Case 5 2

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Case 5 - Exercise 2

Abernethy and Chapman
Internal Control Evaluation

Client:
Prepared by:
Date:

Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the operating efficiency of controls in the revenue and cash receipts cycle. For each individual test, indicate the anticipated results if the control procedure is working properly. Also, if the control is not functioning properly, list the potential problems that exist. Use the following format for your response:

Step
Anticipated Results
Potential Problem(s)
1-A
The total listed on the sales invoice should agree with the total on the sales invoice slip. In addition, evidence should be present to indicate that a Lakeside employee has already made this same
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Because the credit system is not well documented, the auditor will be searching for evidence that sales were potentially made without credit approval. Such evidence would have an effect on the auditor’s judgment as to the amount of evidence needed in examining the allowance account and bad debt expense.
2-A
Each debit entry should be corroborated by an appropriate sales invoice agreeing as to amount and customer.
This test has major significance in that it can alert the auditor to any falsification of sales for the year. Fictitious sales could easily be created by Lakeside since they prepare all sales invoices and other documents internally.
2-B
Each credit should agree with the cash remittance list as to amount and possibly date of payment depending upon the method of posting.
This tracing could denote errors in postings within the system. Errors could indicate lapping by company employees.
2-C
Each credit to a specific account should agree with the listings of individual items on the bank deposit slips.
Again, lapping or attempts by employees to cover cash shortages may be uncovered through this test.
3
For each of the customers, complete and updated credit reports should be on file.
The use of credit reports is an essential step in establishing an appropriate credit-granting system. The presence of these reports would indicate that the control procedure is operating efficiently. If the reports are missing or

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