Question 11. 25
Your firm has been engaged to audit the financial statements of Haven Ltd. In obtaining an understanding of internal control relating to credit sales, the following questionnaire is used:
1 Does the company evaluate the customer’s credit history, and is amount of available credit checked before a sale is authorised?
Select a sample of credit order and inspect credit history and other supporting documents. Review the policy/procedure for customer approval and setting of credit limits.
2 Is there adequate segregation of duties between authorising sales, shipping goods, and recording sales?
Observe and make inquiries about the performance of various functions and duties.
3. Does management compare all shipments with recorded sales to ensure that all sales are recorded?
Submit test data for a transaction that has shipping information, both with and without a supporting sales invoice.
Select a sample of sales invoices and examine for evidence that the company
compared details to shipping documents, purchase orders, and sales orders.
4. Is every recorded sale checked against shipping records for appropriateness of revenue recognition? Submit test data where invoice data does not match with underlying shipping information.
5 Are there adequate controls over the accuracy of the sales invoice?
Select a sample of sales invoices and examine them.
6 Are there adequate controls to ensure that the sales invoices are recorded in the correct time period?
Select a number of sales invoices - compare date on sales invoice with date in sales ledger.
Perform sales cut‑off tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period.
The sales cutoff test involves:
Examining shipping documents for several days before and after the cutoff date to determine the date and terms of shipment. Tracing shipping documents to sales and inventory records to establish that the entries were made in the correct accounting period. Inspecting invoices for a period of time before and after the cutoff date to ascertain the validity and propriety of the shipments and corresponding entries. Inquiring of management about any direct shipments by outside suppliers to customers and determining the appropriateness of related entries.
7 Are there adequate controls to ensure that the proper customer is invoiced for shipments?
Submit test data the customer who received the shipment but does not match the underlying customer information on the sales order.
8 Does management review all sales that are recorded on a weekly basis?
Observe and make inquiries about the managements’ comments made on weekly sales report
9 Do adequate controls exist to review company accounting policies regarding revenue recognition?
Observe and inquire about the policies regarding revenue recognition.
10 Do adequate controls exist to review the consistency of the estimation of the allowance for doubtful debts?
Review subsequent cash receipts from the customer, discusses unpaid accounts with the credit manager and examines the credit files.
These should contain customer's financial statements, credit reports and correspondence between the client and the customer. Based on this evidence, the auditor estimates the likely amount of non-payment for the customer, which is included in the estimate of the allowance for doubtful accounts. In addition, an allowance should be estimated for all other customers, perhaps as a percentage of the current accounts and a higher percentage of past due accounts. The auditor compares his/her estimate to the balance in the allowance account and proposes an adjusting entry for the difference.
Identify a possible test of controls for the control procedure, assuming a Yes answer to each question?
Tests of controls are auditing...
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