Understanding the controls normally encountered in the revenue and receipts cycle enables the

auditor to assess the control risk in a client firm. Listed below are some of the controls.

(i) A copy of shipping document is filed with the sales invoice and sales order, and there is an

independent review of file for items ordered but not shipped, or items shipped but not

accompanied by a sales order.

(ii) Pre-numbered shipping documents are matched with sales invoices and sales orders by an

independent person.

(iii) An independent person examines the pre-numbered credit notes for approval, compares them

with receiving reports, verifies the prices and extensions of credit notes, and examines the

postings to accounting records.

(iv) The accounts receivable general ledger account and the subsidiary ledger accounts are posted

by different individuals, and there is independent periodic reconciliation between the control

account and subsidiary ledger accounts.

(v) Customer statements are mailed monthly, and an independent person compares the amounts

on the statements with the balances in the subsidiary ledger accounts.

Required:

For each of the (i) to (v) control above:

a) Explain how existence of the control can minimize the control risk.

b) List an audit procedure that must be performed to assess control risk.