not sequentially numbered. Habib used to despatch goods via a reliable national courier company. However, to reduce costs they have changed to a cheaper local courier and some orders have been delivered to customers late. Trade customers' sales invoices are automatically generated by the system on the day the online order is placed. The prices are inserted in accordance with the website rates. Occasionally Habib makes special offers or discounts sales; when this occurs the master file data has to be amended to ensure that the correct prices are used on invoices. This task is usually performed by a senior sales ledger clerk. Revenue and receivables records On a monthly basis statements are sent to the hotel customers; a number of trade customers have been requesting monthly statements and Habib is considering this request. The company only reconciles the sales ledger control account at the end of September in order to verify the year-end balance.

Required -

(a) As the external auditor of Habib Co, report to management in respect of the sales system described above which:

(i) Identifies and explains FIVE deficiencies in the sales system; and

(ii) Provides a recommendation to address each of these deficiencies.

(b) Describe FOUR substantive procedures the auditor should perform to confirm Habib Co's revenue.