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Chapter 14
Review Questions
14-1 a. The bill of lading is a document prepared at the time of shipment of
goods to a customer indicating the description of the merchandise, the
quantity shipped, and other relevant 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.
b. A sales invoice is 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.
The sales invoice is the document for recording sales in the
accounting records.
c. The credit memo is 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.
d. The remittance advice is 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.
A remittance advice is used to permit the immediate deposit of cash
receipts as a means of improving control over the custody of assets.
e. The monthly statement to customers is 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.
14-2 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.
Adequate controls in the credit function enable the auditor to place more
reliance on the client's estimate of uncollectible accounts. 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 uncollectible accounts is reasonable.
14-1
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14-3 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.
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, cash receipts journal. The total in the accounts receivable
master file equals the total in the accounts receivable general ledger account.
14-4 BestSellers.com 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. Because credit card issuers often
transfer funds electronically almost immediately after a sale, BestSellers.com could
also set up their system to ship books only after payment has been received by the
credit card issuer. Finally, BestSellers.com could arrange with an online credit
service bureau to run credit checks on customers purchasing over a preset
minimum amount. Although BestSellers.com sells its goods through the Internet, the
company should still record sales revenue when the books are shipped to
customers.
14-5
TRANSACTION-RELATED
AUDIT OBJECTIVE KEY INTERNAL CONTROLS
1. Recorded sales are for Recording of sales is supported by authorized
shipments actually made shipping documents and approved customer
to existing customers orders.
(occurrence). Credit is authorized before shipment takes
place.
Sales invoices are prenumbered and properly
accounted for.
Only customer numbers existing in the
computer data files are accepted when they
are entered.
Monthly statements are sent to customers;
complaints receive independent follow-up.
2. Existing sales Shipping documents are prenumbered and
transactions are recorded accounted for.
(completeness). Sales invoices are prenumbered and
accounted for.
14-2
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14-5 (continued)
TRANSACTION-RELATED
AUDIT OBJECTIVE KEY INTERNAL CONTROLS
3. Recorded sales are for the Determination of prices, terms, freight, and
amount of goods shipped discounts is properly authorized.
and are correctly billed and Internal verification of invoice preparation.
recorded (accuracy). Approved unit selling prices are entered into
the computer and used for sales.
Batch totals are compared with computer
summary reports.
4. Sales transactions are Regular monthly statements sent to
properly included in the customers.
accounts receivable master Internal verification of accounts receivable
file and are correctly master file contents.
summarized (posting and Comparison of accounts receivable master file
summarization). or trial balance with general ledger balance.
5. Sales transactions are Use of adequate chart of accounts.
properly classified Internal review and verification of the account
(classification). classifications.
6. Sales are recorded on the Procedures requiring billing and recording of
correct dates (timing). sales on a daily basis as close to the time of
occurrence as possible.
Internal verification of timely recording of
transactions.
14-6
Tests of controls:
14-3
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14-7 The most important duties that should be segregated in the sales and
collection cycle are:
14-8 The use of prenumbered 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. 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. The same type of 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.
14-4
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14-10 The purpose of footing and crossfooting the sales journal and tracing the
totals to the general ledger is to determine that sales transactions are properly
included in the accounts receivable master file and are correctly summarized. The
auditor will make a sample selection from the sales journal to perform tests of
controls and substantive tests of transactions, so he or she must determine that the
general ledger agrees with the sales journal.
14-11 The verification of sales returns and allowances is quite different from the
verification of sales for three primary reasons:
14-12 Cash is the most liquid asset that a company owns and thus it is the most
likely target of misappropriation. The emphasis the auditor places on the possibility
of misappropriation of cash is not inconsistent with his or her responsibility, which is
to determine the fairness of the presentation of the financial statements. If material
fraud has occurred, and it is not fully disclosed in the financial statements, those
statements are not fairly presented.
14-5
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14-13
TRANSACTION-RELATED
AUDIT OBJECTIVE KEY INTERNAL CONTROLS
1. Recorded cash receipts are for Separation of duties between
funds actually received by the handling cash and record keeping.
company (occurrence). Independent reconciliation of bank
accounts.
2. Cash received is recorded in the Separation of duties between
cash receipts journal handling cash and record keeping.
(completeness). Use of remittance advices or a
prelisting of cash.
Immediate endorsement of incoming
checks.
Internal verification of the recording
of cash receipts.
Regular monthly statements to
customers.
3. Cash receipts are deposited and Same as 2 above.
recorded at the amounts received Approval of cash discounts.
(accuracy). Regular reconciliation of bank
accounts.
Batch totals are compared with
computer summary reports.
4. Cash receipts are properly included Regular monthly statements to
in the accounts receivable master customers.
file and are correctly summarized Internal verification of accounts
(posting and summarization). receivable master file contents.
