Question

You travel to one of the shops where you park your car beside a Ferrari Testa Rossa in the store car park, and
enter the store to find an immaculately dressed lady who runs the store on her own. The dresses sold in the
store retail for several thousand dollars an item. On chatting to the lady, you discover the Ferrari is her
“getting to work” car. You note that there is no cash register and are told that given the value of the dresses,
only a few sales a day are processed, and these are either by EFTPOS using a single machine, or cash, which
is immediately banked. Customers are given handwritten detailed receipts, which do not carry a serial
number.
Required:
Given the above situation critically analyse the sales process and describe in detail what management
assertions may be at risk relative to sales. Give full reasons for your choices. In your answer explain what
management assertions are.

Answer 1

Answer-

General Manangement assertions in ralelations to sales transactions are as follows -

1. Receivables are appropriately classified as to trade and otherreceivables in the financial statements and are clearly described.

2. Sales transactions have been recorded in the proper period.

3. Accounts receivable are recorded at the correct amounts.

4. Sales transactions have been recorded in the appropriateaccounts.

5. All required disclosures about sales and receivables have beenmade.

6. All accounts receivable have been recorded.

7. Disclosures related to receivables are at the correctamounts.

8. Sales transactions have been recorded at the correctamounts.

9. Recorded accounts receivable exist.

10. Disclosures related to sales and receivables relate to theentity.

11. Recorded sales transactions have occurred.

12. There are no liens or other restrictions on accountsreceivable.

13. All sales transactions have been recorded.

In the given case, the sales process is not effective and would effect various assertions.The reasons for the sales system to be ineffective are as follows -

a) As handrecipt document is issued there is no certainity that all the sales transactions are properly recorded.

b)As no cash register is maintained ,there is no details of cash received from sales so there are high chances of misappropiration of cash i.e cash may be used for purposes other than business use.

c) No serial number on recipt to be given to customer also indicates chances of misstatements.

d)Transactions done through EFTPOS can be traced with the statement from the partnered bank but this will only be effective for sales through this medium which will not provide reasonable assurance that all sales transactions have disclosed.