Answer the following questions based on the information presented for Cloud 9 in Appendix B of this
Question:
Effective internal controls at the transaction level are designed to prevent or detect material misstatements that could occur within the flow of transactions. In the case study assignment in chapter 7, you were required to identify potential misstatements and affected financial statement assertions within the sales to cash receipts process for wholesale sales.
Required
(a) Use your worksheet from the case study assignment in chapter 7 to complete this part of the assignment. In column four, include the transaction-level internal controls Cloud 9 has implemented to prevent and/or detect potential errors.
(b) In designing the audit strategy, auditors should consider the effectiveness of the client's internal control structure, thereby determining the control risk. An auditor should perform a preliminary assessment of control risk in order to be confident that they can use a controls-based approach to the audit strategy. A controls-based strategy is one in which the internal controls of a significant process are tested and proven to be effective, which means they can be relied on to reduce the level of substantive testing needed.
If internal controls are tested and proven to be operating effectively, the auditor can reduce the control risk of the related financial statement assertion. This method of testing controls can reduce the number of substantive procedures to be performed or can allow substantive testing to be performed prior to year end.
When designing control tests, consider whether there will be sufficient evidence that the control:
€¢ operated as it was understood to operate
€¢ was applied throughout the period of intended reliance
€¢ was applied on a timely basis
€¢ encompassed all applicable transactions
€¢ was based on reliable information
€¢ resulted in timely correction of any errors that were identified.
Based on the preliminary assessment of Cloud 9's control environment obtained in earlier procedures, the audit team has decided to test controls over the sales to cash receipts process. It is expected that there will be no deficiencies in the transaction-level internal controls.
Josh has partially completed the testing for selected controls over the sales/ receivables and cash receipts processes. He has asked you to complete the testing for him. All information has been provided by the client (refer to Appendix B of this book). Document your findings on the work papers Josh has started (see tables 8.6 and 8.7), and then conclude with your assessment on the overall effectiveness of the controls tested.
Cloud 9 controls testing-saleseceivables process as at December 31, 2012
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For the purposes of this case study, sample tests 9 to 19 have been removed. There were no exceptions noted in the results.
Aim: To test selected controls over the sales and receivables process. Sample: We randomly selected 25 sales invoices from the entire year.
(a) To complete this test, we matched the sales invoice to the shipping note, ensuring it
was signed by the customer.
(b) We used the shipping note reference number in order to recall the online authorization
screen. We noted the pass code entered by the shipping supervisors, which agreed with
the pass code listings obtained by the IT manager.
Cloud 9 controls testing-cash receipts process as at December 31, 2012
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For the purposes of this case study, sample tests 9 to 19 have been removed. There were no exceptions noted in the results.
Aim: To test selected controls over the cash receipts process.
Sample: We randomly selected 25 working days from the entire year in order to test the reconciliation of daily bank receipts to trade receivables. Document the conclusion of the controls testing.
Using the results of your controls testing, assess the control risk for the following assertions and write your conclusions in the worksheet in table 8.8. Use the information you provided in the worksheet completed for part (a) to focus your controls testing on the significant assertions.
Cloud 9 controls testing conclusions
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Step by Step Answer:
1 Controls Significant Process Potential Misstatements Assertions Control SalesAccounts Receivable Process Credit memos are not issued or recorded for returns on a timely basis or at all Sales Occurre...View the full answer
