Please help me answer question 1 of this case, thank you!

Ardmore Beer Distributors, Inc. Identification of Tests of Controls for the Revenue Cycle LEARNING OBJECTIVES Upon completion of this case, students will be able to: 1) Identify typical documents and records needed to record transactions within the revenue cycle. 2) Understand typical control activities implemented to record transactions within the revenue cycle. 3) Know which control activities a client can utilize to reduce the probability of a material misstatement. 4) Recognize the management assertions to which certain control activities pertain. 5) Specify appropriate tests of controls for each client control activity. INTRODUCTION Ardmore Beer Distributors (ABD) is a closely held business that was founded twenty-seven years ago by Michael Donohoe and Timothy Bauer. ABD is a distributor that purchases and sells domestic and international beer to retail stores located in medium-sized markets. The company does not have any clients located in major cities such as Philadelphia or New York. The primary focus of the company is to maintain a broad selection of beers, both inexpensive and premium, at a low cost and then resell its inventory to small retail outlets that have difficulty obtaining adequate, or any, amounts of the various types of beer. ABD is capable of keeping its costs low by purchasing large blocks of over-production by firms, ordering quantities of various beers during off-peak periods, and sourcing inventory directly from individual breweries thus saving suppliers on shipping costs. Additionally, ABD manages its labor costs by leveraging lower-cost labor where it can. For example, workers in its warehouses are typically undergraduates with ages ranging between 18 and 21. Over the course of the past year, ABD purchased beer from 30 different domestic and 80 different international beer companies. The brands that ABD carry include Miller, Budweiser, Stella, Victory, Dogfish Head, Rochefort, and Westmalle. At the current time, ABD has two warehouses. The first is located in Wilmington, DE and the second is located in Fayetteville, NC. In the prior year, ABD had 148 retail beer store customers and net sales of $16,548,951. Generally, sales are strongest in the third and fourth quarters of the calendar year with sales being the weakest in the second quarter. BACKGROUND ABD is compelled to have an audit of its annual financial statements under the requirements of its loan agreement with its primary financial institution. The audit must be completed consistent with AICPA professional standards for the audit of a nonpublic company. Your audit firm is currently planning for the 2014 fiscal year audit in accordance with these standards. ABD has the following accounts on its general ledger pertaining to sales and cash collection: - Sales Sales discounts Sales returns and allowances Uncollectible accounts expense Accounts receivable Allowance for uncollectible accounts Following professional standards, Tracie Majors, an audit manager with Elliott and Associates, reviewed ABD's control environment, risk assessment process, and monitoring system. Her assessment is that they are strong. Tim Brown, a staff auditor at Elliott and Associates, reviewed ABD's information system and control activities related to sales, cash receipts, and returns and prepared the enclosed flowcharts (labeled in the upper right hand corner as R 25-1, R 25-2, R 253, and R 25-4). Your team is assuming the role of the audit senior on this engagement. Your role requires you to (i) identify internal control activities that assure transactions, accounts and disclosures related to sales and cash collection activities are not materially misstated and (ii) identifying tests of controls that would test the design and operating effectiveness of internal control activities identified for sales and cash collection activities. REQUIRED 1) As a first step, ascertain \"what could go wrong\" with ABD's sales, cash receipts, and returns activities by completing step 5 of the audit program R 1-1. Your work should be documented in audit schedules R 1-1, R 26-1, R 26-2, and R 26-3 (numbering the examples for what could go wrong similar to the examples provided in the case). Note that accuracy in your assessment matters. You must identify at least ten issues though you may include more. 2) List ABD's control activities by completing step 6 of the audit program R 1-1. Document your work in audit schedules R 1-1, R 27-1, R 27-2, and R 27-3 (assume only that the control activities identified in flowcharts exist and number control activities similar to the activity provided). Note that accuracy of your identification of controls matters. You must identify at least ten controls though you may include more. 3) Consider and note potential tests of controls by completing step 7 of the audit program R 1-1. Your work should be recorded in schedules R 1-1, R 33-1, R 33-2, and R 33-3 (tests should be number similar to the example provided). Note that accuracy of your identification of tests of controls matters. You must identify at least ten tests of controls though you may include more. 4) Complete step 8 of the audit program R 1-1 by ascertaining any internal control deficiencies the company has. Your work should be recorded in schedules R 1-1 and R 28. 