14-33 (Objective 14-4) The Meyers Pharmaceutical Company, a drug manufacturer, has the following internal controls for

billing and recording

accounts receivable:
1. An incoming customers purchase order is received in the order department by a clerk who prepares a prenumbered company sales order
form on which is inserted the pertinent information, such as the customers name and address, customers account number, quantity, and items
ordered. After the sales order form has been prepared, the customers purchase order is attached to it.
2. The sales order form is then passed to the credit department for credit approval. Rough approximations of the billing values of the orders
are made in the credit department for those accounts on which credit limitations are imposed. After investigation, approval of credit is noted on the
form.
3. Next, the sales order form is passed to the billing department, where a clerk uses a computer to generate the customers invoice. It
automatically multiplies the number of items times the unit price and adds the extended amounts for the total amount of the invoice. The billing clerk
determines the unit prices for the items from a list of billing prices. The invoice copies are designated as follows:
(a) Customers copy.
(b) Sales department copy, for information purposes.
(c) File copy.
(d) Shipping department copy, which serves as a shipping order. Bills of lading are also prepared as carbon copy by-products of the invoicing
procedure.
4. The shipping department copy of the invoice and the bills of lading are then sent to the shipping department. After the order has been
shipped, copies of the bill of lading are returned to the billing department. The shipping department copy of the invoice is filed in the shipping
department.
5. In the billing department, one copy of the bill of lading is attached to the customers copy of the invoice and both are mailed to the customer.
The other copy of the bill of lading, together with the sales order form, is then attached to the invoice file copy and filed in invoice numerical order.
6. As the computer generates invoices, it also stores the transactions in an electronic file that is used to update the accounting records daily. A
summary report is generated and all journals and ledgers are printed for a hardcopy of the records.
7. Periodically, an internal auditor traces a sample of sales orders all the way through the system to the journals and ledgers, testing both the
procedures and dollar amounts. The procedures include comparing control totals with output, recalculating invoices and refooting journals, and
tracing totals to the master file and general ledger.

Required
a. Flowchart the billing function as a means of understanding the system.
b. List the internal controls over sales for each of the six transaction-related audit objectives.
c. For each control, list a useful test of control to verify the effectiveness of the control.
d. For each transaction-related audit objective for sales, list appropriate substantive tests of transactions audit procedures, considering
internal controls.
e. Combine the audit procedures from parts c and d into an efficient audit program for sales.

INTEGRATED CASE APPLICATION PINNACLE MANUFACTURING: PART V

14-34 (Objectives 14-3, 14-5) In Part III of this case study, you obtained an understanding of internal control and made an initial assessment of
control risk for each transaction-related audit objective for acquisition and cash disbursement transactions. The purpose of Part V is to continue the
assessment of control risk by determining the appropriate tests of controls and substantive tests of transactions. In order to do this, you must
complete the steps needed to prepare a high-quality performance format audit program for tests of controls and substantive tests of transactions
for acquisitions and cash disbursements.
Assume in Part III that you identified the following as the key controls you want to rely on (even though your answers were likely different from
these):
1.
2.
3.
4.
5.
6.
7.
8.
9.

Segregation of the purchasing, receiving, and cash disbursements functions

Use of prenumbered voucher packages, properly accounted for
Use of prenumbered checks, properly accounted for
Use of prenumbered receiving reports, properly accounted for
Internal verification of document package before check preparation
Review of supporting documents and signing of checks by an independent, authorized person
Cancellation of documents prior to signing of the check
Monthly reconciliation of the accounts payable master file with the general ledger
Independent reconciliation of the monthly bank statements

Required
a. Prepare an audit file listing the nine controls or download them from the textbook Web site.
b. After each control, identify the transaction-related audit objective(s) that it partially or fully satisfies.
c. Immediately below the control, list one audit procedure to test the control. Use the most reliable test of control evidence that you can think of.
Write the audit procedure in good form.
d. Immediately below the test of control, list one substantive test of transactions audit procedure to test whether the control failed to be
effective. Use the most reliable substantive tests of transactions evidence that you can think of.
e. Create a separate audit schedule labeled Acquisitions Substantive Tests of Transactions. Decide and write one substantive test of
transactions audit procedure for each transaction-related audit objective for acquisitions. The audit procedures must be different than the
ones in requirement d. The schedule should be designed as follows: