Question

The Meyers Pharmaceutical Company has the following system for billing and recording accounts​ receivable:

1.	An incoming​ customer's purchase order is received in the order department by a​ clerk, who prepares a prenumbered company sales order on which the pertinent​ information, such as the​ customer's name and​ address, customer's account​ number, and items and quantities​ ordered, is inserted. After the sales order has been​ prepared, the​ customer's purchase order is stapled to it.
2.	The sales order is then passed to the credit department for credit approval. Rough approximations of the billing values of the orders are made in the credit department for those accounts on which credit limitations are imposed. After​ investigation, approval of credit is noted on the sales order.
3.	Next the sales order is passed to the billing​ department, where a clerk​ key-enters the sales order information into a data​ file, including unit sales prices obtained from an approved price list. The data file is used to prepare sales invoices. The billing application automatically accumulates daily totals of customer account numbers and invoice amounts to provide​ "hash" totals and control amounts. These​ totals, which are inserted in a daily record​ book, serve as predetermined batch totals for verification of computer inputs. The billing is done on​ prenumbered, continuous, multicopy forms that have the following​ designations:      ​ (a) Customer copy      ​ (b) Sales department​ copy, for information purposes      ​ (c) File copy      ​ (d) Shipping department​ copy, which serves as a shipping order Bills of lading are also prepared as​ by-products of the invoicing procedure.
4.	The shipping department copy of the invoice and the bills of lading are then sent to the shipping department. After the order has been​ shipped, copies of the bill of lading are returned to the billing department. The shipping department copy of the invoice is filed in the shipping department.
5.	In the billing​ department, one copy of the bill of lading is attached to the​ customer's copy of the invoice and both are mailed to the customer. The other copy of the bill of​ lading, together with the sales​ order, is then stapled to the invoice file copy and filed in invoice numerical order.
6.	The data file is updated for shipments that are different from those billed earlier. After these changes are​ made, the file is used to prepare a sales journal in sales invoice order and to update the accounts receivable master file. Daily totals are printed to match the control totals prepared earlier. These totals are compared with the​ "hash" and control totals by an independent person. Requirements a. Identify the important controls and related sales​ transaction-related audit objectives. b. List the procedures that a CPA will use in an audit of sales transactions to test the identified controls and the substantive aspects of the sales transactions. Requirement a. Identify the important controls and related sales​ transaction-related audit objectives. Controls A. Bills of lading are produced with sales invoices and eventually filed with the sales invoice in numberical​ order; differences in quantities are corrected and transaction amounts are adjusted. B. Hash totals of daily processing matched to hash and control totals generated by an independent person. C. Prices are entered using an approved price list. D. Sales invoices are prepared from the data file created from sales order​ entry; hash totals are generated and​ used; sales invoices are​ prenumbered; control totals are reconciled by an independent person. E. Segregated approval of sales by credit​ department; customer purchase orders are attached to sales​ orders; approval is noted on form. F. Segregated entry of approved sales orders. G. Use of prenumbered sales orders. Audit objectives M. Existing sales transactions are recorded. N. Recorded sales are at the correct amount. O. Recorded sales are at the correct price. P. Recorded sales are for shipments made to existing customers. Q. Recorded sales are for the correct quantity of goods shipped. R. Recorded sales are posted to the correct customer account. S. Recorded transactions are for shipments made to existing customers. T. Sales transactions are properly included in the master files. Sales Transaction-Related Control Audit Objective 1. G. M. 2. E. P. 3. F. P. R. A. M. Q. B. P. 4. 5. 6. Requirement b. List the procedures that a CPA will use in an audit of sales transactions to test the identified controls and the substantive aspects of the sales transactions. ​(Select all that​ apply.) A. Ascertain that the sales invoices are in agreement with the data on the sales order forms. B. Ascertain that bills of lading have been prepared for all invoices and are in agreement therewith. C. Determine that the price list used by the billing clerk has been properly authorized. Trace prices on the list to​ invoices, and test the extensions and additions on the invoices. D. Account for the sequence of prenumbered sales invoices. E. Account for the sequence of prenumbered sales order forms. F. Determine that evidence of approval by the credit department appears on all sales order forms. G. Review the sales order forms for agreement with purchase orders from customers.

Answer 1

answer (a)

	sales transaction related important control
s.no	control	audit objective
1.	A	N,O,Q
2.	B	N,Q
3.	C	N,O
4	D	T
5	E	R,S
6	F	R
7	G	O

answer (b)

The procedure that CPA follow for Audit of sale transaction to test the identified controls and the substantive aspects of the sales transactions are as follows :

1.

Ascertain that the sales invoices are in agreement with the data on the sales order forms.

2.

Ascertain that bills of lading have been prepared for all invoices and are in agreement therewith.

3.

Determine that the price list used by the billing clerk has been properly authorized. Trace prices on the list to​ invoices, and test the extensions and additions on the invoices.

4.

Account for the sequence of prenumbered sales invoices.

5.

Account for the sequence of prenumbered sales order forms.

6.

Determine that evidence of approval by the credit department appears on all sales order forms.

7.

Review the sales order forms for agreement with purchase orders from customers.