The auditor designed an audit procedure to test the following control procedures in the revenue cycle of a company that makes large factory equipment:

1. Credit approval

2. Sale price taken from authorized sales price list unless specifically approved by the division sales manager

3. A shipping document existing for each invoice A random sample of 100 items was selected from the total population of invoices. The following results were obtained:

In considering your answers to parts (a) and (b) below, the following information is available to the auditors from the preliminary assessment of the organization's control environment:
1. The company is experiencing some financial difficulty; earnings have been down. Management is optimistic about this year and hopes to position the company to increase its stock value or to participate in a merger.
2. J.P. Maxwell is in his second year as the division sales manager. A significant portion of his yearly earnings will be based on reported sales and profits.
3. The auditor expected a low failure rate for all three attributes but considers them important.

Required
a. Identify the audit steps the auditor should use to follow up in evaluating the sample findings. Be specific as to each attribute.
b. Assume that the audit follow-up in part (a) reveals the continuance of the same pattern of control procedure failures. Identify the implications for the design of substantive audit procedures, and briefly indicate the rationale for your answer.
c. Comment on whether any of the areas noted above would be considered either a significant or material weakness in internalcontrol.

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Attribute Fallures Description of Fallures 1. Credit appa 3Approvals were bypassed for sales of equipment to new customers. Each of the new customer sales was the result of efforts by the division sales manager. 2. Sales price 6 Five of the price failures were attributable to a senior salesperson and represented price discounts ranging from 10 to 18%. The other failure was a 5% reduction of a sale by a different salesperson that took place while the division sales manager was on vacation. No shipping documents could be found. All five sales were recorded in the last week of the year. 3. Shipping 5 document exists