Niosoki Auto Parts sells new parts for foreign cars to car dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk writes the date on the shipping document. The last shipment made in the financial year ended 30 June 20X4 was recorded on document 2167. Shipments are billed in the order that the billing clerk receives the shipping documents.
For late June and early July, shipping documents are billed on sales invoices as follows:
Shipping document no. Sales invoice no.
2163...............................................................4332
2164...............................................................4326
2165...............................................................4327
2166...............................................................4330
2167...............................................................4331
2168...............................................................4328
2169...............................................................4329
2170...............................................................4333
2171...............................................................4335
2172...............................................................4334
The June and July sales journals have the following information included:
Sales Journal-June 20X4
Day of month Sales invoice no. Amount of sale
29..........................................4326...............................$ 726.11
29..........................................4329................................1914.30
30..........................................4327.................................419.83
30..........................................4328.................................620.22
30..........................................4330...................................47.74
Sales Journal-July 20X4
Day of month Sales invoice no. Amount of sale
1..........................................4332..............................$ 4641.31
1..........................................4331..................................106.39
1..........................................4333..................................852.06
2..........................................4335.................................1250.50
2..........................................4334..................................646.58
REQUIRED
a. What are the requirements for a correct sales cutoff?
b. Which sales invoices, if any, are recorded in the wrong accounting period? Prepare an adjusting accounting entry to correct the financial statements for the year ended 30 June 20X4. Assume that the company uses a periodic inventory system (inventory and cost of sales don't need to be adjusted).
c. Assume that the shipping clerk accidentally wrote 30 June on shipping documents 2168 to 2172. Explain how that would affect the correctness of the financial statements. How will you, as an auditor, discover that error?
d. Describe, in general terms, the audit procedures you would follow in making sure that cutoff for sales is accurate at the balance sheet date.
e. Identify internal controls that would reduce the likelihood of cutoff errors. How would you test each control?