Professional Documents
Culture Documents
Chapter 05 - Solutions
Chapter 05 - Solutions
5-1.
Directly. Higher levels of control risk induce auditors to audit larger samples of
receivables, with confirmation date closer to the fiscal year end date. As for
nature of the procedures: higher levels of control risk induce auditors to use
positive confirmations instead of negative confirmations, and to consider
vouching subsequent payments by the customers.
5-2.
The features of a cash receipts internal control system which would be expected to
prevent an employee from absconding with company funds and covering with
funds from the employee pension fund is the prohibition against one employee
having custody of company funds and noncompany funds. The auditor can detect
such transfers by controlling and counting both funds simultaneously.
To prevent the cash receipts journal and recorded cash sales from reflecting more
than the amount shown on the daily deposit slip, the internal control system
should provide that receipts be recorded daily and intact. A careful bank
reconciliation by an independent person could detect such errors.
5-3.
5-4.
The evaluation after the review phase was to determine which controls appeared
adequate as a basis for justifying a low control risk assessment. The final
assessment after test of controls auditing is to determine if the controls are
actually operating as well as they appeared to be.
5-5.
a.
5-2
Before goods are shipped, the customers credit must be approved. The credit
department maintains a list of unauthorized customers and their credit limits,
which an employee must review to determine whether to accept an order. A
credit department employee signs a copy of the sales order authorizing the
credit sale. When an order is received from a prospective customer not on the
list or when a customer has exceeded the authorized credit limit, the credit
department generally conducts a credit investigation and makes a decision to
accept or reject the order. When the order is accepted, a copy of the sales
order is sent to the warehouse and a copy is retained in the credit department.
c.
On the basis of the sales order approved by the credit department, warehouse
personnel issue goods to the shipping department.
The accounting
department, rather than warehouse personnel, maintains perpetual records for
the inventory.
d.
The shipping department verifies that the goods received from the warehouse
to be shipped agree with the quantity and description of goods on the sales
order. The shipping department then packs the merchandise, arranges
transportation with a common carrier, and prepares a shipping document. The
shipping document is a multicopy document that lists the items, gives
instructions to the common carrier as to whom and to what the address to ship
the merchandise, and may serve as a packing slip for the merchandise.
Copies of the shipping document are given to the carrier, and copies are sent
to the billing department. Sometimes entities use a bill of lading as a
Audit of the Revenue and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
5-3
f.
One of the best controls over cash receipts is a lockbox system in which
customers mail their remittances to a post office box controlled by a bank.
The banks bonded employees obtain the mail from the post office box, make
a listing of the amount by customer, mail the remittance advices and a copy of
the list to the business, and deposit the cash. When mail containing
remittances comes directly to the entity, the first step in the control process is
to obtain a listing of the cash and checks. This listing is generally prepared
by a receptionist or a mailroom employee designated to open mail. However,
the person should have a high level of integrity and not be otherwise involved
in handling cash or maintaining accounts receivable records. The listing of
cash receipts, referred to as a prelisting, serves to establish control over cash
receipts. Remittance advices are prepared if necessary, and when the listing
5-4
5-6.
g.
h.
i.
a.
b.
Audit of the Revenue and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
c.
5-5
5-7.
Managers may experience pressure to show high profits and may inflate sales
because of the pressure to meet target profits established by senior managers, to
obtain bonuses, to retain the respect of senior managers, or even to retain their
jobs.
5-8.
Until a record of cash received has been made, removing cash is one of the easiest
forms of fraud to commit and among the hardest to detect because records do not
reflect what has occurred.
5-9.
5-10.
Auditors are not required to perform tests of controls. However, when a client has
effective internal control, performing tests of controls is cost effective because it
may provide a basis for the auditor to assess control risk at less than maximum.
Assigning a reduced level of risk to control risk reduces the amount of substantive
testing the auditor must perform. Substantive tests are more expensive to perform
than tests of controls. Hence, auditors perform tests of controls when they believe
it will enable them to reduce the amount of substantive testing. Also, auditors
may perform much of the testing of controls before year end, thus spreading the
audit work.
5-11.
5-6
5-12.
5-13.
5-14.
1.
2.
