Question

14-23 (Objectives 14-2 , 14-3, 14-4, 14-5) Items 1 through 9 are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the sales and collection cycle. In using the questionnaire for a client, a “yes” response to a question indicates a possible internal control, whereas a “no” indicates a potential deficiency.

1.Are customer orders evaluated for credit approval by someone independent of sales?

2. Is the bill of lading information forwarded in a timely fashion to accounting to ensure recording in the sales journal?

3. Is the numerical sequence of bills of ladings accounted for to identify duplicates or missing documents?

4. Are online sales automatically recorded in the sales system?

5. Are unit prices obtained from a preapproved and restricted master file of unit prices?

6.Are sales invoice amounts independently verified for correctness?

7. Are entries in the sales journal restricted to those that are supported by a valid bill of lading?

8. Are entries in the sales journal timely recorded in the accounts receivable master file?

9. Are individuals responsible for handling cash collections independent of accounting and shipping functions?

a. For each of the preceding questions, state the transaction-related audit objectives being fulfilled if the control is in effect.

b. For each control, list a test of control to test its effectiveness.

c. For each of the preceding questions, identify the nature of the potential financial misstatements.

d. For each of the potential misstatements in part c., list a substantive audit procedure to determine whether a material misstatement exists.

Answer 1

Answer-

The following is the list of transaction related audit objectives, test of control, nature of the possible financial misstatements and the substantive audit procedure for each of the problem:

S. No.	Transaction related audit objectives	Test of control	Nature of the possible financial misstatements	Substantive audit procedure
1	Recorded sales are to valid customers who are able to pay (Occurrence).	Select a sample of sales recorded in the sales journal and determine if the appropriate individuals approved thecorresponding customer order.	Sales may be overstated if customer is unable to pay for the goods.	Examine sales returns and write-offs of accounts during the year to determine if returns and write-offs are the result of customers unable to pay. Review aging of accounts receivable to determine if accounts in older aging categories include sales transactions that are unlikely to be collected

2

Existing sales transactions are recorded (Completeness) and sales are recorded on the correct dates (Timing).

Inquire of shipping personnel about the process they use toforward shipping documents to accounting and observe the timeliness of when that occurs.

Goods shipped may not be recorded in the sales journal atall or in the wrong time period.

Compare date per shipping order to date of posting in sales journal for a sample of shipments.

3

Recorded sales are for shipments actually made (Occurrence) and all shipments are recorded as sales (Completeness).

Review the client’s documentation for the sequence of billsof lading.

Shipments could be recorded twice (due to duplicate bills oflading) which would overstate sales or shipments may not be recorded (due to missing bills of lading) which would understatesales.

Review the list of bills of lading to determine if there are duplicates or missing documents

4

Online sales are recorded in the sales system.

Review online sales system documentation and make inquiriesof client personnel to determine that the automatic interface isa part of the system design. Enter a sample of test transactionsof online sales to determine if test data included in the sales journals. Reverse all test data items.

Online sales may not be recorded in the sales account, whichwould understate sales.

Trace a sample of online sales transactions to the sales journal.

5

Recorded sales are billed using approved prices (Accuracy).

Obtain a list of pre-approved unit prices in the master file. Enter product numbers into the sales system to determine if the unit price presented is correct. Inquire about access privileges to the master file. Attempt to login to access themaster file.

Sales transactions could be recorded using incorrect amounts.

Compare a sample of prices on a sample of sales invoices to the approved prices lists at the time the sale occurred.

6

Recorded sales are for the correct amounts (Accuracy).

Review a sample of sales transactions to determine if thereis documentation of the independent verification.

Sales could be misstated because they are recorded atinaccurate amounts.

For a sample of sales transactions, verify the accuracy of the sales amount.

7

Recorded sales are for shipments actually made (Occurrence).

Attempt to enter a sales transaction into the sales journal without a bill of lading number to determine if thetransaction is rejected.

Sales could be recorded even though goods have not beenshipped to customers.

Review the sales journal to determine if there is a correspondingbill of lading for a sample of sales journal entries

8

Sales transactions are correctly included in the accountsreceivable master file and are correctly summarized (Posting and Summarization).

Examine evidence that the accounts receivable master file to the general ledger for accounts receivable.

The accounts receivable master file does not reflect transactionsthat are included in the ending accounts receivable generalledger balance.

Compare the dates of entry in the sales journal for a sample of sales transactions to the date the transactions are posted in the accounts receivable master file.

9

All cash sales are recorded (Completeness).

Inquire about duties for individuals responsible for cash collections and observe whether they have access toaccounting or shipping functions.

The person handling cash collections may misappropriatecash and not record the cash sale in accounting records.

Trace a sample of shipments to determine if they have been recorded as sales in the accounting records.