Question

List the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved. Give your opinion which of the four functions should require the most audit effort and explain why. What is control risk? Why do you think this is an important issue in auditing?

Answer 1

Processing customers order: key documents involved customers order and sales order.

Granting credit: key documents involved are customers order or sales order.

Shipping good: key document is shipping bill or bill of lading.

Billing customer and recording sales: sales invoice, sales journal, summary sales report, accounts receivable master file, accounts receivable trial balance, and monthly statement.

Out of four functions billing and recording of sales require most audit efforts given the higher risk of fraud and misappropriation of financial resources. Rest of functions and related to processing of order and physical transfer of goods.

Control risk: risk of material misstatement due to fraud or error that could occur in an assertion, individually or in group with other misstatements, will not be prevented or detected on timely basis by Internal Auditor.

It is important to detect material misstatement caused due to fraud or error to take corrective actions and to prevent it from occurring in future.

Misstatements may result in financial losses and loss of credibility of organisation