(g) Each shipping document should have a corresponding invoice when the
goods are shipped. The appropriate direction of testing is from the shipping
documents to the sales invoices.
3.
(f) Daily sales summaries are from the book of original entry the sales
journal. Comparing the summaries with the total of invoices will detect
failure to record all invoices.
4.
5.
(i) Credit approval should be received before sales are made. Thus, shipping
to customers on an approved list should reduce the risk of sales to customers
with unsatisfactory credit.
6.
Audit of the Revenue and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
5-7
7.
(d) Requiring shipping clerks to compare the amounts and types of goods
received from the warehouse with approved sales orders ensures that goods
shipped agree with those ordered by customers.
8.
(l) Comparing sales invoices with shipping documents will ensure that each
invoice is supported by a shipment. Fictitious sales i.e., those for which no
shipment was made should be detected.
9.
(p) The total receipts credited to customer accounts in the subsidiary ledger
should equal the total receipts deposited, given that daily receipts are
deposited intact.
10. (c) Checks misappropriated (stolen) prior to forwarding to the cashier will
not be posted to customer accounts (assuming that the remittance advices
were stolen as well). Thus, customers will complain when their payments fail
to be reflected in the balances on the monthly statements.
11. (c) Mailing monthly statements to customers with outstanding accounts will
detect receipts posted to the wrong accounts. Customers whose accounts
were misposted will contest the statements.
12. (p) If more than one customer account is credited for the same cash receipt,
the error will be detected when the total of the amounts posted to the accounts
receivable ledger is compared with the total cash receipts.
13. (s) The bank reconciliation will detect errors in recording cash receipts (and
disbursements). The balance in the ledger will not reconcile with the amount
in the bank statement.
14. (p) If the checks are misappropriated (stolen) prior to deposit, the total of the
amounts posted to the accounts receivable ledger will be greater than the
validated bank deposit slip.
15. (n) Invalid sales returns are prevented by requiring approval of returns by the
sales department supervisor.
5-15.
1) e
2) a
3) c
4) f
5-16.
1) d
2) a
3) c
4) b
5-17.
1) a
2) a
3) d
4) d
5-18.
1) b
2) b
3) c
4) b
5-19.
1) b
2) a
3) c
5-8
5-21.
a.
2.
a.
b.
c.
3.
a.
b.
c.
4.
a.
b.
c.
5.
a.
b.
c.
6.
a.
b.
c.
7.
a.
b.
c.
8.
a.
b.
c.
Audit of the Revenue and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
5-22.
5-9
1.
a.
b.
c.
Existence, completeness
Cash may be misappropriated or lapping may occur.
Observe separation of duties and inquire of personnel about their
responsibilities.
2.
a.
b.
Existence, completeness
Fictitious cash receipts may be recorded or cash receipts may be
misappropriated.
Observe whether a prelisting is prepared and inquire of preparer about
the procedures followed.
c.
3.
a.
b.
c.
Existence, completeness
Cash may be unrecorded or misappropriated.
Observe the procedure and inquire of personnel who perform the
procedure.
4.
a.
b.
c.
Existence
Bank reconciliations may hide shortages.
Examine bank reconciliations and determine that preparer does not have
conflicting interests.
5.
a.
b.
c.
Valuation
A customer may take a larger discount than appropriate.
For a sample of entries in the cash receipts journal, examine remittance
advices for approval of discounts taken.
6.
a.
b.
Existence
A validated deposit ticket is obtained for daily deposits and compared to
the cash receipts summary.
For a sample of entries in the cash receipts journal, reconcile the total to
validated deposit tickets.
c.
5-23.
Weakness
Recommended Improvement
1.
2.
5-10
4.
5.
6.
7.
5-24.
The Code of Professional Conduct does not prohibit a member of the audit team
from taking advantage of discounts when purchasing goods from clients.
However, auditors may follow standards that are more restrictive than the Code of
Ethics. The purpose of this exercise is for students to consider the possibility of
such a discounts affecting the auditors independence. Some auditors would
decide that independence is lost if the discount was equivalent to the discount
given employees. Students should also appreciate that auditors do not necessarily
agree on acceptable behavior in this situation. Some CPA firms impose
restrictions on employees regarding this matter.
5-25.
a.
Audit of the Revenue and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
b.
