Question 3:

This entity manufactures doors and sells to architects and builders. You have met with the manager and here is the description that he gave you about internal controls.

Once the sales clerk receives an order from a client, he fills a work order (name of client, address, items, quantity, unit price) in 4 copies. Work orders are pre-numbered.

• the sales clerk keeps copy #1
• copies #2-3-4 are sent to his supervisor for credit approval. The supervisor estimates the total amount of the sale, checks with the client file for the pre-established credit limit and authorizes the transaction by putting her initials on the three copies. She keeps copy #2 and sends copies #3-4 to the expedition department.
• the expedition department checks that the supervisor's initials are on the work order, prepares the package and a shipping document (name of client, address, date of delivery, items and quantity delivered) in two copies, keeps one and sends the other with copy #4 of the work order to the accounting department.
• The accounting department uses the information received, prepares the invoice and sends it to the customer

In this business, sales are usually paid after the delivery. A sale would be paid before the delivery when the supervisor of the sales department did not authorize the credit. He would authorize the transaction only after a payment in advance has been confirmed by the accounting department.

The auditor concludes that internal controls are strong enough and intends to rely on it (the question is not about improving controls). The auditor is considering the following tests to ensure that controls were performed as described by the manager.

Test #1: select a sample of shipping documents, trace the corresponding work orders and check if the initials of the supervisor of the sales department are on them

Test #2: select a sample of invoices and compare each to the credit limit pre-established for this client

Test #3: visit the supervisor of the sales department, select a sample of a wowork orders in the stack that is in her office (copy #2) and check if the sequence of numbers is complete[1].

Required:for each test

• Identify the potential mistake that the auditor may find
• what would such a mistake suggest about the control described by the manager?
• what is it that the auditor wants to ensure when he performs this test? (he wants to ensure that ...)

[1]This is done by checking the numbers of 2 work orders before and 2 after. You should have a perfect sequence of five numbers.