6.4 Flashcards
Which of the following are not directly involved in the revenue cycle?
Receiving department clerk.
The receiving department clerk is involved in the purchases-payables cycle. The clerk counts the goods and prepares receiving reports that provide partial authorization for invoice payment.
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.
An auditor using a transaction cycle approach to assessing control risk is testing controls related to transactions involving the sale of goods to customers. The auditor most likely is testing controls over
Collection of receivables.
Among the relevant accounts considered in the sales-receivables-cash receipts (revenue) cycle are (1) cash, (2) trade receivables, (3) other receivables, (4) allowance for bad debts, (5) sales, (6) sales returns, and (7) bad debt expense. Accordingly, the collection of receivables belongs to the same transaction cycle as sales of goods.
Which of the following employees should report to the chief financial officer?
Credit manager.
The CFO’s primary responsibility is to safeguard assets. Although credit approval is an authorization process, assets are lost if credit is improperly granted. Thus, the credit manager should be responsible to one who has no vested interest in the granting of credit.
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.
An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in support of management’s financial statement assertion of
Valuation.
The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that balances are reported at appropriate amounts, e.g., accounts receivable at net realizable value.
Which of the following controls is most likely to detect an invalid customer number entered into the sales order entry screen?
A validity check.
A validity check tests the relationships among input items and other parts of the system, e.g., that customer 1272 on the sales order is included in the customer file.
Fact Pattern: A sales transaction record designed to contain the information presented below. 1-10 Customer account number 11-30 Customer name 31-38 Amount of sale 39-44 Sales date 45-46 Store code number 47-49 Sales clerk number 50-59 Invoice number
If the last letter of a customer’s name is erroneously entered in column 31, which of the following is most likely to detect the error during an input edit run?
A field check.
The erroneous entry of a customer’s name into the field that should contain the amount of the sale is detected by a field check. This control identifies an alphabetic character in a field that should contain only numeric characters.
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 would be the best protection for a company that wishes to prevent the lapping of trade accounts receivable?
Have customers send payments directly to the company’s depository bank.
Lapping is the delayed recording of cash receipts to cover a cash shortage. Current receipts are posted to the accounts of customers who paid one or two days previously to avoid complaints (and discovery) when monthly statements are mailed. The best protection is for the customers to send payments directly to the company’s depository bank. This procedure precludes client personnel from having access to the money.
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: A sales transaction record designed to contain the information presented below. 1-10 Customer account number 11-30 Customer name 31-38 Amount of sale 39-44 Sales date 45-46 Store code number 47-49 Sales clerk number 50-59 Invoice number
If a record is rejected during computer processing because the sales clerk whose identification number appears on the record does not work at the store indicated by the numbers in columns 45 and 46, the error was probably detected by which of the following?
A validity check.
A validity check can be used to determine the consistency of one field with another.
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.
A CPA is gaining an understanding of the internal controls for a client that sells garden products using an Internet site. Which of the following is not likely to be found on the client’s organization chart?
The sales order department.
The customer directly communicates the order via the Internet site. Thus, a sales order department is not needed to handle and process the order. Acceptance of the order, collection of payment, and scheduling of products for shipment are largely independent of human involvement.
Which of the following procedures would an auditor most likely perform to test controls relating to management’s assertion about the completeness of cash receipts for cash sales at a retail outlet?
Observe the consistency of the employee’s use of cash registers and tapes.
An assertion about completeness of transactions addresses whether all transactions that should be presented are included in the financial statements. To determine that controls are operating effectively to ensure that all cash receipts are being recorded for cash sales in a retail environment, the auditor may observe the activities of the employees. Controls should provide assurance that employees use cash registers that contain internal functions (e.g., tapes) to record all sales.
