6.2 Flashcards
Which of the following could indicate source document fraud?
The same invoice number appears on different invoices.
Each invoice should have a unique invoice number. The duplication of an invoice number can signify source document fraud.
An auditor noted that the accounts receivable department is separate from other accounting activities. Credit is approved by a separate credit department. Control accounts and subsidiary ledgers are balanced monthly. Similarly, accounts are aged monthly. The accounts receivable manager writes off delinquent accounts after 1 year, or sooner if a bankruptcy or other unusual circumstances are involved. Credit memoranda are prenumbered and must correlate with receiving reports. Which of the following areas could be viewed as an internal control deficiency of the above organization?
Write-offs of delinquent accounts.
The accounts receivable manager has the ability to perpetrate fraud because (s)he performs incompatible functions. Authorization and recording of transactions should be segregated. Thus, someone outside the accounts receivable department should authorize write-offs.
When performing an audit, a CPA notes that bad-debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?
Require credit checks on all new customers.
The credit manager, who should report to the chief financial officer (CFO), should authorize credit for all new customers and initiate write-offs of bad debts. Credit checks should be performed before credit is approved.
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 gather audit evidence that uncollected items in Marvel Company’s customers’ accounts represented valid trade receivables, the auditor should select a sample of items from the population represented by the
Subsidiary customers’ accounts ledger.
The auditor should sample from records of open accounts receivable to determine if they represent valid assets. The open accounts receivable are maintained in the subsidiary customers’ accounts ledger. Items would be confirmed directly with the debtors.
Which of the following most likely would be the result of ineffective internal control in the revenue cycle?
Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.
Ineffective controls in the revenue cycle, such as inappropriate segregation of duties and responsibilities, inadequate supervision, or deficient authorization, may result in the ability of employees to perpetrate fraud. Thus, sales personnel should approve sales returns and allowances but not the related credit memos. Moreover, no authorization for the return of goods, defective or otherwise, should be considered complete until the goods are returned as evidenced by a receiving report.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
Ineffective controls in the revenue cycle, such as inappropriate segregation of duties and responsibilities, inadequate supervision, or deficient authorization, may result in the ability of employees to perpetrate fraud. Thus, sales personnel should approve sales returns and allowances but not the related credit memos. Moreover, no authorization for the return of goods, defective or otherwise, should be considered complete until the goods are returned as evidenced by a receiving report.
Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer record contains the name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow is to
Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.
The auditor should consider developing a program to compare the balances with the credit limits and to print out the exceptions. The auditor can then focus on those customers whose credit limits may have been exceeded.
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be shipped that are not invoiced. The inadequate controls could cause an
Understatement of revenues and receivables and an overstatement of inventory.
If goods are shipped before the sales are invoiced, inventory will not be credited for the shipments, thus overstating inventory. Moreover, if the accounting function does not receive copies of the invoices, sales and receivables will not be recorded, with the consequent understatement of those accounts.
To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?
Sales return.
To conceal a theft of customer payments on account, a bookkeeper debits sales returns and credits accounts receivable. If accounts receivable are not credited, the customer will continue to be billed and will complain.
Upon receipt of customers’ checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the
Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
The individuals with recordkeeping responsibility should not have custody of cash. They should use either the remittance advices or a listing of the remittances to make entries to the cash and accounts receivable control account and to the subsidiary accounts receivable records. Indeed, having different people make entries in the control account and in the subsidiary records is an effective control.
When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor would be most concerned about the
Potential for computer disruptions in recording sales.
Processing sales on the Internet (often called e-commerce) creates new and additional risks for clients. The client should use effective controls to ensure proper acceptance, processing, and storage of sales transactions. Threats include not only attacks from hackers but also system overload and equipment failure.
One of two office clerks in a small company prepares a sales invoice for $4,300; however, the invoice is incorrectly entered by the bookkeeper in the general ledger and the accounts receivable subsidiary ledger as $3,400. The customer subsequently remits $3,400, the amount on the monthly statement. Assuming there are only three employees in the department, the most effective control to prevent this type of error is
Using predetermined totals to control posting routines.
A control total should be generated for the transactions to be posted. It then should be compared with the total of items posted to the individual accounts.
Mill Co. uses a batch processing method to process its sales transactions. Data on Mill’s sales transaction file are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs of the creation of this file most likely would be a
Report showing exceptions and control totals.
Batch processing is useful for processing large volumes of data, especially when sorted in sequential order, for example, by customer number. Editing (validation) of data should produce a cumulative automated error listing that includes not only errors found in the current processing run but also uncorrected errors from earlier runs. Each error should be identified and described, and the date and time of detection should be given. The creation of the file also generates various totals that serve as controls over the accuracy of the processing.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
Authorization of transactions (write-offs of receivables) and custody of assets (cash) are incompatible duties.
