Control Procedures. Dreyfet department store maintains on-line prices on minicomputers in stores connected to the automatic cash registers For most products the product and price are read into the cash register by scanning devices that read the bar codes on the merchandise. The product name (abbreviated) and the prices are printed on the customer’s cash receipt and are also captured internally as part of the sales recording process. The process also updates the perpetual inventory record at the store. Prices for all products are set by the buyers and are entered on to the client’s mainframe computer system and downloaded to the stores. Only the store manager can override the price on the store computer. All overrides are supposed to be reported to the buyer and the general merchandise manager for the department store division. The dollar amounts of sales of products for which price changes were made are used to develop a special report showing sales volume by product, average retail price, product cost, and loss (profit) per product.

Required:

A. Identify the key control procedures the auditor would expect to find in the environment described.

B. Develop an audit program to determine whether the control procedures are working as described.

C. What are the implications to the audit if the control procedures are not working as described, especially if the store manager is making a wide variety of product price markdowns, but the price changes are not generating any exception reports?

D. What are the implications to the audit if the auditor tests prices in six of 42 stores and finds that on 10 percent of the items tested, the price in the store’s cash register differs from the price on the master sales file? Assume that most of the changes result in a lower price being charged. [Adapted from Rittenberg & Schweiger (1997) Auditing Concepts for a Changing Environment, 2nd edn, Dryden Press, Fort Worth, Texas.]