III. Inrernal Control: Transaction Cycles - Revenue/Receipts - Sales

Question 1

Objective of auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the

Answer 1

Shipping documents to the sales invoices.

Why? tracing from shipping documents to sales invoices will reveal whether the items shipped (and presumably sold) have been recorded, as evidenced by the existence of sales invoices.

Note:

Auditor most likely perform this test to verify management’s assertion of completeness

Question 2

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

Answer 2

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Explanation:

matching of shipping documents with entries in the sales journal will provide assurance that all shipped items (sales) have been completely recorded.

Question 3

What does the shipping document file help do?

Answer 3

Represents the items that have been shipped, and accordingly, these shipments should be invoiced.

Note:

They help to determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices

Question 4

An auditor who uses a transaction cycle approach most likely would test control activities by relating sale of goods to customers with the

Answer 4

Collection of receivables

why?

collection of receivables relates to the valuation of accounts receivable, a part of the sales (revenue) cycle.

Question 5

Daily sales summaries are compared to daily postings to the accounts receivable ledger would assure what?

Answer 5

that all billed sales are correctly posted to the accounts receivable ledger

Question 6

How would an auditor verify management assertion of completeness?

Answer 6

Compare a sample of shipping documents to related sales invoices.

Why?

Comparison of a sample of shipping documents to recorded sales invoices will provide evidence on whether all items shipped were recorded on sales invoices, which ultimately leads to the recording of a sale (completeness); thus, if no sales invoice is prepared it is doubtful that a sale will be recorded, even though goods have been shipped.

Question 7

How would an auditor test credit of approval?

Answer 7

Through valuation and allocation

Note:

Testing credit approval helps assure that goods are shipped to customers who are likely to be able to pay;

Question 8

How do know that Sales billed to customer were actaully shipped?

Answer 8

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that

Question 9

What is lapping customer check mean?

Give an example.

Answer 9

It is a scheme is a fraudulent accounting practice that hides stolen cash by overlapping successive receivables.

Example:

begins when someone – a clerk, for example – steals money that was generated by a transaction (for example, a sale). This individual offsets the missing money using cash from the next transaction. The receivable from this second transaction is covered by money from the third transaction, etc.

Question 10

If auditor suspect that a client cashier is misappropriating cash receipts through the use of lapping, how would they attempt to uncover the embezzlement scheme?

Answer 10

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Note:

Lapping will result in a delay in the recording of specific remittance credits on the financial records, but the checks will be deposited in the bank as they are received.

Question 11

Who has proper authorization of write-offs of uncollectible accounts?

Answer 11

Treasurer

The department responsible for bad debt write-offs should be independent of the sales, credit, and the recordkeeping for that function, and should have knowledge relating to the accounts.

Question 12

What are bad-debt expense?

Answer 12

Bad debts expense is also referred to as uncollectible accounts expense or doubtful accounts expense. Bad debts expense results because a company delivered goods or services on credit and the customer did not pay the amount owed.

Question 13

In what ways can an auditor lower bad debt expense?

Answer 13

Require credit checks on all new customers.

By doing credit checks we can be assure more customer with better credit are going to pay on time

Note: Bad Debt Expense are those people that are not paying for the goods/services on credit

Question 14

When would an auditor limit substantive tests of sales transactions with controls risk being low in concerning of sales transactions and with the auditor having enough evidence?

Answer 14

Cash receipts and accounts receivable.

Question 15

How do auditor know if the shipment to the customers were properly invoiced?

Answer 15

By tracing shipping documents to prenumbered sales invoices

Question 16

An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controlsmost likely is performed to support management’s financial statement assertion(s) of

Answer 16

Observing the mailing of monthly statements and follow-up of errors will provide evidence to the auditor as to whether the receivables exist at a given date;

Note:

the tests do not directly address the presentation and disclosure assertion since little evidence is obtained about whether financial statement components are properly classified,

Question 17

An auditor’s tests of controls for completeness for the revenue cycle usually include determining whether

Answer 17

An invoice is prepared for each shipping document.

This is consider complete.

Question 18

What example would be a detection of auditor’s review of a client’s sales cutoff?

Answer 18

Unrecorded sales at year-end.

Why?

Auditor’ review will include a study of sales recorded late in December and early in January. This will be accomplished by reviewing the period when the revenue was earned by shipment of goods or performance of services, as compared to the period in which the revenue was recorded. Accordingly, the review of sales recorded in January may reveal unrecorded sales for the preceding year.

Question 19

What fraudulent activities most likely could be perpetrated due to the lack of effective internal control in the revenue cycle?

Answer 19

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

Remember:
A goal under strong internal control is to segregate transaction authorization, recordkeeping and custody of assets. Because an individual who receives cash and writes off receivables has both custody of cash and recordkeeping responsibility it makes this answer correct.

Why?

A possible fraudulent scheme here is for that individual to collect cash on an account, not report that payment, and then write off the receivable as uncollectible.

Question 20

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit?

Answer 20

Point of selling the goods for cash, decisions on matters such as appropriate discounts will have already been made.

Why?

The fact that cash is being received eliminates any credit problem considerations. Therefore, the lack of specific authorization will not be of great concern to the auditor in this situation.

Question 21

For effective internal control, the billing function should be performed by the

Answer 21

Accounting department.

Note:

the accounting department serves a recording function and billing is an example of a recording function. Therefore, the accounting department’s performance of the billing function would allow effective internal control.

Question 22

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of

Answer 22

Completeness.

The completeness assertion deals with whether all transactions have been included in the proper period.

Question 23

Objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the

Answer 23

Accounting records to the source documents.

Tracing from accounting records to source documents tests for overstatements (the existence assertion).

For example, an auditor might trace from the sales journal to support such as sales invoices, shipping documents and customers’ orders.