To test an organizations internal control procedures, auditors design a test of controls audit program. This audit program is a list of control tests to be performed, and each is directly related to an important auditee control procedure. Auditors perform the tests to obtain evidence about the operating effectiveness of the auditees control procedures.

Required:

The controls listed below relate to a system for processing sales transactions. Each numbered item indicates an error or irregularity that could occur and specifies a control procedure that could prevent or detect it. Identify the control objective satisfied by the auditees control procedure. Write the test of controls audit program by specifying an effective control test to produce evidence about the auditees performance of the control procedure. Hint: A control test is a two-part statement consisting of (1) identification of a data population from which a sample can be drawn and (2) expression of an action to take.

1. The company wants to avoid selling goods on credit to bad credit risks. Poor credit control could create problems with estimating the allowance for bad debts and a potential error by overstating the realizable value of accounts receivable. Therefore, the control procedure is as follows. Each customer order is to be reviewed and approved for 30-day credit by the credit department supervisor. The supervisor then notes the decision on the customer order, which is eventually attached to copy 2 of the sales invoice and filed by date in the accounts receivable department. The company used sales invoices numbered 20,001 through 30,000 during the period under review.

2. The company considers sales transactions complete when shipment is made. The control procedures are as follows. Shipping department personnel prepare prenumbered shipping documents in duplicate (sending one copy to the customer and filing the other copy in numerical order in the shipping department file). The shipping clerk marks up copy 3 of the invoice, indicating the quantity shipped, the date, and the shipping document number, and sends it to the billing department, where it is taken as authorization to complete the sales recording. Copy 3 is then filed in a daily batch in the billing department. These procedures are designed to prevent the recording of sales (i) for which no shipment is made or (ii) before the date of shipment.

3. The company wants to control unit pricing and mathematical errors that could result in overcharging or undercharging customers, thus producing errors of overstatement or understatement of sales revenue and accounts receivable. The accounting procedures are as follows. Billing clerks use a catalogue list price to price the shipment on invoice copies 1, 2, and 3. They compute the dollar amount of the invoice. Copy 1 is sent to the customer. Copy 2 is used to record the sale and is later filed in the accounts receivable department by date. Copy 3 is filed in the billing department by date.

4. The company needs to classify sales to subsidiaries apart from other sales so that the consolidated financial statement eliminations will be accurate. That is, the company wants to avoid the error of understating the elimination of intercompany profit and, therefore, overstating net income and inventory. The control procedure is as follows. A billing supervisor reviews each invoice copy to see whether the billing clerk imprinted sales to the companys four subsidiaries with a big red 9 (the code for intercompany sales). The supervisor does not sign the invoices.