6.1 Flashcards
Fact Pattern:
Management discovers that a supervisor at one of its restaurant locations removes excess cash and resets sales totals throughout the day on the point-of-sale (POS) system. At closing, the supervisor deposits cash equal to the recorded sales on the POS system and keeps the rest.
The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank deposit slip to the company’s revenue accounting department. The revenue accounting department records the sales and the cash for the location in the general ledger and verifies the deposit slip to the bank statement. Any differences between sales and deposits are recorded in an over/short account and, if necessary, followed up with the location supervisor. The customer food order checks are serially numbered, and it is the supervisor’s responsibility to see that they are accounted for at the end of each day. Customer checks and the transaction journal tapes from the POS system are kept by the supervisor for 1 week at the location and then destroyed.
Which of the following controls allowed the fraud to occur?
The accounting for customer food checks by the supervisor.
An inappropriate segregation of duties existed because the supervisor was responsible for accounting for customer food checks and depositing receipts and had the ability to reset POS totals throughout the day.
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
The sequential numbering of documents provides a standard control over transactions. The numerical sequence should be accounted for by an independent party. A major objective is to detect unrecorded and unauthorized transactions. Moreover, comparing shipments with the sales journal also will detect unrecorded transactions.
Which of the following credit approval procedures would be the basis for developing a deficiency finding for a wholesaler?
Salespeople are responsible for evaluating and monitoring the financial condition of prospective and continuing customers.
Salespeople should be responsible for generating sales and providing service to customers. For effective control purposes, the credit department should be responsible for monitoring the financial condition of prospective and continuing customers in the credit approval process.
For the purpose of effective internal control, postdated checks received from customers should be
Restrictively endorsed.
All checks received from customers should be restrictively endorsed with the phrase “For Deposit Only” in the company account regardless of their date. They should be physically safeguarded until deposit.
In a retail cash sales environment, which of the following controls is often absent?
Separation of functions.
In the usual retail cash sales situation, the sales clerk authorizes and records the transactions and takes custody of assets. However, management ordinarily employs other compensating controls to minimize the effects of the failure to separate functions. The cash receipts function is closely supervised, cash registers provide limited access to assets, and an internal recording function maintains control over cash receipts.
Immediately upon receipt of cash, a responsible employee should
Prepare a remittance listing.
Effective control of cash requires that receipts be recorded promptly. For mail receipts, a listing of remittance advices by an employee not performing incompatible functions is a standard control procedure. If the customer does not return the remittance advice, one should be prepared at the time the mail is opened. If remittance advices are not used, a listing of receipts should still be made when the mail is opened.
Which of the following activities most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?
Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
The accounts receivable subsidiary ledger contains all receivables outstanding to date. It is not feasible to attempt to reconcile current sales invoices with the accounts receivable subsidiary ledger. However, the accounts receivable subsidiary ledger should be reconciled to the general ledger control account periodically.
Fact Pattern:
Sales procedures that were encountered during the regular annual audit of Marvel Wholesale Distributing Company are described below.
Customer orders are received by the sales-order department. A clerk computes the dollar amount of the order and sends it to the credit department for approval. Credit approval is stamped on the order and returned to the sales-order department. An invoice is prepared in two copies, and the order is filed in the customer order file. The customer copy of the invoice is sent to the billing department and held in the pending file, awaiting notification that the order has been shipped. The shipping copy of the invoice is routed through the warehouse, and the shipping department has authority for the respective departments to release and ship the merchandise. Shipping department personnel pack the order and prepare a three-copy bill of lading: The original copy is mailed to the customer, the second copy is sent with the shipment, and the other is filed in sequence in the bill of lading file. The invoice shipping copy is sent to the billing department. The billing clerk matches the received shipping copy with the customer copy from the pending file. Both copies of the invoice are priced, extended, and footed. The customer copy is then mailed directly to the customer, and the shipping copy is sent to the accounts receivable clerk. The accounts receivable clerk enters the invoice data in a sales-accounts receivable journal, posts the customer’s account in the subsidiary customers’ accounts ledger, and files the shipping copy in the sales invoice file. The invoices are numbered and filed in sequence.
To determine whether Marvel Company’s internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor should select a sample of transactions from the population represented by the
Bill of lading file.
The auditor should match bill of lading file copies relating to customer shipments to sales invoices (or possibly to the accounts receivable subsidiary ledger) to determine whether shipments were not billed.
Sound internal control activities dictate that defective merchandise returned by customers be presented initially to the
Receiving clerk.
For control purposes, all receipts of goods or materials should be handled by the receiving clerk. Receiving reports should be prepared for all items received.
To safeguard the assets through effective internal control, accounts receivable that are written off should be transferred to
A separate ledger.
Accounts receivable that are written off should be transferred to a separate ledger. This ledger should be maintained by the accounting department and periodically reviewed to determine if any of the accounts have become collectible.
When an office supply company is unable to fill an order completely, it marks the out-of-stock items as back ordered on the customer’s order and enters these items in a back order file that management can view or print. Customers are becoming disgruntled with the company because it seems unable to keep track of and ship out-of-stock items as soon as they are available. The best approach for ensuring prompt delivery of out-of-stock items is to
Match the back order file to goods received daily.
Reconciling the back order file to shipments received daily would identify unfilled orders for appropriate action.
Under effective internal controls, the Sales Department should be responsible for which of the following activities?
Approval of the return of defective merchandise.
To ensure that the sales returns and allowances function is effective, proper controls must be established, including a segregation of duties. The Sales Department should be responsible for the initial approval of sales returns and allowances.
Proper authorization procedures in the revenue cycle usually provide for the approval of bad debt write-offs by an employee in which of the following departments?
CFO
The credit manager, who reports to the CFO, usually is responsible for authorizing write-offs of bad debts based on evidence such as aging reports and collection agency reports. The CFO, or another official not involved with sales transactions and recordkeeping, will also approve the write-off.
Which of the following controls will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?
Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
The CFO usually is responsible for authorizing write-offs of bad debts based on evidence such as receiving reports for the returned goods, correspondence with customers, collection agency reports, and recommendations by the credit department.
Fact Pattern:
Management discovers that a supervisor at one of its restaurant locations removes excess cash and resets sales totals throughout the day on the point-of-sale (POS) system. At closing, the supervisor deposits cash equal to the recorded sales on the POS system and keeps the rest.
The supervisor forwards the close-of-day POS reports from the POS system along with a copy of the bank deposit slip to the company’s revenue accounting department. The revenue accounting department records the sales and the cash for the location in the general ledger and verifies the deposit slip to the bank statement. Any differences between sales and deposits are recorded in an over/short account and, if necessary, followed up with the location supervisor. The customer food order checks are serially numbered, and it is the supervisor’s responsibility to see that they are accounted for at the end of each day. Customer checks and the transaction journal tapes from the POS system are kept by the supervisor for 1 week at the location and then destroyed.
Which of the following audit procedures would have detected the fraud?
For selected days, reconciling the total of customer food checks to daily bank deposits.
Using the total of the customer food checks as a confirmation of sales would have detected the shortage in the bank deposit.
