Chap 12 Flashcards
Describe the nature of the following documents and records and explain their use in the sales and collection cycle:
Document/record
Bill of lading
Sales invoice
Credit memo
Remittance advice
Monthly statement to customers
Description/purpose of document
b. A document indicating a reduction in the amount due from a customer because of returned goods or an allowance granted. It often takes the same general form as a sales invoice, but it reduces the customer’s accounts receivable balance rather than increasing it.
c. A document that accompanies the sales invoice mailed to the customer and can be returned to the seller with the payment. It is used to indicate the customer name, sales invoice number, and the amount of the invoice when the payment is received. This document is used to permit the immediate deposit of cash receipts as a means of improving control over the custody of assets.
d. The document prepared monthly and sent to each customer indicating the beginning balance of that customer’s accounts receivable, the amount and date of each sale, cash payments received, credit memos issued, and the ending balance due. It is, in essence, a copy of the customer’s portion of the accounts receivable master file.
e. A document indicating the description and quantity of goods sold, the price including freight, insurance, terms, and other relevant data. It is the method of indicating to the customer the amount owed for the sale and the due date of the payments. The original is sent to the customer and one or more copies are retained. This is the document for recording sales in the accounting records.
f. A document prepared at the time of shipment of goods to a customer indicating the description of the merchandise, the quantity shipped, and other data. Formally, it is a written contract of the shipment and receipt of goods between the seller and carrier. It is also used as a signal to bill the client. The original is sent to the customer and one or more copies are retained.
Bill of lading: f Sales invoice: e Credit memo: b Remittance advice: c Monthly statement to customers: d
Distinguish between the sales journal and the accounts receivable master file.
A. The sales journal is a document or electronic record indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data. Transactions recorded in the sales journal are then posted to the general ledger, and then all sales transactions are used to update the accounts receivable master file.
B. The sales journal contains the record of each sales transaction that includes the customer name, date, amount, and the account classification for each transaction. The sales journal generally represents the record of each individual transaction. Typically, the sales journal accumulates transactions for a period of time, which is often monthly. Transactions recorded in the sales journal are then posted to the general ledger, and if the transaction is for sales on account, the accounts receivable master file is updated for each transaction.
C. The sales journal is a computer-generated file that includes all sales transactions processed by the accounting system for a period, which could be a day, week, or month. It includes all information entered into the system and information for each transaction, such as customer name, date, amount, account classification or classifications, salesperson, and commission rate. Transactions recorded in the sales journal are then posted to the general ledger, and then all sales transactions are used to update the accounts receivable master file.
D. The sales journal is a document or electronic record indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data. The sales journal generally represents the record of each individual transaction. Transactions recorded in the sales journal are then posted to the general ledger, and if the transaction is for sales on account, the accounts receivable master file is updated for each transaction.
b
What type of information is recorded in each and how do these accounting records relate?
A. The accounts receivable master file is used to record only individual sales and cash receipts. The master file is updated using only data from the sales journal and cash receipts journal.
B. The accounts receivable master file is updated using data from the sales journal, sales return journal and customer journal. The accounts receivable master file is used to maintain individual sales and customer account balances.
C. The accounts receivable master file is used to record individual sales, cash receipts, and sales returns and allowances for each customer and to maintain customer account balances. The master file is updated using data from the sales journal, sales return journal, and cash receipts journal.
D. The accounts receivable master file is used to record only individual sales, sales returns and allowances for each customer, and to maintain customer account balances. The master file is updated using only data from the sales journal, sales return journal, and customer journal
c
Explain the importance of proper credit approval for sales.
A. Proper credit approval for sales eliminates the amount of bad debt, since every sales order on credit is always reviewed by a credit manager, no exceptions.
B. Proper credit approval for sales helps minimize the amount of bad debts and the collection effort for accounts receivable by requiring that each sale be evaluated for collection potential.
C. Proper credit approval for sales helps eliminate goods that are returned from customers who cannot afford them.
D. All of the above.
b
What effect do adequate controls in the credit function have on the auditor’s evidence accumulation?
A. Adequate controls in the credit function enable the auditor to place more reliance on the client’s estimate of bad debts by the auditor examining Dun and Bradstreet credit records for each customer as an indication of the uncollectibility of the debt.
