QUESTION 4

Your client has the following internal controls implemented for its sales transactions:

1. All sales transactions under $10,000 may be approved by the computer authorisation program. All transactions over $10,000 must be approved by the credit manager.
2. All sales invoices are priced according to the authorised price list maintained on the computer. Any exceptions must be approved by the sales manager.
3. All shipping documents are prenumbered and periodically accounted for, and shipping document references are noted on all sales invoices.
4. Customer complaints regarding receipt of goods are routed to a customer service representative. Any discrepancies are immediately followed up to determine the cause of the discrepancy.
5. The company pays all freight charges, but the customer is charged a freight fee based on a minimum amount and a sliding scale as a percentage of the total invoice amount. The policy is documented and the charge is added automatically by the computer.

Required:

For each internal control (i) to (v) above:

1. Indicate the financial misstatement that could occur if the client did not implement the control effectively. (5 marks)
2. Devise two (2) audit procedures to test the effectiveness of the internal control. (10 marks)