Question

The following internal controls were identified by the auditor while gaining an understanding of internal control for the sales cycle.

1. Access to the customer master file is restricted to authorized personnel. Customers are added to the master file only after appropriate approval, including adequate background and credit checks.

2. Sales are made only to approved customers. The computer system rejects orders if the customer number is invalid or the order exceeds the customer’s approved credit limit.

3. The computer matches the products and quantities on the customer order, shipping document, and sales invoice and generates an exception report of differences for follow-up in the accounting department.

4. The computer generates a daily list of unmatched shipping documents. The sales clerk follows up on each exception and electronically signs the report when they are resolved.

5. Invoice prices are obtained from the price master file. Any changes to the standard prices on an invoice must be appropriately authorized.

6. Monthly statements are sent by mail or electronically to customers with an outstanding balance.

7. The computer automatically posts sales transactions to the accounts receivable master file and general ledger.

8. The accounts receivable clerk prepares a monthly reconciliation of accounts receivable in the general ledger with the accounts receivable master file. He signs and dates the reconciliation and forwards to the controller for review and approval.

Required

1. For each internal control, identify whether the control is an automated control (AC), manual control (MC), or a manual control with an automated component (MAC).

2. For each internal control, identify the transaction-related audit objective(s) to which it applies.

3. For each control, list a specific misstatement that could result from the absence of the control.

4. For each control, identify one audit test that the auditor could use to uncover misstatements resulting from the absence of the control.

Answer 1

Answer:

1.

a. Automated control (AC).
b. Recorded sales transactions exist (occurrence).
c. Sales could be made to fictitious customers, or sales could be made to customers with poor credit.
d. The auditor could perform substantive tests of transactions or confirm year-end receivable balances to verify that they exist.

2.

a. Automated control (AC).
b. Recorded sales transactions exist (occurrence).
c. Sales could be made to fictitious customers, or sales could be made to customers with poor credit.
d. The auditor could perform substantive tests of transactions or confirm year-end receivable balances to verify that they exist. The auditor can test subsequent collections on outstanding receivables as a test of valuation.

3.

a. Manual control with an automated component (MAC).
b. Sales transactions are accurate (accuracy).
c. Quantities invoiced could differ from amounts shipped or ordered by the customer.
d. Substantive tests of transactions could be performed to verify that quantities invoiced agree to quantities shipped and ordered by the customer.

4.

a. Manual control with an automated component (MAC).
b. Existing sales transactions are recorded (completeness).
c. Goods could be shipped but not invoiced to customers.
d. Trace from a sample of shipping documents to recorded sales.
 

5.

a. Manual control with an automated component (MAC). The authorization of price changes is a manual control.
b. Sales transactions are accurate (accuracy).
c. Customers could be invoiced at incorrect prices.
d. Substantive tests of transactions could be performed to verify that invoice prices agree with the approved price master file.

6.

a. Manual control if sent by client personnel; automated control if the statements are sent electronically by the computer.
b. Recorded sales transactions exist and are accurate (occurrence, accuracy).
c. Sales could be recorded to incorrect customers or for incorrect amounts.
d. The auditor could perform substantive tests of transactions or confirm year-end receivable balances to verify that they exist and are accurate.

7.

a. Automated control (AC).
b. Recorded sales transactions are correctly summarized and recorded in the general ledger and recorded in correct customer accounts (posting and summarization).
c. Failure to record sales or record them in customer accounts.
d. Foot the journal for a test period and verify postings to the general ledger and subledger. Test monthly reconciliation of the accounts receivable subledger to the general ledger.

8.

a. Manual control (MC).
b. Recorded sales transactions are correctly summarized and recorded in the general ledger and subledger (posting and summarization).
c. Failure to record sales or record them in customer accounts.
d. Foot the journal for a test period and verify postings to the general ledger and subledger.