3 - TBS and DRS Flashcards
3 - Outlining the findings upon reviewing the audit workpapers for billing cycle controls testing.
- Observed CUSTOMER SERVICE CLERK answer 10 calls and enter information into the system, which then generated a sales order. No exceptions noted. Control functioning as designed.
Agree, Disagree or Follow Up Needed? Explain Why.
Additional follow up needed. Auditor needs to review system generated sales order to ensure that it is prenumbered sequentially by the system
EXPLANATION
An important part of the control being tested is that the system will automatically generate a prenumbered sales order after the CUSTOMER SERVICE CLERK enters the relevant information into the software system; thus, the auditor needs to review the system-generated sales order to ensure that it is prenumbered sequentially by the system.
3 - Outlining the findings upon reviewing the audit workpapers for billing cycle controls testing.
- Observed three instances of CREDIT MANAGER approving an order that exceeded credit limits. Observed two times when the CUSTOMER SERVICE CLERK used the CREDIT MANAGER’S password to sign into the system and approve the order when neither the CREDIT MANAGER nor the CFO was available. Not an exception, as system required and then received proper approval. Control functioning as designed.
Agree, Disagree or Follow Up Needed? Explain Why.
Disagree. The CUSTOMER SERVICE CLERK should never approve orders that exceed written credit limits.
EXPLANATION Although approval was entered into the system, the CUSTOMER SERVICE CLERK is not authorized to approve an order that exceeds written credit limits and should never use another person’s password to perform a task.
3 - Outlining the findings upon reviewing the audit workpapers for billing cycle controls testing.
- For 10 sales orders, observed INVENTORY CLERK (in warehouse) removing the physical goods from the inventory area and forwarding the goods and the sales order to the shipping and receiving area. No exceptions noted. Control functioning as designed. Agree, Disagree or
Follow Up Needed? Explain Why.
Agreed. Observed proper individual performing procedure.
EXPLANATION The crux of this control is that only the INVENTORY CLERK should remove physical goods from the inventory area and forward the goods and the sales order to the shipping and receiving area.
3 - Outlining the findings upon reviewing the audit workpapers for billing cycle controls testing.
- For 10 sales orders, observed INVENTORY CLERK updating the sales journal system to indicate that the goods have been removed from inventory and shipped. No exceptions noted. Control functioning as designed.
Agree, Disagree or Follow Up Needed? Explain Why.
Additional follow up needed. The control is poorly designed.
EXPLANATION In this case, it does not matter that there were no exceptions in the testing, since the control is weak. J+T’s accounting policy is FOB shipping point, which dictates the recording of sales at the time when the goods are delivered to the shipping company, not when they leave the inventory area.
Since J+T’s procedures record the goods as shipped once they leave the inventory area, these procedures could have an adverse effect on the proper recording of sales revenue.
The sales revenue may be recorded prior to the date of shipment, which affects revenue recognition. The auditor needs to communicate this control weakness to J+T’s management.
3 - Outlining the findings upon reviewing the audit workpapers for billing cycle controls testing.
- For 10 sales orders, observed SHIPPING CLERK packaging goods and transferring them to shipping company. No exceptions noted.
Agree, Disagree or Follow Up Needed? Explain Why.
Additional follow up needed. The control is poorly designed.
EXPLANATION Although the auditor has observed the first part of the control, which is the movement of the physical asset, the auditor does need to inspect the actual bill of lading and observe the filing of it. However, the control is poorly designed. The SHIPPING CLERK does not compare the physical goods received from the inventory area to the amounts on the shipping documents. The auditor needs to communicate this control weakness to J+T’s management.
3 - Outlining the findings upon reviewing the audit workpapers for billing cycle controls testing.
- Inquired of ACCOUNTANT 2 about procedures for writing off for uncollectible accounts. Reperformed entering those journal entries into General Ledger. No exceptions noted.
Agree, Disagree or Follow Up Needed? Explain Why.
Additional follow up needed. The control is poorly designed.
EXPLANATION
Having the same individual (ACCOUNTANT 2) both authorize the write off and record the write off causes a conflict and an opportunity for fraud.
