Chapter 14: Audit of Sales And Collection Answers

* Documents used: customer order, sales order, shipping document, sales invoice, sales journal, remittance advice, bank deposit list, cash receipts jornal, credit memo, sales return and allowance journal, uncollectable account authorization form, a/r master file, a/r trail balance, monthly statement

This control is directly related to the accuracy transaction-related audit objective for sales. The auditor might test the effectiveness of this control by examining a sample of duplicate sales invoices for the clerk’s initials indicating that the unit selling price was verified.

Fill in the blanks with the correct vocabulary terms from this chapter. 1. Judy was unaware that checks were processed through at her bank. before they arrived

The Firm offers direct deposit of paychecks as a convenience to our employees. Participation in direct deposit is voluntary. Direct deposit forms can be obtained from your supervising Partner or the Firm Administrator.

Cash receipts and cash disbursements are from one and only one cash account. New cash accounts are added to the database when they are opened with a deposit. Sometime after this checks can be written from them. Employees are added to the database on the day they are hired (but before they are involved in a purchase or sale, or involved with a vendor). Cash accounts can have many receipts and many disbursements.

Credit limits are set to manage the spending of their customers, this way Office Products Depot can ensure that customers aren’t purchasing too many goods. This means that if the customer is unable to pay their account Office Products Depot loses say $2000 (a company’s credit limit) rather than $10000. To set these credit limits, Office Products Depot estimates the amount of money they estimate the customer will spend over a two month period. This number is then rounded to the nearest $500 to make recording credit limits easier. Customer payment of money owed is managed by the same salesperson that the customer first dealt with, as they receive commission based on money received by their particular customers. The salesperson is often in direct contact with the customer to make sure the credit is being paid off. However, sometimes the credit limit of a particular customer can be increased, if they have paid well in the past. An example of this is Jones Stationery, who is $300 over their credit limit. When Office Products Depot sends invoices to their customers, they send a separate tax invoice for each provided service. This makes the customer more aware of the each individual charge. Monthly statements are also sent out aswell. Refunds and reductions are also given occasionally to customers, to maintain a good relationship, and fix incorrectly recorded charges. An example of this Office Products Depot

Once the dollars are received to the bank, the current process of Electronic Payment Posting entails the file being processed through the system, the system accepts all items that are clean and items that are not clean (with issue) fall into an edit to be reviewed/amended by staffed and processed manually.

In terms of the confirmation of cash balances, what deficiencies can you identify in terms of the procedures

d. Trace the date, check number, and amount of outstanding item – Occurrence & Completeness. (AU-C 315.A114 a.i-ii)

b. The bogus debit memos for accounts payable. – The most reliable form of evidence that the auditors could have obtained in this situation would be confirmations. The auditors should have sent confirmations to vendors, suppliers, and creditors confirming the amount that Crazy Eddie owed them. The amounts reportedly owed could then be matched with the amounts recorded in the company’s accounting records. Auditors should question any discrepancies.

11. Print paychecks. Print paychecks, either manually on individual checks or, much more commonly, through a computer printer, with the printouts using a standard format that itemizes all wage calculations and deductions on the remittance advice. If direct deposits are made, a remittance advice should still be printed and issued. 12. Enter payroll information in general ledger. Use the information in the payroll register to compile a journal entry that transfers the payroll expense, all deductions, and the reduction in cash to the general ledger (see Chapter 13, “Payroll Journal Entries”). 13. Send out direct deposit notifications. If a company arranges with a local bank to issue payments directly to employee accounts, then a notification of the accounts to which payments are to be sent and the amounts to be paid must be assembled, stored on tape or other media, and sent to the bank (see Chapter 10, “Payments to Employees”). 14. Deposit withheld taxes. The employer must deposit all related payroll tax deductions and employer-matched taxes at a local bank that is authorized to handle these transactions. The IRS imposes a rigid deposit schedule and format for making deposits that must be followed in order to avoid penalties (see Chapter 8, “Payroll Taxes and Remittances”). 15. Issue paychecks. Paychecks should, at least occasionally, be handed out directly to employees, with proof of identification required; this is a useful control point in larger

Following the risk assessment procedures, substantive procedures are designed and conducted to detect material misstatements of relevant assertions. Substantive procedures include analytical procedures and tests of details. Analytical procedures involve evaluations of financial statement information by a study of relationships among financial and nonfinancial data. Tests of details may be divided into three types. One test is the test of account balances to address whether there are misstatements in the ending balance of an account. In the case of Crazy Eddie, auditors should have put greater attention to inventory and accounts payable accounts. The second test is a test of classes of transactions to determine whether particular types of transactions have been properly accounted for during the period. Crazy Eddies fraudulently classified these transshipping transactions as retail sales to inflate its sales revenue and continue growth at existing stores. A key ratio for retailers is to compare growth in existing stores to growth from new stores. The third and final test is a test of disclosures to evaluate whether financial statement disclosures are properly presented. Crazy Eddie prepared bogus debit memos of over $20 million to understate accounts payable.

Standardized journal entries are used for recurring journal entries. Journal entries are supported and authorized before being posted. System logic prevents journal entries for which debits do not equal credits. The system will not allow journal entries to be recorded to a closed accounting period. System logic will not allow duplicate journal entry numbers. A procedure detailing the calculation of specific accruals and recording rules exists and is consistently applied. CMA solutions identify unauthorized journal entries. CMA solutions identify journal entries for which debits do not equal credits. CMA solutions identify journal entries that have been recorded after a closed accounting period. CMA solutions identify duplicate journal entries.

Cardholders who have incurred charges must submit an expense report, similar to the Travel and Expense process, through the company approved expense reporting tool, Concur Expense within 30 days. All expense reports are to have appropriate manager approval. Further, CMC is relying on the independent approver’s (supervisor/manager) diligence in the

Next morning, these cheques are delivered to the respective banks between 9:00 to 9:30AM. In the same manner, other banks present their clearing drawn on Habib Bank. Total number of cheques and their amount delivered to other banks and received from them are written on the Clearing House schedule branch for their payment. After proper scrutiny of cheques,