5) For each internal control deficiency you noted in the audit schedule R 28 list at least one control activity that would remediate the deficiency. 6) Would your work differ if ABD was public? What else might you need to consider in that case? Ardmore Beer Distributors Reference: Prepared by: Date: Reviewed by: ____R 1-1___ ____TB_____ __8/12/14___ ___________ Ardmore Beer Distributors Revenue Cycle Planning Audit Program - Identification of Tests of Controls For the Year Ended December 31, 2014 Audit Procedures 1. Obtain and study a copy of the client's policies and procedures manuals related to sales, cash receipts, and returns. 2. Discuss with and observe client personnel performing control activities related to sales, cash receipts, and returns. 3. Perform a document walk-through of the client's policies and procedures related to sales, cash receipts, and returns. 4. Obtain or prepare a flowchart for sales, cash receipts, and returns showing control activities, document flows, and records. 5Use the \"what could go wrong\" matrix to identify what could go wrong with sales, cash receipts, and returns activities. 6. Use the control activities matrix to identify client control activities that address \"what could go wrong\" related to sales, cash receipts, and returns. 7. Use the planning audit test matrices to identify potential tests of controls. 8. Based on the previous procedures, identify internal control deficiencies that may need to be reported to the client on the internal control deficiencies schedule. Initial TB Date 8/12/14 Ref. N/A TB 8/12/14 N/A TB 8/12/14 N/A TB 8/19/14 R 25-1 R 25-2 R 25-3 R 25-4 R 26-1 R 26-2 R 26-3 R 27-1 R 27-2 R 27-3 R 33-1 R 33-2 R 33-3 R 28 Ardmore Beer Distributors Reference: Prepared by: Date: Reviewed by: ___R 25-1___ ____TB_____ __8/19/14___ ___________ Ardmore Beer Distributors Revenue Cycle - Sales Flowchart For the Year Ended December 31, 2014 Sales Clerk Office Manager Customer Order (Mail, Phone, or Web) - Authorize All Sales and Initial Customer Orders - Confirm order does not exceed credit limit (if applicable) Review or Prepare Customer Order Input Transaction Update Sales Register, A/R Master File, and G/L Prints Pre-numbered Sales Invoice - Customer Order1 Sales Invoice - Automatic Computer Update of Sales Register, A/R Master File, and G/L Using Standardized Chart of Accounts - Automatic Computation of Invoice Amounts using Standard Price List 1 Customer Order2 Sales Invoice Sales Invoice NUM (sales invoice) Legend: NUM - orders are filed numerically by number A - off-age connector Sales Register A/R Master File G/L 2 3 A Ardmore Beer Distributors Reference: Prepared by: Date: Reviewed by: ___R 25-2___ ____TB_____ __8/19/14___ ___________ Ardmore Beer Distributors Revenue Cycle - Sales Flowchart For the Year Ended December 31, 2014 Shipping Accounting Clerk A 1 Check for Office Manager Authorization File Customer Order Prepare Pre-numbered Bill of Lading Sales Register Accounting Clerk Prepares Pre-numbered Adjustment Memo and Updates Journals/Ledgers as Required Merchandise Reconcile Sales Invoices and Bills of Lading to Sales Register and Follow-up on Missing Documents Customer Order2 Bill of Lading 2 Sales Invoice 2 Sales Register Sales Invoice 3 Bill of Lading 3 Sales Invoice 3 is used as a Remittance Advice Customer Order2 Sales Invoice 2 Bill of Lading NUM CHRON 2 Prepare Monthly Customer Statements A/R Master File Accounting Clerk Follow-up on Exceptions Noted by Customers To Customer Customer Statement 2 Customer Statement 1 NUM Legend: ALPHA - filed alphabetically by name CHRON - filed chronologically by date NUM - orders are filed numerically by number A - off-age connector ALPHA To Customer 1 Ardmore Beer Distributors Reference: Prepared by: Date: Reviewed by: ___R 25-3___ ____TB_____ __8/19/14___ ___________ Ardmore Beer Distributors Revenue Cycle - Cash Receipts Flowchart For the Year Ended December 31, 2014 Receptionist Accounting Clerk Cash Receipts (Received from Customers) 1 - C/R Journal - A/R Master File -G/L Two Individuals Open Mail, Restrictively Endorse Checks, and Prepare and Sign Cash Receipt Summary Computer Automatically Updates Cash Receipts Journal and General Ledger Using Standardized Chart of Accounts Deposit Slip Prepared Cash Deposited at Bank Deposit Slip Validated by Bank Input Transactions Updates Cash Receipts Journal, A/R Master File, and G/L for Cash Receipts and Sales Discounts Deposit Slip 2 Sales Invoice 2 Cash Receipt Summary Cash Receipts Journal Customer Checks Deposit Slip Deposit Slip 1 2 Sales Invoice 2 Cash Receipt Summary To Bank (Daily) Legend: CHRON - filed chronologically by date 1 CHRON CHRON Ardmore Beer Distributors Reference: Prepared by: Date: Reviewed by: ___R 