Module III: Control TestingSales Processing

In this module you will apply attribute sampling to Brony's Bikes' prenumbered sales invoices to evaluate whether sales have been processed properly. Recall from Module II that several deficiencies in the design of the controls suggest an increased likelihood of material misstatement. However, the audit team believes that the use of prenumbered sales invoices and the related requirements (agree invoice to bill of lading and customer invoice, agree prices on invoice to master price list, agree calculations on invoice, and agree that customer balance is within authorized credit limit) is an effectively designed control activity and the audit team would like to rely on that control. Accordingly, the audit team has decided to test sales transactions to see whether this control activity is operating effectively. If the control is operating effectively, the audit team would be able to reduce the assessed level of control risk for the relevant assertions related to sales and accounts receivable, thereby enabling them to decrease the extent of accounts receivable confirmation and other substantive procedures related to the revenue cycle.

Specifically, you want to determine whether the control related to sales invoices is performed effectively. Knowing whether the control is operating effectively will help the audit team determine whether all recorded sales were shipped (occurrence assertion for sales) and whether all shipments were invoiced and recorded at appropriate amounts (completeness assertion for sales). As discussed previously in the case, invoices are mailed to customers prior to shipment; therefore, customers may have received invoices for goods not yet or never shipped. Also, in the absence of pre-numbered bills of lading, goods may have been shipped but never billed to the customer. The second possible processing problem is that customers may have exceeded existing credit limits without home office knowledge; you need to test the degree to which this has occurred. Finally, because of lack of input editing, the prices, customer number, and/or product number may be incorrect; you will test for this as well.

Derick has asked you to complete the sampling plan worksheet that he began earlier. This worksheet (WP C) file is labeled 20X9_atrib.xlsx. He has defined the sampling unit as the prenumbered sales invoice, and the relevant attributes as: 1. Bill of lading attached and signed by the carrier; 2. Product prices in agreement with master price list stored in computer; 3. Extensions and footings correct; 4. Quantities and product type in agreement with customer order; and 5. Customer balance within the authorized credit limit.

You are NOT required to perform the sample selection process. In this Module the sample has already been selected and has already been audited. The following information lets you know what would have been done as part of the sample selection process. The population for attribute sampling purposes is the numeric file of sales invoices. During 20X9, 22,400 sales invoices were processed, with document numbers ranging from 10610 to 33009 inclusive. For each sales invoice number drawn at random and included in the sample, you would request the client to supply the invoice/bill of lading packet and the corresponding customer order. The sales invoice/bill of lading packet could be obtained from the numeric file maintained in CBIS. The customer order, the number of which appears on the face of the invoice, is stored in the computer and could be printed out on demand. You then would examine the documents for the above attributes.

Requirements

1. Based on the deficiencies in the design of controls identified in the sales processing subset of the revenue cycle as explained in the first two paragraphs of this module, does the sampling plan and testing described in the previous paragraph address all relevant financial statement assertions related to sales and accounts receivable? If not, which assertion(s) are not considered in the initial plan, and how could the plan be adjusted to address these assertions?

2. Retrieve the file titled "20X9_attrib." Using the sample size and sample evaluation tables from Exhibit 8.5 and Exhibit 8.6 in the textbook Chapter 8 and the following data, complete the attribute sampling plan worksheet (in using the "Sample Results Evaluation" table, select the sample size that is closest to your sample size): a. The auditor sets the risk of overreliance at 5% (implying that the auditor is willing to accept a 5% chance that inferences from the sample will be incorrect). A 5% risk of overreliance (sampling risk) is reflected in the 20X9_attrib file. b. Misstatements have been defined, and expected deviation rates set for each attribute as follows: 1) Bill of lading not attached to packet: 1% 2) Incorrect prices: 1% 3) Extension and/or footing errors: 0.5% 4) Quantities and/or product type not in agreement with customer order: 1% 5) Customer balance exceeds authorized credit limit: 1.5% c. Tolerable deviation rates (sometimes referred to as the tolerable failure rate) of 4% have been set for all attributes; and d. Assume that the sample has already been selected and audited and the following misstatements were found in examining the sample:

Sales Order Number	Misstatement
12511	Bill of lading not signed by carrier
15439	Invoice causing customer to exceed authorized credit limit
18616	Bill of lading missing
23468	Bill of lading missing
27891	Bill of lading missing 1. Sampling risk is the risk of overreliance on the sampling result. Based on the Brony's Bikes Module III information, which sampling method -- non-statistical or statistical -- would be more appropriate to assure the auditor obtains an objective measure of sampling risk? statistical or nonstatistical 2. Refer to WP C. If the upper limit of the possible deviation rate exceeds the tolerable deviation rate for any of the five attributes tested, no further control testing is required. True or False 3. Enter the upper deviation limit from your WP C "Bill of lading attached and signed by carrier." 6% 4. Because the auditor did not detect any errors for incorrect prices, extension and/or footing errors or quantities and/or product type not in agreement with customer order, the auditor may conclude that no further control testing of these attributes is necessary. True or False 5. Because the auditor detected attribute errors in both "customer balance within authorized credit limit" and "bill of lading not attached to packet", the auditor should consider (1) testing a different control designed to mitigate these same risks, or (2) adjusting the nature, timing, and/or extent of the related substantive testing of the accounts affected by the control. True or false