Examine the inherent risk, impact of controls, and residual risk plots in Figure 11-6 for the sales and customer service process. Based on this plot, what conclusions should an auditor reach for each of the risks regarding whether to test controls and the extent to which substantive testing should be performed?

Figure 11-6

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Transaction Sales Typical Financial Reporting Controls Maintain a list of approved customers. Segregate credit approval from sales activity. Maintain up-to-date approved credit limits for existing customers. Use prenumbered sales, shipping, and billing documents in sequence. Utilize automated systems (e.g., point-of-sale system) to track all sales by operations personnel, including any discounts offered, etc. Provide indication of credit approval in documentation. Verify quantities shipped against the shipping document and sales order. Provide indication of shipment in documentation. Verify prices charged for items shipped. Verify extensions and totals on invoice. Post transactions on a timely basis. Use control and hash totals to verify accuracy of postings. Customer account numbers and product numbers should contain check digits. Match and verify all documents. Maintain up-to-date chart of accounts. Reconcile general ledger totals and activity with subsidiary ledger and supporting journals. Utilize automated systems to post all routine sales transactions. Use proper access controls to enable adjusting entries. Review all adjusting journal entries prior to entering. Investigate unusual entries to accounts. Cash receipts Automate receipts through use of electronic funds transfers handled by qualified third-parties (e.g., banks, PayPal). Separate initial handling of receipts from other accounting functions and sales-related activities. Sales return processing Write-off processing Bad debt estimation Obtain item counts of incoming payments. Prepare list of all cash receipts immediately. Do not accept cash payments through mail. Use prenumbered receipts for cash transactions. Restrictively endorse all checks received as "for deposit only." Use lockbox system. Compare amount received to amount per remittance advice. Separate checks from remittance advices and prepare timely bank deposit. Verify that payments agree with quoted terms (e.g., discounts, time period, interest). Post transactions on a timely basis. Use control and hash totals to verify accuracy of postings. Reconcile bank accounts independently of receipt processing and posting. Reconcile general ledger totals and activity with subsidiary ledger and supporting journals and records (e.g., bank deposits, cash listing). Send monthly statements to customers. Use prenumbered credit memos. Record credit memos on a timely basis. Require approval of sales returns by operations personnel not directly interacting with customers. Segregate preparation of credit memos from cash receipt processing. Prepare receiving reports (prenumbered) of returned goods on a timely basis. Reconcile amounts per credit memo with documentation of original sale. "Cancel" original sales documents to prevent duplicate returns. Prepare an aged receivables trial balance on a regular basis. Review overdue accounts periodically. Keep customer correspondence files related to overdue amounts current. Approve write-offs by someone independent of the sales and cash receipt functions. Use prenumbered documents to evidence write-offs. Maintain bad debt historical data. Review assumptions underlying estimation procedures for appropriateness. Review calculation procedures for deriving estimates.