Comparison of accounts receivable
master file or trial balance totals with
general ledger balance.
5. Cash receipts transactions are Use of adequate chart of accounts.
properly classified (classification). Internal review and verification.
6. Cash receipts are recorded on the Procedure requiring recording of
correct dates (timing). cash receipts on a daily basis.
Internal verification.
14-6
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14-14 Audit procedures that the auditor can use to determine whether all cash
receipts were recorded are:
14-15 Proof of cash receipts is a procedure to test whether all recorded cash
receipts have been deposited in the bank account. In this test, the total cash
receipts recorded in the cash receipts journal for a period of time, such as a month,
are reconciled to the actual deposits made to the bank during the same time period.
The procedure is not useful to discover cash receipts that have not been recorded in
the journals or time lags in making deposits, but it is useful to discover recorded
cash receipts that have not been deposited, unrecorded deposits, unrecorded loans,
bank loans deposited directly into the bank account, and similar misstatements.
14-17 The audit procedures most likely to be used to verify accounts receivable
charged off as uncollectible and the purpose of each procedure are as follows:
14-7
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14-17 (continued)
Consider the reason for the charge-off compared to the company policy
for writing off uncollectible accounts. The purpose is to determine
whether or not company policy is being followed.
14-18 The primary objective of the tests of controls and substantive tests of
transactions for sales and cash receipts is to determine whether or not the auditor
may rely on internal controls to produce accurate information. If it is determined
through tests of controls and substantive tests of transactions that the system
provides reliable information as to accounts receivable balances, the auditor may
reduce the sample size for the confirmation of accounts receivable and adjust the
type of confirmation and timing of the tests. If the system is not considered effective
because of deficiencies in internal control, the sample size must be increased,
positive confirmations will probably be necessary, and the confirmations will most
likely be as of the balance sheet date.
14-19 It is often acceptable to perform tests of controls and substantive tests of
transactions at an interim date. The auditor may decide it is necessary to test the
untested period at year-end. It is acceptable to perform tests of controls and
substantive tests of transactions for sales and cash receipts at an interim date and
not perform additional tests of the system at year-end under the following
circumstances:
The auditor believes that internal controls are effective.
The auditor does not anticipate significant changes in the internal
controls during the remaining period.
The transactions normally occurring between the completion of the
tests of controls and substantive tests of transactions and the end of
the year are similar to the transactions prior to the test date.
The remaining period is not too long.
14-20 Generally, successful tests of controls and substantive tests of transactions
allow for a reduction of tests of details of balance at year-end. However, Diane
Smith chose the month of March, which only represents one-twelfth of the year, as
her test period. With such a short test period, Diane cannot conclude that she has
selected a representative sample from the total population; therefore, without testing
additional months (consensus of several CPA firms requires at least nine months
coverage), Diane should not change the scope of her tests of details of balances at
year-end.
14-8
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14-24 1. a. Recorded sales are for the amount of goods ordered and are
correctly billed and recorded. (Accuracy)
b. Examine indication of internal verification on sales documents.
c. Incorrect prices may be charged, the customer may be billed
for the wrong quantity, or the total amount may be computed
incorrectly.
d. Recompute information on the sales invoices. Trace details on
sales invoices to shipping records, price lists, and customers'
orders.
2. a. Recorded sales and credit transactions are for shipments
actually made and existing sales transactions are recorded.
(Occurrence and Completeness)
b. Account for the numerical sequences of sales orders, invoices,
and credit memoranda.
c. Shipments or returns are not recorded. Orders from customers
are misplaced and not filled.
d. Examine correspondence concerning credit memoranda to
assure that they were properly issued. Trace sample of shipping
documents to related sales invoices and entries into the sales
journal and accounts receivable master file. Confirm accounts
receivable.
3. a. Existing transactions are recorded; recorded transactions exist.
(Completeness and Occurrence)
b. The auditor should observe the employees and discuss the
procedures with personnel.
c. Sales could be made and not recorded, with the employee
keeping the proceeds of the sale.
d. Trace selected shipping documents to related duplicate sales
invoices, the sales journal, and accounts receivable master file.
4. a. Existing transactions are recorded. (Completeness)
b. Online shipping documents are prenumbered and accounted
for weekly.
c. Online sales could be made but not recorded.
d. Select a sample of online shipments (using the prenumbered
online shipping documents), and trace to a sales invoice, sales
journal or listing, and the accounts receivable master file.
5. a. Existing transactions are recorded. (Completeness)
b. The auditor should observe the activities of those employees
and discuss the procedures with personnel.
c. These unusual sales could be made but not recorded and the
proceeds kept from the company.
d. Examine sales documents for these sales and trace the entries
into the cash receipts journal.
