Question

An internal auditor is investigating the performance of a division with an unusually large increase in sales, gross margin, and profit.
Assume that the analysis shows unusually high sales and gross margin during the months of November and December and the internal auditor wishes to investigate further. Which of the following engagement procedures will be most effective in analyzing whether fraudulent sales may have been recorded?

A.   Take a sample of shipping documents and compare them with the related sales invoices, noting that all items were properly billed.
B.   Confirm accounts receivable with large customers.
C.   Perform an analytical review comparing sales and gross margin with the previous 10 months and the first month of the following year.
D.   Use regression analysis techniques for the first 10 months to estimate the sales and cost of goods sold for the last 2 months.

Answer 1

High Sales and gross margin in November and December may be due to :

1. Fictitous Sales

2.Sales of January included in December

3.High gross margin because of not recording purchases

4. Incorrect recording of Purchase

If there are fictitous Sales which inflates sales in November and December, these will be credit sales.Cash sales cannot be fictitious because cash needs to be depositsed in Bank.

Hence Sales will be recorded with fictitous or wrong accounts or amounts of accounts receivables.Shipping documents also can be fictitous like invoices. Hence comparing shipping documents with invoice will not reveal the fraud ,if there is any.

Performing analytical review or regression analysis will give information which is already known,ie.sales of November and December are unusually high.

Third party confirmation will give the proper assurance of correctness or otherwise of the unusually high sales.

Hence, the auditor need to confirm with cutomers for sales of November and December,specially the high value sales.

B. Confirm accounts receivable with large customers