This simulation presents the Memo re Sales Invoice Procedures/Results relating to the Keystone Computers & Networks Incorporated (Keystone), audit. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6. Callouts 14 of this simulation relate most directly to Chapters 10 and 11; Callouts 57 require knowledge of sampling, as presented in Chapter 9.

A staff member on your audit team has performed a portion of the audit plan for the audit of Keystone Computers & Networks Incorporated, a nonissuer. The procedures involved selecting a random sample of sales invoices from throughout the year and comparing them to the authorized customer list and to appropriate support related to the sale.

Required:

Your job as senior on the engagement is to review the various points made by the assistant, including consideration of the exhibits. For each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Links to each of the exhibits are provided in the document, but are available in the list below for convenience.

Exhibit 1 - Sales Invoice Sample

Exhibit 2 - Sample Inputs and Results

Exhibit 3 - Conversation with Controller Memo

Exhibit 4 - Conversation with Billing Clerk Memo

Document

(For each Document Callout, choose the correct Determination from the table below.)

Memo re Keystone Sales Invoice Procedures/Results

1/22/year 6

A number of the credit sales in our sample were to customers not on the authorized customers list (Exhibit 1, fifth column). Selling to unauthorized customers may increase the risk that receivables will not be collectible. Accordingly, to address this issue, I suggest that we test for year-end receivables to unauthorized customers that remain uncollected as of the end of January. For those not collected, we should corroborate that the client has taken its normal 2 percent estimate for credit losses. (Callout #1)

Keystone in some circumstances ships sales FOB destination and pays the freight (see Exhibit 3). Because title ordinarily passes on such goods when they are delivered, there is a possibility that some sales have been recorded prior to the passage of title. Accordingly, we should increase the scope of our audit plan by selecting a sample of sales shipped FOB Shipping Point shortly after year-end to determine that the sale is recorded in the period goods were received by the customer. (Callout #2) Our sample results (Exhibit 1) reveal two sales recorded in year 5 that should have been recorded in year 6. (Callout #3)

A billing clerk (Exhibit 4) informed us that in several cases, sales were not recorded (completeness). Based on the discussion, an effective audit procedure to address this would be to select a sample of invoices sent to customers and agree their details to the underlying customer purchase order and shipping document. (Callout #4)

As a part of the audit of sales to unauthorized customers (above, top paragraph), we selected a sample of 40 sales invoices and found that three in our sample were to unauthorized customers. As indicated above, Exhibit 1 details our sample; Exhibit 2 presents results relating to the sample. The most likely deviation rate in the population is 5 percent (Callout #5). The sample results in rejection because the achieved upper deviation rate exceeds the sample deviation rate (Callout #6). Because we do not intend to expand our sample, the most likely effect on our audit will be a decrease in the assessed level of control risk (Callout #7) for the related assertion(s).