We need help in writing a Memo on Revenue Cycle Problems. We need to write a memo identifying and explaining the significance of the qualitative features indicated by these deviations. 1. If the control performance were uniform for the year, the deviations would be evenly distributed by month. 2. Apollo Shoes faced financial problems in the fourth quarter of the year. 3. Sales transactions with missing bills of lading suggest improperly recorded sales. 4. December is the month when deviations overstating sales can have the most effect on the financial statements. 5. The company reports financial results each calendar quarter ending in March, June, September, and December. 6. Lack of credit approval for sales generally suggests the company might experience collection problems. 7. Errors in billing customers generally might be expected to be a mixture of overcharges and undercharges to the customers. 8. For customer overcharges, what was the average delay between the invoice date and the date a credit memo was entered giving the customer credit to correct the mistake? 9. Can you find any qualitative characteristics not signaled by these indicators

Internal Controls Assignment Internal control is a management process designed to achieve: Effectiveness and Efficiency of Operations Reliable financial reporting, and Compliance with laws and regulations. Internal Controls: Task: Complete the Sales Internal Control Questionnaire on pages 2-3. Complete the ICQ for Apollo. For \"yes\" answers, add a comment stating which department and clerk performs the function. For \"no\" answers, describe the possible \"errors\" or \"frauds\" that could occur because of the control weakness. Prepare a Revenue Cycle Bridge Working Paper. Memo on Revenue Cycle Problems Prepare a Purchasing Cycle Bridge Working Paper. Example on page 4 and instructions are on page 5 Instructions on page 6. Example on page 7 and instructions on page 8. Attach supporting evidence to your assignment and reference. . Apollo Shoes, Inc. Internal Control Questionnaire - Sales Transaction Processing December 31, 2007 Objectives and Questions Environment: 1. Is the credit department independent of the sales department? 2. Are sales of the following types controlled by the same procedures described below? Sales to employees, COD sales, disposals of property, cash sales and scrap sales. Existence Objective: 3. Is access to sales invoice blanks restricted? 4. Are prenumbered bills of lading or other shipping documents prepared or completed in the shipping department? Completeness Objective: 5. Are sales invoice blanks prenumbered? 6. Is the sequence checked for missing invoices? 7. Is the shipping document numerical sequence checked for missing bills of lading numbers? Valuation Objective: 8. Are all credit sales approved by the credit department prior to shipment? 9. Are sales prices and terms based on approved standards? 10. Are returned sales credits and other credits supported by documentation as to receipt, condition, and quantity and approved by a responsible officer? Occurrence Objective: 11. Are shipped quantities compared to invoice quantities? 12. Are sales invoices checked for error in quantities, prices, extensions and footing, and freight allowances and checked with customers' orders? 13. Is there an overall check for errors in arithmetic accuracy of period sales data by a statistical or product-line analysis? 14. Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting? Yes, No, Comments Presentation and Disclosure Objective: 15. Does the accounting manual contain instruction for classifying sales? 16. Are summary journal entries approved before posting? 17. Does the accounting manual contain instructions to date sales invoices on the shipment date? Apollo Shoes, Inc. Sales Transaction Processing Bridge Working Paper December 31, 2007 Index Control Activity Implications Test control Test procedures Date: Fri, 18 JAN 2008 08:13:24 +0000 From: "Darlene Wardlaw" Subject: Revenue Cycle Bridge Working Paper We need to make sure that we address the fraud auditing standard (SAS 99) in the workpapers, specifically the identification of potential for fraud (and errors for that matter) in the Revenue Cycle. I need you to prepare a bridge working paper (ICC-1) for the audit of Apollo Shoes as of December 31, 2007, addressing this issue. This is what I need you to do: 1. In the first column, use an index number (S-# or W-#) cross-referenced to your flowchart to indicate potential strength or weakness. 2. In the second column, describe the control activity (or lack thereof) that may serve to prevent, detect, or correct errors or frauds. Understand that Apollo may or may not have the control activity in place. If they do, we may test the control if that is cost-effective. If they don't, we can propose the control as a management letter comment. 3. In the third column, describe the audit implications of the strengths/ weaknesses related to the control activities with respect to transactions or accounts reported in the financial statements (e.g., the presence of a credit check ensures that sales are only made to creditworthy customers; a lack of a credit check would allow sales to customers unable to pay, and therefore ultimately increase bad debt expense). 4. In the fourth column, describe specifically how (recalculation, reperformance, inquiry and observation, etc.) you would test the control. 