6.5 Flashcards
A wholesaling firm has a computerized billing system. Because of a clerical error while entering information from the sales order, one of its customers was billed for only three of the four items ordered and received. Which of the following controls could have prevented, or resulted in prompt detection and correction, of this situation?
Matching line control counts produced by the computer with predetermined line control counts.
Detective controls, such as a line control count, identify undesirable events as they occur. A line control count counts individual line items on documents. These counts are compared to predetermined line control counts for each document to detect missing lines.
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.
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.
For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve
Write-offs of customer accounts.
An employee who authorizes a transaction, such as the write-off of a receivable, ordinarily should not be responsible for recording the same transaction. Segregating the functions of authorization, recordkeeping, and custody of assets reduces the possibility that an employee may be able to perpetrate and conceal fraud or error in the normal course of his or her duties.
An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives remittances from the mail room and also prepares the
Daily deposit slip.
Preparing the bank deposit slip is a part of the custodial function, which is the primary responsibility of a cashier. The cashier is an assistant to the CFO and thus performs an asset custody function. The preparation of a bank deposit slip is an integral part of the custodial function, along with the depositing of remittances daily at a local bank.
A mail-order retailer has just modified its processing programs to charge each customer the appropriate sales tax. The best approach for detecting whether sales taxes are applied correctly is to
Add the program code that will sort orders by area, compute taxes in the aggregate, and compare the amount with the sum of individual taxes charged for each area.
Sales taxes vary from one jurisdiction to another. Thus, the program should sort orders by area. Verification of the accuracy of the tax charges then can be obtained by calculating the total taxes for each area in two ways: applying the tax rate to total sales or adding the taxes charged on individual sales.
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.
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.
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Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by
Observing the employees who are performing the control activities.
Observation is a risk assessment procedure performed to obtain an understanding of the entity and its environment, including its controls. It is also a test of controls. Observation of entity activities and operations supports inquiries of management and provides information about the entity and its environment.
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.
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.
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.
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.
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 post invoices to the customers’ accounts ledger, the auditor should select a sample of transactions from the population represented by the
Sales invoice file.
The auditor should trace sales according to the sales invoices to the accounts receivable subsidiary ledger. Sales invoices in the sales invoice file without corresponding entries in the subsidiary ledger represent transactions not posted.
Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?
Understating the sales journal.
Not recording sales on account in the books of original entry is the most effective way to conceal a subsequent theft of cash receipts. The accounts will be incomplete but balanced, and procedures applied to the accounting records will not detect the defalcation.
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.
