Precision Industries Incorporated is a manufacturer of electronic components. When a purchase order is received from a customer, a sales clerk prepares a serially numbered sales order and sends copies to the shipping and accounting departments. When the merchandise is shipped to the customer, the shipping department prepares a serially numbered shipping advice and sends a copy to the accounting department. Upon receipt of the appropriate documents, the accounting department records the sale in the accounting records. All shipments are FOB shipping point.

The auditors were present at Precision during the last business day of year 20X3, the year being audited, and recorded the last numbers of the sales orders and shipping advices issued that day. They also noted that all sales orders and shipping advices were being issued in sequential order, with numbers higher than the last number unissued as of year-end 20X3. (Please answer both questions (a) and (b) below.)

Required:

a. Assume that the following were recorded as 20X3 sales and had the indicated support. Which is most likely to represent a misstatement?

• A sales order number lower than the last number.

• A shipping advice lower than the last number attached to a customer purchase order dated prior to the shipping advice.

• A shipping advice with a number greater than the last number.

• A sales order attached to a shipping advice with a subsequent date.

b. Assume that all shipments for the first five days of 20X4 were recorded as occurring in 20X3. Which of the following is the most likely effect on the 20X3 financial statements?

• Understate sales.

• Understate cost of goods sold.

• Overstate inventory.

• Overstate accounts receivable.