A high-level manager, such as CFO or CONTROLLER should utilize objective criteria to establish amounts that need to be written off, and ACCOUNTANT 2 should make the actual journal entry.
While it is true that the auditor should not be entering items into the General Ledger and should be inspecting ACCOUNTANT 2’s journal entries, the overarching problem is the ineffectiveness of the control.
The accompanying partially completed flowchart depicts part of your client’s revenue cycle.
Some of the flowchart symbols are labeled to indicate controls and records. For each symbol numbered 1 through 13, select one response from all the answer lists below. Each response in the lists may be selected once or not at all.
- COMPUTERIZED ORDER PROGRAM: Perform Credit Checks and Prepare Sales Order
- File Storage: between COMPUTERIZED ORDER PROGRAM and SHIPPING PROGRAM
- Sales Order under Warehouse and Shipping
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
- Perform customer credit check - The inputs to the #1 include the customer credit file and customer data and the output includes the sales order. It would be lo that the customer’s credit would be checked before the sales order would be completed and all information necessary to do so is available.
- Open order file - Sales orders are prepared just before the symbol for #2 and using #2 as an input, open orders are retrieved. It would be logica that the sales orders would be stored in an open order file and that the file would be used for retrieving open orders.
- Match customer purchase order with sales order - The customer purchase order and copies of the sales order are inputs and outputs for #3. It seems logical that the purchase or would be matched to the sales order in this step.
- Verify agreement of sales order and shipping document - The inputs to #4 include the shipping documents and the sales order. It would be logical that the sales order and the shipping document would be compared to verify that they agree - Verify agreement of sales order and shipping document
- Release goods for shipment - Once the shipping documents and sales order have been compared to verify agreement, the goods can be shipped.
- Master price file - The accounts receivable master file, the shipping file, and #6 are inputs to a process that involves entering price data. In orde do so, the master price file must be input, making it #6.
- Prepare sales invoice - Inputs to #7 include the accounts receivable master file, the shipping file, and the master price file. The process includes retrieving shipping data, entering price data, and preparing a sales transaction file. Since goods have already been shipped by this ti it would be appropriate to prepare a sales invoice so that the customer can be billed.
- Sales invoice - Since the sales invoice is being prepared in step #7, the sales invoice must be an output from the process.
- To accounts receivable department - In addition to sending a copy of the sales invoice to the customer, it must be sent to the accounts receivable department so tha can be entered as a receivable on the customer’s record.
- General ledger maste file - The inventory master file, the sales transaction file, and #10 are inputs to a process that involves updating the master files, preparing a general ledger transaction summary, preparing the accounts receivable ledger, and preparing an aged trial balance. The general ledger transaction summary could not be prepared without the general ledger master file as an input.
- General ledger master file - The inventory master file, the sales transaction file, and #10 are inputs to a process that involves updating the master files, preparing a general ledger transaction summary, preparing the accounts receivable ledger, and preparing an aged trial balance. The general ledger transaction summary could not be prepared without the general ledger master file as an input.
- Prepare sales journal - With the sales transaction file as an input to the process, it would make sense that the sales journal would be prepared.
- Sales journal - Since the sales journal is being prepared as part of the process leading to #12, the sales journal must be an output. The sales journal would be forwarded to accounting.
- Aged trial balance - Since the process leading to #13 includes preparing an aged trial balance, the aged trial balance must be an output. The aged trial balance would be forwarded to customer credit.
Background
Darren, CPA, is auditing the financial statements of Menter, Inc. for the year ended January 31, 20X5. Darren has compiled a list of possible errors and irregularities that may result in the misstatement of Menter Inc. financial statements, and a corresponding list of internal control procedures that, if properly designed and implemented, could assist Menter Inc. in preventing or detecting the errors and irregularities.
Required
For each possible error and irregularity, select one internal control procedure from the answer list that, if properly designed and implemented, most likely could assist Menter Inc. in preventing or detecting the errors and irregularities. Each response in the list of internal control procedures may be selected once, more than once, or not at all.
