$0.00
$500,000.00
$1,000,000.00
$1,500,000.00
$2,000,000.00
$2,500,000.00
$3,000,000.00
Sum of Absolute amount
March April May June July August
SeptemberOctoberNovembe r December
Cash Receipt Sales
REQUIRED
What does this chart tell you about potential risks of misstatement in accounts receivable?
Explain which assertions are at risk and the potential over/understatement in accounts receiv- able balance.
M12_AREN1983_15_SE_C12.indd 452 25/03/21 9:44 AM
453 4. Are all COD, scrap, equipment, and cash sales accounted for in the same manner as
charge sales, and is the record-keeping independent of the collection procedure?
5. Is the collection function independent of, and does it constitute a check on, billing and recording sales?
6. Are customer master files balanced regularly to general ledger control accounts by an employee independent of billing functions?
7. Are cash receipts entered in the accounts receivable system by persons independent of the mail-opening and receipts-listing functions?
8. Are receipts deposited intact on a timely basis?
REQUIRED
a. For each of the Items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect.
b. For each control, list a test of control to test its effectiveness.
c. For each of the items above, identify the nature of the potential financial misstatements.
d. For each of the potential misstatements in Part c. list an audit procedure to determine whether a material error exists.
12-38 3 4 YourTeam.com is an online retailer of university, college, and professional sports team memorabilia, such as hats, shirts, pennants, and other sports logo products. Consumers select the university, college, or professional team from a pull-down menu on the company’s website. For each listed team, the website provides a product description, picture, and price for all products sold online. Customers click on the product number of the item they wish to purchase.
YourTeam.com has established the following internal controls for its online sales:
1. Only products shown on the website can be purchased online. Other company products not shown on the website are unavailable for online sale.
2. The online sales system is linked to the perpetual inventory system, which verifies quanti- ties on hand before processing the sale.
3. Before the sale is authorized, YourTeam.com obtains credit card authorization codes electronically from the credit card clearing house.
4. Online sales are rejected if the customer’s shipping address does not match the credit card’s billing address.
5. Before the sale is finalized, the online screen shows the product name, description, unit price, and total sales price for the online transaction. Customers must click on the Accept or Reject sales buttons to indicate approval or rejection of the online sale.
6. Once customers approve the online sale, the online sales system generates a pending sales file, which is an online data file that is used by warehouse personnel to process ship- ments. Online sales are not recorded in the sales journal until warehouse personnel enter the bill of lading number and date of shipment into the pending sales data file.
REQUIRED
a. For each control, identify the related assertion.
b. For each control, describe potential financial misstatements that could occur if the con- trol were not present.
c. For each control, identify an important general control that would affect the quality of the control.
d. For each control, list a test of control to test its effectiveness.
12-39 3 The following misstatements are sometimes found in the revenue account balances:
1. Cash amounts received from collections of accounts receivable in the subsequent period are recorded as current period receipts.
2. The allowance for uncollectible accounts is inadequate due to the client’s failure to reflect depressed economic conditions in the allowance.
3. Several accounts receivable are in dispute due to claims of defective merchandise.
4. The pledging of accounts receivable to the bank for a loan is not disclosed in the finan- cial statements.
5. Goods shipped and included in the current period sales were returned in the subsequent period.
6. Long-term interest-bearing notes receivable from affiliated companies are included in accounts receivable.
7. The aged accounts receivable trial balance total does not equal the amount in the general ledger.
CHAPTER 12 I AUDIT OF THE REVENUE CYCLE
454
8. Several accounts receivable balances in the accounts receivable master file are not included in the aged trial balance report.
9. One accounts receivable customer included in the accounts receivable master file is included in the aged trial balance twice.
REQUIRED
a. For each misstatement, identify the balance-related or presentation- and disclosure-re- lated audit objective to which it pertains.
b. For each misstatement, list an internal control that should prevent it.
c. For each misstatement, list one test of details of balances audit procedure that the auditor can use to detect it.
12-40 7 The following are various potential frauds in the revenue cycle:
1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered.
2. The allowance for doubtful accounts was understated because the company altered the aging of accounts receivable to reduce the number of days outstanding for delinquent receivables.
3. The accounts receivable clerk stole cheques received in the mail and deposited them in an account that he controlled. He issued credit memos to the customers in the amount of the diverted cash receipts.
4. The company asked a major customer to accept a large shipment of goods before year- end. The customer was told that the goods could be returned without penalty if they could not be sold.
5. A cashier stole cash receipts that had been recorded in the cash register.
6. The company recorded “bill-and-hold sales” at year-end. Although the invoices were recorded as sales before year-end, the goods were stored in the warehouse and shipped after year-end.
7. The company did not record credit memos for returns received in the last month of the year. The goods received were counted as part of the company’s year-end physical inven- tory procedures.
8. A cashier stole cash receipts by failing to record the sales in the cash register.
9. The CFO recorded fictitious credit sales at the end of the year without recording the associated cost of sales and reduction in inventory.
REQUIRED
a. Indicate whether the fraud involves misappropriation of assets or fraudulent financial reporting.
b. For those frauds that involve misappropriation of assets, state a control that would be effective in preventing or detecting the misappropriation.
c. For those frauds that involve fraudulent financial reporting, state an audit procedure that would be effective in detecting the fraud.
12-41 7 The following audit procedures are included in the audit program because of height- ened risks of material misstatements due to fraud.
1. Search the accounts receivable master file for account balances with missing or unusual customer numbers (e.g., “99999”).
2. Send confirmations to customers for large sales transactions made in the fourth quarter of the year to obtain customer responses about terms related to the transfer of title and ability to return merchandise.
3. Search sales databases for missing bill of lading numbers.
4. Use audit software to search for journal entries posted to the sales revenue account from a nonstandard source (other than the daily sales journal).
REQUIRED
For each audit procedure:
a. Describe the type of fraud risk that is likely associated with the need for this audit proce- dure.
b. Identify the related accounts likely affected by the potential fraud misstatement.
c. Identify the related audit objective(s) that this procedure addresses.
M12_AREN1983_15_SE_C12.indd 454 25/03/21 9:44 AM
455