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Apollo Shoes Revenue Cycle Test of Controls Memo
While reviewing Apollo Shoes’ revenue cycle, we tested 120 sales transactions and discovered 51 deviations. This significant number of deviations could potentially indicate more serious shortcomings in the system of internal controls surrounding the revenue cycle and highlights areas that will require more careful scrutiny throughout the audit. The most common type of deviation noted was the lack of the expected credit approval notation on the transaction documents. In fact, 31 of the 51 total deviations resulted from the lack of credit approval. Of the 31 “No credit approval” sales, 10 are still recorded as “unpaid” (ICC-2). This seemingly regular ignorance of a credit approval in the revenue cycle suggests that Apollo might experience above average difficulty with accounts receivable collections. As a result, it is important that the audit procedures for the allowance for doubtful accounts be strengthened to ensure the reasonableness of the company’s A/R assumptions. Errors in billing accounted for 17 of the 51 total deviations. Generally, errors in billing are expected to be a mixture of overcharges and undercharges. However, all 17 of the billing error deviations discovered in this sample of transactions were attributable to overcharges (ICC-2). This seems to indicate a specific breakdown in the internal controls system as it relates to transaction quantity and price data entry. Due to the volume of overcharges, revenues and accounts receivable could be overstated. A larger sample of transactions should be tested to better understand the likelihood of a material misstatement as well as the cause of these errors. Because 10 transactions were tested for each calendar month, it is reasonable to expect that the number of deviations would be relatively uniform throughout the year. However, 40 of the 51 deviations occurred in the second half of the year (22 in Q3 and 16 in Q4) (ICC-2). Although the initial...
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