Question

Describe for each category below an example of a test of control you can execute to assess internal controls in the sales cycle. [4 points]

Method of testing internal control	Example of test of control for sales cycle
Inquiry
Inspecting documents
Observation
Re-performance

Answer 1

Method of Testing Internal Control	Example of test of Control for Sales Cycle
Inquiry	Before acceptance of any order the position of inventory of the relevant article should be known to ascertain whether the order can be executed at time. Determining who actually performs each function and not merely who is supposed to perform it. Auditor may ask the client's personnel for an explanation about inventory counting procedures at year end.
Inspecting Documents	Inspection of documents supporting transactions and other events to gain audit evidence that internal controls have operated properly. The documents (e.g. invoices) has to inspected for verifying that transaction has been authorised. the auditor can inspect that whether an advice under the authorisation of sales manager should be sent to the party placing the order. If it is required to send, whether this advice is prepred on a standardised form and a copy thereof has been forwarded to inventory section to enable it to prepare for the execution of the order in time.
Observation	The auditor has to observe that credit period allowed to the party is in normal credit period during the audit period. Also the rate at which the order has been accepted and other terms about transport, insurance,etc. should be clearly specified. Further it is to be observed that before deciding upon the credit period, a reference has been made to the credit section to know the creditworthiness of the party and particularly whether the party has honoured its commitments in the past.
Reperformance	Reperformance can be performed by the reconciliation of bank accounts to ensure whether the payments have been correctly performed by the entity.