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In: Accounting

Examples of Deviations. Dana Beckham, CPA, is performing an attributes sampling application for Posh Company. In...

Examples of Deviations. Dana Beckham, CPA, is performing an attributes sampling application for Posh Company. In doing so, Beckham is interested in determining whether quantities on sales invoices are verified by client personnel and agreed with those on the corresponding shipping documents. Per Posh Company’s instructions, client personnel are supposed to place checkmarks next to the quantities on the sales invoices to identify that these quantities have been verified. During the tests of controls, Beckham selected a total of 100 invoices for examination. Of these invoices, 95 had checkmarks clearly indicated on them. Beckham’s examination of the remaining five invoices revealed the following: 1. On one invoice, checkmarks were not placed next to the quantities; however, the designation “OK” was written next to them. 2. One of the invoices selected for examination could not be located. Posh Company indicated that invoices occasionally are discarded when customers return the merchandise for credit. 3. No marks or identification was noted next to the quantities on one of the invoices; however, this invoice was marked “VOID.” 4. A checkmark was placed on an invoice; however, this checkmark was not adjacent to any of the quantities and could not easily be associated with specific quantities noted on the invoice. 5. One of the invoices contained 15 different types of items. However, only five checkmarks were placed on the invoice, all adjacent to items from the same location in the warehouse. Required: a. For each of the five invoices noted, indicate whether you believe the item represents a deviation. Please justify your treatment of the invoice. b. What is one fallacy associated with assuming that the internal controls related to the 95 remaining invoices are functioning effectively?

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Expert Solution

A.

1. This invoice do not represent any deviation ,since it is marked as "OK". But there might be a chance that some of the invoices might have been checked by some other people who are not client personnel . so, it might have been written as " ok". Anyway, since the invoice is marked as ok, it has to be taken for rechecking purpose before coming to a conclusion on the existence of deviation.

2. It represents a deviation.Because, when merchandise had been returned, the invoice once generated cannot be discarded. Instead a credit note can be attached to such invoice by crediting the debtor. Else some indication has to be provided on the invoice showing that the goods have been returned. Discarding of an invoice represents something fishy and the sample size has to be increased to check for the existence of more number such discarded invoices.

3. Before declaring whether there is any deviation or not in such invoice , the purpose of marking the invoice as void is to be known. Some times there may be revision in quantity or revison in rate, which may make the invoice void. In such a case, it cannot be considered as deviation. Hence the reason has to be known.

4.It doesn't represent any deviation. Since, human are involved in the process of checkmarking the invoices, there exists a chance of carelessness while checkmarking the invoices which makes the checkmark unrelatable to the quantities. However sampling size has to be revised to check for the presence of more number of such invoices ,which increses the risk factor of audit.

5. There exists a deviation, since all the checkmarked items are belonged to the same location. Client personnel might have completely skipped some locations while selection of sample, which increases the risk and also there exists a pretty good chance that the result arising because of such sample selection might be completely different from the result that might have arrived by doing complete application. Hence it has to be taken into consideration.

B.

Mere presence of the checkmarks on the 95% of the invoices alone cannot be taken to ensure that the internal controls are sound enough. Since, some of the issues found in the remaining 5% questions the presence of effective internal controls other procedures have to be adopted to check the presence of effective internal controls. Even though 5% in absolute terms is not a significant number , the substance of the finding has to be taken into consideration.


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