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