14-9
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14-24 (continued)
2. a. Test of control
b. Recorded sales are for shipments actually made to existing
customers. (Occurrence)
c. Documentation
14-10
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14-25 (continued)
5. a. Test of control
b. Recorded sales returns are for returns from existing customers.
(Occurrence)
c. Documentation
6. a. Test of control
b. (1) Cash received is recorded in the cash receipts journal.
(Completeness)
(2) Cash receipts are recorded on the correct dates. (Timing)
c. Observation or documentation
14-11
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14-26 (continued)
d.
(3)
(1) (2) POSTING AND
OCCURRENCE COMPLETENESS SUMMARIZATION
SUBSTANTIVE Procedure Procedure Procedure
TEST OF 6 1 5
TRANSACTIONS
TEST OF Procedure Procedure Procedure
CONTROL 2 4 3
e.
NATURE OF
MISSTATEMENT
PROCEDURE CONTROL BEING TESTED TRYING TO PREVENT
2 A shipping document is To prevent billing to a
attached to each duplicate customer or recording a
sales invoice. sale for which no shipment
has been made.
3 An independent person Preventing misstatements
traces from the sales journal in failure to post to the
to the accounts receivable accounts receivable master
master file. A tick mark is file, posting to the wrong
shown in the margin of the customer, at the wrong
sales journal after a amount, or at the wrong
transaction is traced. date.
4 At the time of billing, the The failure to bill
duplicate sales invoice customers for shipments
number is written on the actually made.
bottom left-hand corner of
each shipping document.
Periodically, the entire
sequence of shipping
documents is accounted for
and each is examined to
make certain there is an
invoice number, which
indicates that a given
shipment has been billed.
14-12
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14-28
TEST OF CONTROL
OR SUBSTANTIVE TRANSACTION-
TEST OF RELATED AUDIT
TRANSACTIONS OBJECTIVE(S) SUBSTANTIVE TEST
1. S T of T Accuracy Not applicable
2. S T of T Posting and Not applicable
summarization
3. T of C Accuracy Compare unit selling prices on
duplicate sales invoices to the
approved price list.
4. T of C Classification Examine a sample of sales
transactions to determine if
each one is correctly classified
in the sales journal.
5. S T of T Classification Not applicable
6. S T of T Completeness Not applicable
Accuracy
Timing
Posting and
summarization
7. S T of T Occurrence Not applicable
Completeness
Accuracy
Timing
8. T of C Accuracy Recalculate the cash
discounts for a sample of
remittances and determine
whether each one was
consistent with company
policy.
9. T of C Completeness Trace from a sample of
remittance advices to the cash
receipts journal to determine if
the related cash is recorded.
14-13
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14-29
14-14
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14-30 a.
14-15
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14-30 (continued)
14-16
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14-31
a. b. c.
TRANSACTION
STRENGTH OR RELATED
INTERNAL CONTROL DEFICIENCY AUDIT OBJECTIVE NATURE OF DEFICIENCY
1. Credit is granted by a Strength Occurrence of sales.
credit department.
2. Sales returns are Deficiency Prenumbered receiving reports should be
presented to a sales prepared by receiving department clerks
department clerk who immediately upon receipt of returned goods.
prepares a written, A duplicate copy of the receiving report should be
prenumbered receiving sent to the credit department for approval and
report. preparation of a credit memorandum that is then
forwarded to accounting to record the sales
return.
14-17
14-31 (continued)
a. b. c.
TRANSACTION
STRENGTH OR RELATED
INTERNAL CONTROL DEFICIENCY AUDIT OBJECTIVE NATURE OF DEFICIENCY
5. Cash receipts received in Strength Completeness of cash
the mail are received by a receipts.
secretary with no record-
keeping responsibility.
6. Cash receipts received in Deficiency This represents inadequate segregation of duties
the mail are forwarded because it gives custody of the cash to those in
unopened with remittance accounting who are responsible for recordkeeping
advices to accounting. activities. Personnel in accounting could
misappropriate cash receipts and alter accounting
records to hide the fraud.
7. The cash receipts journal Deficiency The cash receipts journal represents the primary
is prepared by the accounting record for all cash received. It should
14-18
14-32
TRANSACTION-
RELATED
AUDIT POTENTIAL FINANCIAL STATEMENT
CONTROL OBJECTIVE MISSTATEMENT IF CONTROL IS ABSENT
1. Occurrence Sales may be recorded for invalid or non-
existent products.
14-19
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■ Case
14-33 a.
c. The fact that the A/R Allowance has not changed in the data table, even though the
total revenue has increased suggests 1) collections have improved or 2) A/R allowance
has not been evaluated with respect to new balance in A/R. As an auditor, you would
pay special attention to adequacy of A/R Allowance during fieldwork.
14-20
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a. b. c. d.
