Chapter 14 - Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Multiple Choice Questions From CPA Examinations

14-21 a. 14-22 a. 14-23 a.

(4) (4) (2)

b. b. b.

(4) (2) (4)

c. c. c.

(1) (1) (4)

d. d.

(3) (1)

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. a. b. c. d. Recorded sales and credit transactions are for shipments actually made and existing sales transactions are recorded. (Existence and Completeness) Account for the numerical sequences of sales orders, invoices, and credit memoranda. Shipments or returns are not recorded. Orders from customers are misplaced and not filled. 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. Existing transactions are recorded; recorded transactions exist. (Completeness and Existence) The auditor should observe the employees and discuss the procedures with personnel. Sales could be made and not recorded, with the employee keeping the proceeds of the sale. Trace selected shipping documents to related duplicate sales invoices, the sales journal, and accounts receivable master file. Existing transactions are recorded. (Completeness) The auditor should observe the activities of those employees and discuss the procedures with personnel. These unusual sales could be made but not recorded and the proceeds kept from the company. Examine sales documents for these sales and trace the entries into the cash receipts journal.

2.

3.

a. b. c. d.

4.

a. b. c. d.

14-24, continued 5. a. b. c. d. 6. a. b. c. d. 7. a. b. c. d. 8. a. b. c. d. 9. a. b. c. d. Existing transactions are recorded and recorded sales are for the amount of goods ordered and are correctly billed. (Completeness and Accuracy) The auditor should observe the activities of employees and discuss the procedures with personnel. A receivable might intentionally not be recorded, allowing the cash to be kept from the company. Trace from the shipping records to the sales invoice, to the accounts receivable master file, and to the cash receipts journal. Sales and cash receipts transactions are properly included in the accounts receivable master file and are correctly summarized. (Posting and summarization) Observation of procedures and examination of indication of internal verification. Unintentional errors could be posted in the control accounts and left undetected for long periods of time. Perform tests of clerical accuracy--foot journals and trace postings from journal to general ledger and accounts receivable master file. Existing cash receipts transactions are recorded. (Completeness) Observation and discussion of procedures with employees. Cash could be received, not recorded, and kept from the company by an employee or lost prior to deposit. Trace receipts recorded on a list such as from a prelisting of cash to the books of original entry. Confirm accounts receivable. Transactions are recorded on the correct dates. (Timing) Compare date per books to the date that the deposit appears on the bank statement. Cash receipts might be recorded in the wrong accounting period, lost, or stolen. Trace cash recorded on a list, such as a prelisting of cash, to the cash receipts journal and to the bank statement. Existing transactions are recorded. Online shipping documents are prenumbered and accounted for weekly. Online sales could be made but not recorded. 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.

14-25 1. a. b. c. 2. a. b. c. a. b. c. 4. b. c. 5. b. c. 6. b. a. a. a. Test of control Recorded sales returns are for returns from existing customers. (Existence) Documentation Test of control Existing sales transactions are recorded. (Completeness) Documentation Test of control Recorded sales are for shipments actually made to existing customers. (Existence) Documentation Substantive test of transactions Recorded sales are for the amount of goods shipped. (Accuracy) Documentation Substantive test of transactions Sales transactions are properly included in the accounts receivable master file and are correctly summarized. (Posting and summarization) Reperformance Test of control (1) Cash received is recorded in the cash receipts journal. (Completeness) (2) Cash receipts are recorded on the correct dates. (Timing) Observation or documentation Substantive test of transactions (1) Recorded receipts are for funds actually received by the company. (Existence) (2) Cash received is recorded in the cash receipts journal. (Completeness) (3) Cash receipts are deposited at the amount received. (Accuracy) (4) Cash receipts are recorded on the correct dates. (Timing) Documentation

3.

c. 7. b. a.

c.

14-29 a. DEFICIENCY 1. Financial secretary exercises too much control over collections. 2. Finance committee is not exercising its assigned responsibility for collection. 3. The auditing function has been assigned to the finance committee, which also has responsibility for the administration of the cash function. Moreover, the finance committee has not performed the auditing functions. 4. The head usher has sole access to cash during the period of the count. One person should not be left alone with the cash until the amount has been recorded or control established in some other way. 5. The collection is vulnerable to robbery while it is being counted and from the church safe prior to its deposit in the bank. RECOMMENDED IMPROVEMENT To extent possible, financial secretary's responsibilities should be confined to record keeping. Finance committee should assume a more active supervisory role. An audit committee should be appointed to perform periodic auditing procedures or engage outside auditors.

The number of counters should be increased to at least two, and cash should remain under joint surveillance until counted and recorded so that any discrepancies will be brought to attention. The collection should be deposited in the bank's night depository immediately after the count. Physical safeguards, such as locking and bolting the door during the period of the count, should be instituted. Vulnerability to robbery will also be reduced by increasing the number of counters. The financial secretary should receive a copy of the collection report for posting to the financial records. The head usher should maintain a copy of the report for use by the audit committee. Contributions should be deposited intact. If it is considered necessary for the financial secretary to make cash expenditures, he should be provided with a petty cash fund. The fund should be replenished by a check based upon a properly approved reimbursement request and satisfactory support. Members should be asked to make checks payable to the church. At the time of the count, ushers should stamp the church's restrictive endorsement (For Deposit Only) on the back of the check. Key employees and members involved in receiving and disbursing cash should be

6. The head usher's count lacks usefulness from a control standpoint because he surrenders custody of both the cash and the record of the count. 7. Contributions are not deposited intact. There is no assurance that amounts withheld by the financial secretary for expenditures will be properly accounted for.

8. Members are asked to draw checks to "cash," thus making the checks completely negotiable and vulnerable to misappropriation. 9. No mention is made of bonding.

bonded. 10. Written instructions for handling cash collections apparently have not been prepared. Especially because much of the work involved in cash collections is performed by unpaid, untrained church members, often on a shortterm basis, detailed written instructions should be prepared. The envelope system should be encouraged. Ushers should indicate on the outside of each envelope the amount contributed. Envelope contributions should be reported separately and supported by the empty collection envelopes. Prenumbered envelopes will permit ready identification of the donor by authorized persons without general loss of confidentiality.

11. The envelope system has not been encouraged. Control features that it could provide have been ignored.