5. Finally, add a fifth column for compensating audit procedures. If the control activity is not in place, or the control activity is in place but not effective, we need to determine what audit procedure (i.e., a compensating test) we could use to catch them. (For example, we can use customer confirmations to test the validity of the transactions if we can't rely on the client's controls.) I suggest that you get Bradley to audit a sample of sales transactions for compliance with these control procedures. The objectives of his work will be to (1) obtain control evidence about the validity, authorization, accuracy, and proper period recording of recorded sales, and (2) obtain control evidence about the accuracy and classification of sales postings to individual customer accounts receivable. If we don't find any problems, maybe we won't have to send out as many positive confirmations. DW Date: Mon, 21 JAN 2008 11:04:37 +0000 From: "Darlene Wardlaw" Subject: FW: Revenue Cycle Problems Bradley sent me a copy of his test of controls work that he did on sales transactions. (Please tell him to send his work to you, rather than me.) Based on what Bradley found, there looks to be some serious problems in Sales and A/R. You need to write a memo identifying and explaining the significance of the qualitative features indicated by these deviations. Some things you may want to think about: 1. If the control performance were uniform for the year, the deviations would be evenly distributed by month. 2. Apollo Shoes faced financial problems in the fourth quarter of the year. 3. Sales transactions with missing bills of lading suggest improperly recorded sales. 4. December is the month when deviations overstating sales can have the most effect on the financial statements. 5. The company reports financial results each calendar quarter ending in March, June, September, and December. 6. Lack of credit approval for sales generally suggests the company might experience collection problems. 7. Errors in billing customers generally might be expected to be a mixture of overcharges and undercharges to the customers. 8. For customer overcharges, what was the average delay between the invoice date and the date a credit memo was entered giving the customer credit to correct the mistake? 9. Can you find any qualitative characteristics not signaled by these indicators? Because of the problems noted, I don't think we can rely on Apollo's controls over revenue and accounts receivable. We will need to confirm most, if not all, of the accounts receivable balances. I suggest that you mail positive confirmations to those customers with accounts greater than $1,000,000 and negative confirmations to those with balances less than $1,000,000. Also, I suggest that you ask Apollo's customers to verify total sales during the year. Normally, you wouldn't do this because it is difficult for the customers to confirm a year's worth of transactions. However, since there is a relatively small amount of sales transactions during the year, they should be able to confirm without a problem. I'll talk to you about it more later. I don't think you need to worry about customers with current zero balances. For now, just write the memo to be placed in the accounts receivable workpapers (C-series) about the problems that Bradley found and their affect on our audit procedures (more extensive testing, positive confirmations, etc.). DW Apollo Shoes, Inc. Bridge Working Paper, Purchasing System December 31, 2007 Index Control Activity Implications Test control Test procedures INSTRUCTIONS FOR COMPLETING: Bridge Working Paper, Purchasing System Similar to what you did with the Revenue Cycle, I want you to prepare a bridge working paper for the audit of Apollo Shoes as of December 31, 2007, listing the major errors that could occur in the purchasing system and to describe the test of controls procedures for auditing related purchasing controls to determine whether reliable control exists. I don't think that Apollo has enough purchase transactions that we need to rely on the controls (in other words, we'll look at them all), but we need to document our finding for our 404 work: 1. In the first column, use an index number (S-# or W-#) to indicate potential strength or weakness. 2. In the second column, describe the control activity (or lack thereof) that may serve to prevent, detect, or correct errors or frauds. Understand that Apollo may or may not have the control activity in place. If they do, we may test the control if that is costeffective. If they don't, we can propose the control as a management letter comment. 3. In the third column, describe the audit implications of the strengths/ weaknesses related to the control activities with respect to transactions or accounts reported in the financial statements (e.g., the presence of a properly completed purchase order check ensures that purchases are authorized). 4. In the fourth column, describe how specifically how (recalculation, reperformance, inquiry and observation, etc.) you would test the control. 5. Finally, add a fifth column for compensating audit procedures. If the control activity is not in place, or the control activity is in place but not effective, we need to determine what audit procedure (i.e., a compensating test) we could use to catch them. (For example, we can use customer confirmations to test the validity of the transactions if we can't rely on the client's controls.) DW