Control Results 1. All sales over $10,000 must be approved by the sales manager by initialing the customer's order. 1. There were only twenty-five sales over $10,000 in the sample. So, the auditor randomly collects an additional seventy-five sales transactions that were over $10,000. All were approved by the sales manager. 2. Credit must be approved by the credit department prior to shipment and noted on the customer's order. 2. Three sales were recorded without evidence of credit approval. The sales manager said she had approved the sales. No customer order could be found for two of the other sampled items. 3. Sales are recorded only when a shipping document is forwarded to the billing department. 3. No shipping document could be found for three of the sam- pled items. 4. The date of recording the sale must correspond to the date on the shipping document. 4. Four sales were recorded prior to the date of shipment. Your follow-up indicates that a temporary employee worked for the last two months of the fiscal year and was unaware of this requirement. 5. All prices are obtained from the current price list that is 5. All prices agreed with the appropriate price list. periodically updated by the sales manager. 6. The shipping department is not to ship products with- 6. No customer order could be found for two sample items as out first receiving an approved customer's order. indicated in Step 2. 7. Four billed quantities were for more than the customer order. Three of these took place near year-end. In addition, there was no customer order for the two items indicated in Step 2. 7. The billing department compares the quantity billed with the customer's order.

Auditing: A Risk Based-Approach (MindTap Course List)

11th Edition

ISBN:9781337619455

Author:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Publisher:Karla M Johnstone, Audrey A. Gramling, Larry E. Rittenberg

Chapter11: Auditing Inventory, Goods And Services, And Accounts Payable: The Acquisition And Payment Cycle

Section: Chapter Questions

Problem 38RQSC

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Question

Assume that you are using attributes sampling to test the controls
over revenue recognition of the Packet Corporation, a public company.
You will use the results as part of the evidence on which to base
your opinion on internal controls and to determine what substantive
auditing procedures you should performed on revenue and accounts
receivable. You have decided to test the following controls and have set
the risk of overreliance at 5%, the tolerable deviation rate at 5%, and the expected deviation rate at 1%. A sample size of 100 is used. (Note
that this sample size is just rounded up from the sample size of 93 that
would have been obtained from the appropriate table.) The results of
your testing are as indicated here.

a. Determine the upper limit of deviation for each of the controls.
b. What impact do these results have on the type of opinion to be
given on the client’s internal controls?
c. Indicate the potential misstatements that could result from the
control deviations.
d. Determine what substantive audit procedures should be performed
in response to each of the identified control deviations.

Control
Results
1. All sales over $10,000 must be approved by the sales
manager by initialing the customer's order.
1. There were only twenty-five sales over $10,000 in the sample.
So, the auditor randomly collects an additional seventy-five
sales transactions that were over $10,000. All were approved
by the sales manager.
2. Credit must be approved by the credit department
prior to shipment and noted on the customer's order.
2. Three sales were recorded without evidence of credit
approval. The sales manager said she had approved the
sales. No customer order could be found for two of the other
sampled items.
3. Sales are recorded only when a shipping document is
forwarded to the billing department.
3. No shipping document could be found for three of the sam-
pled items.
4. The date of recording the sale must correspond to the
date on the shipping document.
4. Four sales were recorded prior to the date of shipment. Your
follow-up indicates that a temporary employee worked for
the last two months of the fiscal year and was unaware of this
requirement.
5. All prices are obtained from the current price list that is 5. All prices agreed with the appropriate price list.
periodically updated by the sales manager.
6. The shipping department is not to ship products with- 6. No customer order could be found for two sample items as
out first receiving an approved customer's order.
indicated in Step 2.
7. Four billed quantities were for more than the customer order.
Three of these took place near year-end. In addition, there
was no customer order for the two items indicated in Step 2.
7. The billing department compares the quantity billed
with the customer's order.

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