Question

In: Accounting

• What should auditor do when risk of fraud with regards to cash is increased? •...

• What should auditor do when risk of fraud with regards to cash is increased?
• What are the aspects of control that auditors are most concerned about for sales and collection cycle?
• What are the significant factors about cutoff for sales/collection cycle?





Solutions

Expert Solution

1) The following may be used by auditor to detect increasing fraud on cash activities:

  • Bank Reconciliation: Tracking transfers to the bank statements. Tracking the reconciled items in the subsequent period.
  • Trace interbank transfers by preparing Bank Transfer Schedule for detecting the possibility of kiting.
  • Trace cash receipts to bank deposit slips by tabulating the details of cash receipts, documentation s, and bank deposits for detecting skimming/lapping.
  • Trace cash receipts from cash sales to sales register
  • Make a surprise cash checks.

2)

1) Proper Segregation of duties:
- Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer.
- The credit-granting function should be separated from the sales function, because credit checks are intended to offset the natural tendency of sales personnel to optimise volume even at the expense of high bad debt write-offs.
- Personnel responsible for doing internal comparisons should be independent of those entering the original data.
2) Proper Authorisation: The auditor is concerned about authorisation at three key points:
1. Credit must be properly authorised before a sale takes place.
2. Goods should be shipped only after proper authorisation
3. Prices, including basic terms, freight, and discounts, must be authorised.
3) Adequate Documents and Records Copies of this document are used to approve credit, authorise shipment, record the number of units shipped, and bill customers. This system greatly reduces the chance of the failure to bill a customer if all invoices are accounted for periodically, but controls have to exist to ensure the sale isn’t recorded until shipment occurs.Under a system in which the sales invoice is prepared only after a shipment has been made, the likelihood of failure to bill a customer is high unless some compensating control exists.
4) Prenumbered Documents: Prenumbering is meant to prevent both the failure to bill or record sales and the occurrence of duplicate billings and recordings. Prenumbered documents must be properly accounted for.

5) Monthly Statements: Sending monthly statements is a useful control because it encourages customers to respond if the balance is incorrectly stated. These statements should be controlled by persons who have no responsibility for handling cash or recording sales or Accounts Receivable to avoid the intentional failure to send the statements.

6) Internal Verification Procedures Computer programme or independent personnel should check that the processing and recording of sales transactions fulfill each of the six transaction-related audit objectives.

3)

1) Policies and Procedures
An understanding of the company's policies and procedures employed in the sales process is the most important tool the auditor has to assess sales cutoff. Because sales cutoff concerns whether sales are recorded in the proper period, it is important for the auditor to understand when title of goods passes from the seller to the buyer. Small-business owners should be prepared to describe and show documentation that supports a company's title transfer procedures. This is especially salient if the company does not simply transfer title upon the exchange of cash.

2) Accounts Receivable Testing
Auditors gain some assurance over sales cutoff through accounts receivable testing. When performing this audit procedure, auditors will send letters asking the company's customers to confirm the amount owed to the company as of the balance sheet date. If sales are recorded in an incorrect period, customers may reply that the balance wasn't owed as of balance sheet date, alerting auditors to a potential cutoff problem. Small-business owners should realize, however, that this method does not provide adequate concern over cutoff on its own and additional procedures are likely to be performed.

3) Sequential Invoicing
If a company numbers invoices sequentially and has a standard procedure for transferring the title of goods sold, then examining the invoices that surround the year-end date can be a simple and effective method for testing sales cutoff. To perform this procedure, the auditor usually will ask for the invoices for the five days before and after year end. Depending on the number of invoices, the auditor will then ask for shipping information regarding either all of the invoices or a reasonable sub-selection. Small-business owners should be ready to supply the auditor with this evidence. In addition, small-business owners may wish to examine these transactions themselves before the audit begins. This give the company time to correct any errors, if they arise.

4) Allowance Cutoff
For companies that have material amounts of sales returns, generally accepted accounting principles require that sales returns are matched with the original sale and counted in the same period. Many companies operate on the assumption that if sales are consistently recorded in the period in which the item is returned, then over time, the sales mis-recorded in each period balance out and there is no material difference between recording the return upon receipt and matching the return to the proper period. Small-business owners who are experiencing rapid growth should take caution with this approach. If sales are increasing year over year, the amount of sales returns may be increasing as well. In this case, this assumption may not hold and the auditor may determine that there is a sales allowance cutoff error that needs to be corrected.


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