Key Transaction Related Test of Substantive Test
# Internal Control Audit Objectives Control of Transaction
1. Segregation of the Recorded acquisitions are for goods and Discuss Trace entries in the acquisitions
purchasing, receiving, services actually received (occurrence). segregation of journal to related vendors'
and cash Recorded cash disbursements are for duties with invoices, receiving reports, and
disbursements goods and services actually received personnel and purchase orders.
functions. (occurrence). observe activities.
2. Independent Existing cash disbursement transactions Examine file Reconcile recorded cash
reconciliation of the are recorded (completeness). of completed disbursements with the cash
14-25
3. Use of prenumbered Existing acquisition transactions are Account for Trace from a file of vendors'
voucher packages, recorded (completeness). a sequence invoices to the acquisitions journal.
properly accounted of voucher
for. packages.
4. Use of prenumbered Existing cash disbursement transactions Account for Reconcile recorded cash
checks, properly are recorded (completeness). a sequence disbursements with the cash
accounted for. of checks. disbursements on the bank
statement (proof of cash
disbursements).
5. Use of prenumbered Existing acquisition transactions are Account for a Trace from a file of receiving
receiving reports, recorded (completeness). sequence of reports to the acquisitions journal.
properly accounted receiving reports.
for.
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14-34 (continued)
a., b., c., and d.
a. b. c. d.
Key Transaction Related Test of Substantive Test
# Internal Control Audit Objectives Control of Transaction
6. Internal verification • Recorded acquisitions are for goods Examine Examine supporting documents
of document package and services actually received document for propriety and recompute
before check (occurrence). package for information on the supporting
preparation. • Recorded acquisitions are stated at indication of documents.
the correct amounts (accuracy). internal
• Acquisition transactions are properly verification.
included in the master files, and are
properly summarized (posting and
summarization).
• Acquisitions are properly classified
(classification).
• Acquisitions are recorded on the
14-26
14-34 (continued)
e.
TRANSACTION-RELATED
AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES
Occurrence • Compare prices on vendor invoices with approved price limits established by
management.
• Review the acquisitions journal, general ledger, and accounts payable master file
for large or unusual amounts.
Completeness • Trace a sample of receiving reports to the acquisitions journal.
14-27
14-34 (continued)
f.
TRANSACTION-RELATED
AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES
Occurrence • Trace cancelled check numbers in the cash disbursements journal to related
cancelled checks and examine for payee, name, and amount.
• Examine cancelled check for authorized signature, proper endorsement, and
cancellation
by the bank.
• Review the cash disbursements journal, general ledger, and accounts payable master
file for large or unusual amounts.
14-28
• Trace cancelled check to the related acquisitions journal entry and examine for payee
name and amount.
Completeness • Trace entries in acquisitions journal to subsequent payment in cash disbursements
journal.
Accuracy • Compare cancelled checks with the related acquisitions journal and cash
disbursements journal entries.
• Recompute cash discounts.
Posting and • Trace individual entries in accounts payable master file to cash disbursements journal.
Summarization
Classification • Compare classification with chart of accounts by reference to vendors' invoices and
acquisitions journal.
Timing • Compare dates on cancelled checks with cash disbursements journal.
• Compare dates on cancelled checks with the bank cancellation date.
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14-34 (continued)
General
Acquisitions
14-25
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14-34 (continued)
Cash Disbursements
c. There are 588 sales invoices (IN), totaling $525,259.16. The largest
single invoice amount is $5,549.19 and the average invoice amount is
$893.30. (Filter by invoice type = IN; then use Statistics command on
the Amount column.)
14-26
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d. Leaving the filter from part c intact, create a computed field with the
following expression: DUE – DATE1 and then add this column to the
table view. Several of the invoices have negative results, which
means that possibly the wrong year was used for the due date. Also,
some are 90 days old, which indicates potential collection problems.
e. See the following printout:, which is the result of using the Stratify
command after a filter is applied to isolate “IN” transactions greater
than or equal to $300.
Answer:
A point of sale system is one that allows the entering of transactions
details and the printing of sales invoices/receipts as transactions occur.
14-27
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Answer:
If a point of sale system is properly implemented and monitored there
should be a reduced likelihood that employees could steal cash. So,
the system must be properly used and controlled if it is to be effective.
3. What are the key controls around point of sale systems implemented
by the University of Toronto?
Answer:
The University of Toronto’s Internal Audit website [http://www.internal
audit.utoronto.ca/resources/controls.htm#B3] includes the following:
These controls are designed to prevent the loss of assets due to error
or misappropriation and to protect customers from misuse of their
credit cards or breaches of their confidentiality.
(Note: Internet problems address current issues using Internet sources. Because
Internet sites are subject to change, Internet problems and solutions may change. Current
information on Internet problems is available at www.pearsonglobaleditions.com/arens.)
14-28