Handout #7 Learning objectives addressed by this exercise: Chapter 7-Learning Objectives 1-5 1. Exhibit 1 contains an arrangement of client control procedures and devices (numbered 115). EXHIBIT 1: CONTROL PROCEDURES 1. Sales order approved for credit. 2. Prenumbered shipping document prepared, sequence checked. 3. Shipping document quantity compared to sales invoice. 4. Prenumbered sales invoices, sequence checked. 5. Sales invoice checked to sales order. 6. Invoiced prices compared to approved price list. 7. General ledger code checked for sales product lines. 8. Sales dollar batch totals compared to sales journal. 9. Periodic sales total compared to same period accounts receivable postings. 10. Accountants have instructions to date sales on the date of shipment. 11. Sales entry date compared to shipping document date. 12. Accounts receivable subsidiary totaled and reconciled to accounts receivable control account. 13. Intercompany accounts reconciled with subsidiary company records. 14. Credit files updated for customer payment history. 15. Overdue customer accounts investigated for collection. Required: For each client control procedure numbered 115, select a test of controls (A-Z) that could produce evidence on the question of whether the client's control procedure has been implemented and is in operation. Note that the each control may have more than one, only one, or no correct answers. If there is more than one answer, only choose one test of controls. If none of the tests of controls apply answer Z. A. Obtain clients documentation showing the accounts receivable subsidiary total reconciled to the accounts receivable control account. Alternatively, total the subsidiary and compare the amount to the control account. B. Count the number of shipping documents (subtract beginning number from ending number) and compare to same period count of sales invoices (to look for different number of documents). C. Select a sample of random numbers representing recorded sales invoices, and compare sales invoice to sales order for quantity, price, and other terms. D. Select a sample of random numbers representing recorded sales invoices, and compare invoice date to shipping document date. E. Select a sample of inventory from the warehouse floor and vouch the amounts to sales journal and accounts receivable subsidiary ledger noting agreement between the two records. F. Select a sample of random numbers representing recorded sales invoices, and compare billed quantity on sales invoice to shipped quantity on shipping document. G. Study the accounting manual on date of shipment and make inquiry about accountants instructions to date sales. H. Select a sample of random numbers representing recorded sales invoices, and inspect the attached sales order for credit approval signature. I. Select a sample of random numbers representing recorded sales invoices, and compare customer payments to ensure that all payments are made sequentially. Inquire with the credit manager regarding any payments that are either larger than the selected invoice or not equal to an individual item on the approved price list. J. Select a sample of random numbers representing shipping documents and look for them in the shipping document file. K. Select a sample of random numbers representing recorded sales invoices, and compare prices on sales invoice to approved price list. L. Select a sample of random numbers representing recorded sales invoices, and trace customer to up to date credit file/information underlying the credit approval. M. Use computer to add the shipping document numbers entered in the files and compare to a computed sum of digits check total. N. Select a sample of random numbers representing recorded sales invoices, and note whether credit files are updated for customer payment history. O. Count the total invoices and make sure that they equal the number of shipping documents and increases to the accounts receivable subsidiary ledger. P. Obtain clients documentation showing reconciliation of intercompany receivables and payables for sales and purchases. Alternatively, confirm balances with subsidiaries or other auditors. Q. Computer scan the shipping document file for missing numbers in sequence. R. Study client correspondence on investigation and collection efforts on overdue customer accounts, noting any dispute conditions. If no effort is made, follow up overdue accounts with audit procedures (confirmation, determine existence of debtor in directories, etc.) S. Select a sample of random numbers representing recorded sales invoices, and find the sales invoice associated with the random number (failure to find this means an invoice wasnt recorded). Alternatively, use the computer to add up the recorded sales invoice numbers and compare to a sum of digits check total. T. Use the same sales dollar batch totals for comparison to separate total of accounts receivable subsidiary postings, if available. U. Select a sample of random numbers representing recorded sales invoices, and check product line code for proper classification compared to products invoices. V. Select a sample of random numbers representing recorded sales invoices, and inspect the attached shipping document for (a) existence, and (b) prenumbering imprint. W. Find clients sales dollar batch totals, recalculate the total, and compare to sales journal of the relevant period. X. Select a sample of credit files and trace to customers accounts receivable, noting extent of update for payment history. Y. Obtain clients sales journal and trace all payments received from customers to the accounts receivable aging schedule. Z. NONE OF THE ABOVE Example answer for hypothetical control procedure 16: D Learning objectives addressed by this exercise: Chapter 7-Learning Objectives 1-5 2. The following questions are six questions taken from an internal control questionnaire. Required: For each question, determine: (I) test of controls you could use to find out whether the control technique was really functioning (A-F); (II) identify the auditing procedure(s) best used to describe (I) above (1-15); and (III) what error or fraud could occur if the question were answered no or if you found the control was not effective (a-f). Note that each question may have more than one, only one, or no correct answer provided. If there is more than one answer, choose what you believe is the best answer. For part I, if none of the tests of controls (A-F) apply answer G and 15 for parts I and II, but answer part III independently for each question. 1.Do customers receive a monthly statement even when the ending balance on the account is zero? 2.Are the duties of the accounts receivable bookkeeper separate from all cash functions? 3.Are sales invoices prenumbered and are all numbers accounted for? 4.Are sales invoices checked for the accuracy of quantities billed? Prices used? Mathematical calculations? 5.Are blank sales invoices available only to authorized personnel? 6.Are customer accounts regularly balanced with the control account? I. Test of controls A. Visit the storage location yourself and see whether unauthorized persons could obtain blank sales invoices or pick some invoices yourself to see what happens. B. Review the clients working paper showing the balancing/reconciliation. Do the balancing yourself. C. Look to see who is performing bookkeeping and cash functions. Determine who is assigned to each function by reading organization charts. Ask other employees. D. Check to the numeric sequencing of invoices to ensure that the number of sales invoices for the month equals the number of invoice statements mailed each month. E. Select a sample of recorded sales invoices and vouch quantities thereon to bills of lading, vouch prices to price lists, and recalculate the math. F. Review the mathematical accuracy of invoices to ensure that each invoice matches the total amount on the monthly statements sent to customers. G. NONE OF THE ABOVE II. Auditing procedure(s) 1. Inquiry 11. Reperformance and Inspection 2. Observation 12. Reperformance and Inquiry 3. Examination and Inspection of documents 13. Observation and Inspection 4. Vouching 14. Observation and Inquiry 5. Tracing 15. NOT APPLICABLE 6. Recalculation 7. Reperformance 8. Confirmations 9. Inquiry and Inspection 10. Vouching and Recalculation III. Error or fraud that could occur if control was ineffective a. Errors on the invoice could cause lost billings and lost revenue or overcharges to customers that are not collectible (thus, overstating sales and accounts receivable). b. Invoices may be double-counted or not counted at all in calculating total revenue resulting in either an over- or under-statement of sales. c. The company will not be notified when the amounts on monthly statements are understated. d. The bookkeeper might be able to embezzle cash and manipulate the accounting records to give the customer credit and hide the theft. For example, debit a customers payment to Returns and Allowances instead of to cash or just charge the control total improperly. e. Someone could pick up a blank sales invoice and make a fictitious sale. f. Accounting entries could be made inaccurately or incompletely and the control account may be overstated or understated. g. NONE OF THE ABOVE. Example answer for hypothetical question 7: A, 1, a