5-11
determine that all sales invoices and other related documents have been
accounted for (for example, by accounting for the integrity of the
numerical sequence).
select sales transactions for review (based on predetermined criteria)
through a review of the sales journal or the accounts receivable
subsidiary ledger.
print a working paper that lists each item selected, with relevant data
inserted in applicable columns.
select all debits posted to the sales account and all postings to the sales
account from a source other than the sales journal.
perform analytical procedures on recorded sales by use of predetermined
criteria (percentage relationship, gross margin, trends, and so forth) on a
periodic or annual basis.
compare duplicate data maintained in separate files for corrections. For
example, the computer may be used to compare the clients records of
quantities sold with the clients records of quantities shipped.
examine records for quality (completeness, consistency, and so forth).
The quality of visible records is readily apparent to the auditor. Sloppy
recordkeeping and lack of completeness are observed by the auditor in
the normal course of the audit. If machine-readable records are evaluated
manually, a complete printout is needed to examine their quality. Honey
may choose to use the computer to examine these records for quality.
5-12
5-26.
5-27.
a.
b.
c. & d.
TYPE OF EVIDENCE
TYPE OF TEST
OBJECTIVE
1. Documentation
(1)Test of control
2. Inquiry
(4)Test of details of
balances
Sales
transactions
are
recorded in the proper period
3. Mechanical accuracy
(4)Test of details of
balances
Accounts receivable
mechanically accurate
are
4. Observation
(4)Test of control
Accounts receivable
mechanically accurate
are
Internal Control
Are customers who pay by check identified via store identification card or
other means?
Does company policy prohibit accepting checks for anything except
merchandise sales plus a nominal cash amount?
Is a receipt produced by the cash register given to each customer?
Is the reading of each cash register taken periodically by an employee who is
independent of the handling of cash receipts?
Are cash counts made on a surprise basis by an individual who is independent
of the handling of cash receipts?
Is the reading of each cash register regularly compared to the cash received?
Is a summary listing of cash register readings prepared by an employee who
is independent of the physical handling of cash receipts?
Are receipts forwarded to an independent employee who makes the bank
deposits?
Are each days receipts deposited intact daily?
Is the summary listing of cash register receipts reconciled to the duplicate
deposit slips authenticated by the bank?
Are entries to the cash receipts journal prepared from duplicate deposit slips
or the summary listing of cash register readings?
Are entries to the cash receipts journal compared to the deposits per bank
statement?
Are areas involving the physical handling of cash reasonably safeguarded?
Are employees who handle receipts bonded?
Audit of the Revenue and Collection Cycle: Tests of Controls and Substantive Tests of Transactions
5-28.
1.
a.
b.
c.
d.
2.
a.
b.
c.
d.
3.
a.
b.
c.
d.
4.
a.
b.
c.
d.
5.
a.
b.
c.
d.
6.
a.
b.
c.
d.
5-13
Existence
Cash may be misappropriated or lapping may occur.
Observe separation of duties and inquire of personnel about their
responsibilities.
For selected days, trace entries in the cash receipts journal to validated
deposit ticket, prelisting of cash receipts, and posting to accounts
receivable.
Existence
Fictitious cash receipts may be recorded or cash receipts may be
misappropriated.
Observe whether a prelisting is prepared and inquire of preparer about
the procedures followed.
For a sample of entries in the cash receipts journal, trace to the prelisting
of cash receipts.
Completeness
Cash may be unrecorded or misappropriated.
Observe the procedure and inquire of personnel who perform the
procedure.
For a sample of entries in the cash receipts journal, compare prelisting to
the deposit ticket.
Existence
Bank reconciliations may hide shortages.
Examine bank reconciliations and determine that the preparer does not
have conflicting interests.
Test bank reconciliations.
Valuation
A customer may take a larger discount than appropriate.
For a sample of entries in the cash receipts journal, examine remittance
advices for approval of discounts taken.
For a sample of entries in the cash receipts journal, examine remittance
advices and verify that discount taken was appropriate.
Existence
The cashier may misappropriate a portion of the cash receipts.
For a sample of entries in the cash receipts journal, reconcile the total to
validated deposit tickets.
For a sample of entries in the cash receipts journal, examine remittance
advices.