25-4___ ____TB_____ __8/19/14___ ___________ Ardmore Beer Distributors Revenue Cycle - Cash Receipts Flowchart For the Year Ended December 31, 2014 Office Manager Bank Statement (Received from Bank) Cash Receipts and Disbursements Journals - Reconciles Cash Receipt/Disbursement Journals Monthly - Identifies Adjusting Entries The Journals are Temporarily Obtained from the Accounting Department Bank Statement Cash Receipts Journal Cash Disbursements Journal CHRON Legend: CHRON - filed chronologically by date CHRON CHRON Ardmore Beer Distributors Reference: Prepared by: Date: Reviewed by: ___R 25-5___ ____TB_____ __8/19/14___ ___________ Ardmore Beer Distributors Revenue Cycle - Returns Flowchart For the Year Ended December 31, 2014 Receiving Clerk Accounting Clerk Merchandise Returns Retrieve Sales Invoice Sales Invoice Prepare receiving records Packing slip A Receiving report 3 Match documents 1 Packing slip Packing slip B C Receiving report Sales Invoice 2 Receiving report 3 1 CHRON CHRON Credit Memo Legend: CHRON - filed chronologically by date Update returns records 1 Reference: Prepared by: Date: Reviewed by: R 26-1 Ardmore Beer Distributors Revenue Cycle - Potential Problems Matrix For the Year Ended December 31, 2014 X customer. Identify the management assertion(s) each what could go wrong affects with an "X". X Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness X 1) Customers cannot pay for sales purchased on credit. 2) Sales are recorded for a nonexistent Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Potential Problems Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 26-2 Ardmore Beer Distributors Revenue Cycle - Potential Problems Matrix For the Year Ended December 31, 2014 Identify the management assertion(s) each what could go wrong affects with an "X". Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Potential Problems Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 26-3 Ardmore Beer Distributors Revenue Cycle - Potential Problems Matrix For the Year Ended December 31, 2014 Identify the management assertion(s) each what could go wrong affects with an "X". Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Potential Problems Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 27-1 Ardmore Beer Distributors Revenue Cycle - Control Activities Matrix For the Year Ended December 31, 2014 X manager. (Corresponds to R 26-1.1 and R 26-1.2) Identify the management assertion(s) each control activity affects with an "X". X X Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Control Activities 1) All sales are approved by the office Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 27-2 Ardmore Beer Distributors Revenue Cycle - Control Activities Matrix For the Year Ended December 31, 2014 Identify the management assertion(s) each control activity affects with an "X". Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Control Activities Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 27-3 Ardmore Beer Distributors Revenue Cycle - Control Activities Matrix For the Year Ended December 31, 2014 Identify the management assertion(s) each control activity affects with an "X". Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Control Activities Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 28 Ardmore Beer Distributors Revenue Cycle - Internal Control Deficiencies For the Year Ended December 31, 2014 Internal Control Deficiencies 1) The client does not internally verify the proper general ledger account classification for sales and cash receipt transactions. Client Personnel Discussed With Absence of paper work Accounts clerk Single person authorization Cash collection by receptionist Accounts clerk Customer Reference: Prepared by: Date: Reviewed by: R 33-1 Ardmore Beer Distributors Revenue Cycle - Audit Tests Planning Matrix For the Year Ended December 31, 2014 W W W manager authorizing sales (Corresponds to R 27-1.1) Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion. Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Tests of Controls 1) Inquire and observe the office Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 33-2 Ardmore Beer Distributors Revenue Cycle - Audit Tests Planning Matrix For the Year Ended December 31, 2014 Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion. Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Tests of Controls Occurrence Sales Reference: Prepared by: Date: Reviewed by: R 33-3 Ardmore Beer Distributors Revenue Cycle - Audit Tests Planning Matrix For the Year Ended December 31, 2014 Indicate whether the test provides Strong (S), Moderate (M), or Weak (W) evidence for the specific management assertion. Accuracy/Valuation Classification/Understandability Completeness Disclosure Occurrence/Rights/Obligations Valuation Completeness Rights/Obligations Classification Cutoff Accuracy Completeness Existence Accounts Receivable Returns Occurrence Classification Cutoff Accuracy Completeness Occurrence Cash Receipts Classification Cutoff Accuracy Completeness Tests of Controls Occurrence Sales