B. Adequate controls in the credit function enable the auditor to place more reliance on the accuracy of the client’s customer list to send positive accounts receivable confirmations to customers. The purposes is to determine that the underlying receivable existed prior to write-off.
C. Adequate controls in the credit function enable the auditor to place more reliance on the client’s estimate of uncollectible debts. Without these controls, the auditor would have to make his or her own credit checks on the customers in order to be convinced that the allowance for bad debts is reasonable.
c
BestSellers.ca sells fiction and non-fiction books to customers through the company’s website. Customers place orders for books via the website by providing their name, address, and credit card number and expiration date.
What internal controls could BestSellers.ca implement to ensure that shipments of books occur only for customers who have the ability to pay for those books?
A. BestSellers.ca could arrange with an online credit service bureau to run credit checks on customers purchasing over a preset minimum amount.
B. BestSellers.ca could set up its system to ship books only after payment has been received by the credit card issuer, since credit card issuers often transfer funds electronically almost immediately after a sale.
C. BestSellers.ca could integrate its online ordering system with its inventory system so that a book shipment is made only after the customer’s credit card company approves the customer’s purchase.
D. All of the above are correct.
At what point will BestSellers.ca be able to record the sale as revenue?
A. BestSellers.ca sells its goods through the internet; the company should record sales revenue when the books are ordered by customers.
B. BestSellers.ca sells its goods through the internet; the company should record sales revenue when the books are shipped to customers.
C. BestSellers.ca sells its goods through the internet; the company should record sales revenue only when it has received a proof of delivery from the customer.
D. BestSellers.ca sells its goods through the internet; the company should record sales revenue after receiving approval from the customer’s credit card company
D
B
List the transaction-related audit objectives for the audit of sales transactions. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements
Audit Objectives
1. Cash payments are recorded on the correct dates (timing).
2. Existing sales transactions are recorded (completeness).
3. Cash payments are properly included in the accounts receivable master file and are correctly summarized (posting and summarization).
4. Sales transactions are properly included in the accounts receivable master file and are correctly summarized (posting and summarization).
5. Recorded cash receipts are for funds actually received by the company (occurrence).
6. Sales are recorded on the correct dates (timing).
7. Recorded sales are for the amount of goods shipped and are correctly billed and recorded (accuracy).
8. Recorded sales are for shipments actually made to existing customers (occurrence).
9. Sales transactions are properly classified (classification).
Key internal controls
a. Independent reconciliation of bank account.
b. Shipping documents are prenumbered and accounted for.
c. Approved unit selling prices are entered into the computer and used for sales.
d. Internal verification of accounts payable master file contents.
e. Procedure requiring recording of cash receipts on a daily basis.
f. Internal verification of timely recording of transactions.
g. Comparison of accounts receivable master file or trial balance with general ledger balance.
h. Use of adequate chart of accounts.
i. Credit is authorized before shipment takes place.
Transaction-Related Key
Audit Objectives Internal Controls
2. b.
4. g.
6. f.
7. c.
8. i.
9. h.
Select the one test of control that the auditor can use to verify the following sales transaction-related audit objective: Recorded sales are stated at the proper amounts.
A. On a sample of sales invoices, examine proper authorization and indication of internal verification of sales amounts.
B. Trace detail on sales invoices to shipping documents, approved price lists, and customers’ orders.
C. Account for a sequence of sales invoices.
D. Trace entries in sales journal to related sales invoices.
a
Select the one substantive test of transactions that the auditor can use to verify the following sales transaction-related audit objective: Recorded sales are stated at the proper amounts.
A. Observe whether monthly statements are sent.
B. Examine approved computer printout of unit selling prices.
C. Account for a sequence of shipping documents.
D. Recompute information on sales invoices.
D
`Select the most important duties that should be segregated in the revenue cycle:
A. Granting credit and pursuing unpaid accounts
B. Maintaining general accounting records
C.Receiving orders for sales
D. Pre-numbered documentation
E. Proper authorization from managers
F. Processing cash receipts
G. Shipping goods
H. Billing customers and recording sales
I. Maintaining detailed accounts receivable records
J. Maintaining inventory records
a, b, c, f, g, h, i, j
Explain why the revenue cycle is desirable that each duty be segregated.
