10-7 List four analytical procedures that can be used to test revenue related

accounts. What potential misstatements are indicated by each of these analytical

procedures?
The analytical procedures that can be used to test revenue-related accounts and the
possible misstatements that can be detected by each analytical procedure are:
Analytical Procedure
Revenue:
Comparison of gross profit percentage by
product line with previous years' and/or
industry data.
Comparison of reported revenue to budgeted
revenue.

Possible Misstatement
Detected
Unrecorded revenue
(understated)
Fictitious revenue (overstated)
Changes in pricing policies
Product-pricing problems

Accounts Receivable, Allowance for

Uncollectible Accounts, and Bad-Debt
Expense:

Comparison of receivables turnover and

days outstanding in accounts receivable to
previous years' and/or industry data.
Comparison of aging categories on aged trial
balance of accounts receivable to previous
years.
Comparison of bad-debt expense as a
percentage of revenue to previous years'
and/or industry data.
Comparison of the allowance for
uncollectible accounts as a percentage of
accounts receivable or credit sales to
previous years' and/or industry data.
Examination of large customer accounts
individually and comparison to previous year.

Under- or overstatement of
allowance for uncollectible
accounts and bad-debt expense

Sales Returns and Allowances, and Sales

Commissions:

Comparison of sales returns as a percentage

of revenue to previous years' and/or industry
data.
Comparison of sales discounts as a
percentage of revenue to previous years'
and/or industry data.
Estimation of sales commissions expense by
multiplication of net revenue by the average
commission rate and comparison to recorded
sales commission expense.

Under- or overstatement of sales

returns
Under- or overstatement of sales
discounts
Under- or overstatement of sales
commission expense and related
accrual

10-12
1. Thompsons business practice is to enter into a written sales agreement that
would require signatures of all authorized personnel of Thompson. Audit
procedures: Review sales agreement for customers signature before delivery
2. (1) Check inventory to ensure the products they have on layway for
customers has been set aside. (2) Examine installment note to ensure note
has been signed by customer
3. (1) Check if the estimations are reasonable. (2) Examine customers ledger
accounts and aging receivables report to determine if such provisions are
required. (3) Review the membership fee policies and examine the companys
estimate of customer cancellations.
10-13 Indicate the deficiencies in the existing internal control system over cash
admission fees
Deficiencies

Recommendations

1. No authorization on the treasurers job

2. No authorized supervisor who endorse

the process of transferring cash to the
bank for approval
3. No segregation of duties between the
clerk who collects the cash and the
clerk who transfers the cash to the
bank

4. Cash receipts are not promptly

deposited.
5. No proof that the amount collected
were accurate

Cash should be deposited daily.

Admission ticket stub should be

reconciled with cash collected
by the treasurer.

Treasurer should be authorized

by the management
Proper authorization should be
implemented regarding the cash
that will be delivered to the bank
Proper segregation of duties
between collecting and
depositing of cash in order to
prevent fraud.

10-14
Assertions

Audit Procedures

1. Ensure that the entity has legal title to

accounts receivable (rights and
obligations)

Review of bank confirmations

and loan agreements

2. Determine that recorded accounts

receivable include all amounts owed to
the client (completeness)

Selection of a sample of
revenue transactions, and
determination that they have
been included in the sales
journal and accounts receivable
subsidiary ledger (tracing)

3. Verify that all accounts receivable are

recorded in the correct period (cut-off)

Selection of a sample of
shipping documents for a few
days before and after year end

4. Ensure that the allowance for

uncollectable accounts is properly
stated (valuation and allocation)
5. Confirm that recorded accounts
receivable are valid (existence)

Review of ageing of accounts

receivable with credit managers

Confirmation of accounts
receivable

Tinkerbell
Test of control is to test good control to prevent error and misstatement in the
financial statements.
(a) Tests of control and objective of each test for the sales cycle of Tinkerbell
Test of control
Objective of test
The auditor should attempt to enter an
order for a fictitious customer account
number. The system should not accept
this order.

To ensure that orders are only accepted

and processed for valid customers.

With the clients permission, attempt to

enter a sales order which will take a
customer over the agreed credit limit, the
system should reject the order.

To ensure that goods are not supplied to

poor credit risks.

Inspect a sample of orders to confirm

that an order acceptance email/letter has
been generated.

To ensure that all orders are recorded

completely and accurately.

Obtain a copy of the current price list and

agree for a sample of invoices that
current prices have been used.

To ensure that goods are only sold at

authorized prices.

Visit a warehouse and observe the goods

dispatch process to assess whether all
goods are double checked against the
goods dispatch note (GDN) and the
dispatch list prior to sending out.

To ensure that goods are dispatched

correctly to customers and that they are
of an adequate quality.

Inspect a sample of GDNs and agree

that a valid sales invoice has been
correctly raised.

To ensure that all goods dispatched are

correctly invoiced.

(b) Identify and explain controls Tinkerbell should implement to reduce the risk of
fraud
Reduce Risk (Mitigate)
Controls

When customers receive monthly

Send out monthly statement to your
customers

statement, they would be able to flag out

Regular rotation of duties among the staff

Review monthly bank reconciliation and

any fictitious transactions.

By implementing rotation sc
By performing and reviewing bank

follow up on the discrepancies.

reconciliation, Tinkerball can identify

problems relating to the cash and bank
accounts.

Sales ledger should be reconciled to the

sales ledger control account on monthly
basis
Suggest to Tinkerbell to have an internal

Fraudulent activities would be

audit department
Suggest to Tinkerbell to implement

This will help reduce the risk of staff

segregation of duties

colluding which may lead to them

committing fraud

(c) Describe substantive procedures the auditor should perform to confirm

Tinkerbells revenue
Substantive Analytical Procedures
1. Compare total revenue to rprior
years revenue to consider any
drastic change
2. Compare GPM by product line
with prior years figures and
industry data to detect any

Test of Details
1. Occurrence select a sample of
transactions recorded in sales
journal and vouch invoices back
to delivery order, price list and
sales ledger
2. Accuracy compare price and

unrecorded (understated)/

sales terms on a sample of sales

fictitious (overstated) revenue

3. Compare reported revenue to

transactions with sales contracts,

budgeted revenue and look out

for significant variance to detect
any changes in pricing policies or
any product pricing problems

authorized price list and terms of

trade. Recalculate the sales
amounts on the invoices to sales
invoices
3. Completeness take a sample of
delivery orders to trace the details
and entries in the sales journal
4. Cutoff review a block of last few
delivery order issued before year
and a block of first few Dos
issued after financial year end to
find out whether the transactions

have been accounted in the

correct period

Compare the overall level of revenue against prior years and budget, and

investigate any significant fluctuations.

Obtain a schedule of sales for the year broken down into the major categories of
toys manufactured and compare this to the prior year breakdown, and for any

unusual movements and discuss with management.

Calculate the gross margin for Tinkerbell and compare this to the prior year, and

investigate any significant fluctuations.

Select a sample of sales invoices for larger customers and recalculate the

discounts allowed to ensure that these are accurate.

Recalculate for a sample of invoices that the sales tax has been correctly applied

to the sales invoice.

Select a sample of customer orders and agree these to the dispatch notes and
sales invoices through to inclusion in the sales ledger to ensure completeness of
revenue.