Auditing

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Chapter 14

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

Solution of Practising Problems

14-4BestSellers.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.

14-6

Tests of controls:

1.On a sample of sales invoices, examine proper authorization and indication of internal verification of sales amounts. 2.Examine approved computer printout of unit selling prices. 3.Examine file of batch totals for initials of data control clerk; compare totals to summary reports.

Substantive tests of transactions:

1.Recompute information on sales invoices.
2.Trace entries in sales journal to related sales invoices. 3.Trace detail on sales invoices to shipping documents, approved price lists, and customers' orders.

14-91.Credit is authorized before a sale takes place.

Test:Analyze the allowance for uncollectible accounts and write-offs of accounts receivable during the period to determine the effectiveness of the credit approval system.

2.Goods are shipped only after proper authorization.

Test:Review physical inventory shortages to determine the effectiveness of inventory control.

3.Prices, including payment terms, freight, and discounts, are properly authorized.

Test:Compare actual price charged for different products, including freight and terms, to the price list authorized by management.

14-12Cash 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.

14-14Audit procedures that the auditor can use to determine whether all cash receipts were recorded are:

← Discussion with personnel and observation of the separation of duties between handling cash and record keeping. ← Account for numerical sequence of remittance advices or examine prelisting of cash receipts. ← Observe immediate endorsement of incoming checks. ← Examine indication of internal verification of the recording of cash receipts. ← Observe whether monthly statements are sent to customers. ← Trace from remittance advices or prelisting to cash receipts journal.

14-15Proof 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.

14-21a.(2)b.(1)c.(3)d.(4)

14-22a.(4)b.(3)c.(1)...
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