A. Segregation of duties should be used extensively in the revenue cycle because the credit granting function is combined with the sales function. There may be a tendency of sales staff to optimize volume even at the expense of high bad debt write-offs.
B. Segregation of duties should be used extensively in the revenue cycle because cash receipts are subject to easy manipulation. The large number and nature of transactions within the cycle make the procedure of cross-checking, where one employee’s duties automatically serve to verify the accuracy of another’s, highly desirable.
C. Segregation of duties should be used extensively in the revenue cycle. If the asset-handling activities (shipping goods and processing cash receipts) are combined with their respective accountability activities (maintaining inventory, accounts receivable, and general accounting records), a serious deficiency with respect to safeguarding those assets exists. It would be easy for an employee, by either omitting or adding an entry, to use the company’s assets for his or her own purpose.
D. All of the above.
d
Explain how pre-numbered shipping documents and sales invoices can be useful controls for preventing misstatements in sales.
A.
The use of pre-numbered documents is meant to prevent the failure to bill or record sales as well as to prevent duplicate billings and recordings. An example of a useful control to provide reasonable assurance that all shipments are billed is for the billing clerk to file a copy of all shipping documents in sequential order after a shipment has been billed.
B.
The use of pre-numbered documents is meant to prevent the failure to bill or record sales as well as to prevent duplicate billings and recordings. Periodically, someone can account for all numbers in the sequence and investigate the reason for missing documents. Computer programs can be used to identify gaps and duplicates in the sequence.
C.
The use of pre-numbered documents is meant to prevent the failure to bill or record sales as well as to prevent duplicate billings and recordings. A useful test in this area is to account for the sequence of duplicate sales invoices in the sales journal, watching for omitted numbers, duplicate numbers, or invoices outside the normal sequence. This test simultaneously provides evidence of both the occurrence and completeness objectives.
D.
All of the above are correct.
d
What three types of authorizations are commonly used as internal controls for sales? For each authorization, state a substantive test that the auditor could use to verify whether the control was effective in preventing misstatements.
Types of authorizations
1.
Goods are shipped only after payment is received.
2.
Prices, including payment terms, freight, and discounts, must be properly authorized.
3.
Credit must be properly authorized before a sale takes place.
Test of controls
A.
Ensure that the shipment is supported by an authorized customer order or that shipments occur only after authorized shipping documents have been prepared.
B.
Compare actual price charged for different products, including freight and terms, to the price list authorized by management.
c.
Analyze the allowance for doubtful accounts and write-offs of accounts receivable during the period to determine the effectiveness of the credit approval system.
1 - A
2- B
3 - C
Explain the purpose of footing and cross-footing the sales journal and tracing the totals to the general ledger.
A.
verify whether or not the accounts receivable master file may contain errors that are not otherwise detected.
B.
verify whether or not the sales journal may include transactions from prior periods that are not included in the audit period.
C.
determine that credit transactions are properly included in the general ledger.
D.
determine that sales transactions are properly included in the accounts receivable master file and are correctly summarized.
D
List the transaction-related audit objectives for the verification of cash receipts. For each objective, state one internal control that the client can use to reduce the likelihood of misstatements.
Audit Objectives
1.
Recorded cash receipts are for funds actually received by the company (occurrence).
3.
Cash receipts are deposited and recorded at the amounts received (accuracy).
5.
Cash receipts transactions are properly classified (classification).
6.
Cash receipts are recorded on the correct dates (timing).
8.
Cash receipts are properly included in the accounts receivable master file and are correctly summarized (posting and summarization).
9.
Cash received is recorded in the cash receipts journal (completeness)
Key Internal COntrols
a.
Use of adequate chart of accounts.
b.
Independent reconciliation of bank accounts.
d.
Batch totals are compared with computer summary reports.
f.
Procedure requiring recording of cash receipts on a daily basis.
h.
Comparison of accounts receivable master file or trial balance totals with general ledger balance.
i.
Immediate endorsement of incoming checks.
- b.
- h.
- d.
- i.
- a.
- f.
