6.6 Flashcards
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.
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.
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.
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.
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
CFO
The write-off of uncollectible accounts requires effective controls. The initiation of the write-off is performed by the credit manager. However, authorization should be by an independent party, typically the CFO. The credit manager is evaluated, in part, on the amount of bad debt written off and should require significant evidence before initiating a write-off.
An auditor is determining whether internal control over the revenue cycle of a wholesaler is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely will select a sample of transactions from the population represented by the
Shipping document file.
The auditor should trace shipping document file copies relating to customer shipments to sales invoices (or possibly to the accounts receivable subsidiary ledger) to determine whether shipments were billed.
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.
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.
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees involved in the credit-granting function are separated from the sales function.
Salespeople should be responsible for generating sales and providing service to customers. For effective control, the credit department should be responsible for monitoring the financial condition of prospective and continuing customers in the credit approval process and should report to the CFO.
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.
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.
Which of the following internal control activities most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
Daily sales summaries are compared with daily postings to the accounts receivable ledger.
Daily sales summaries represent billed sales. Reconciliation with the postings to the accounts receivable ledger would provide assurance that billed sales were posted.
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.
In updating a computerized accounts receivable file, the total used as a batch control to verify the accuracy of posting cash remittances is
Cash deposits plus discounts taken by customers.
The control total for the posting of accounts receivable should be the total amount of reductions in accounts receivable. The total of the cash deposits plus the discounts taken by customers should equal the total reduction in accounts receivable for the batch of transactions processed. This batch control is a financial total, one which has inherent informational significance as opposed to such other batch controls as hash totals or record counts.
An online sales order processing system most likely would have an advantage over a batch sales order processing system by
Enabling shipment of customer orders to be initiated as soon as the orders are received.
An online processing system can handle transactions as they are entered because of its direct connection to a computer network. Thus, shipment of customer orders may be initiated instantaneously as they are received. Batch processing is the accumulation and grouping of transactions for processing on a delayed basis.
