Review Questions

13-5 We are talking about whether “recorded sales are stated at the proper
amount”. So, this is an accuracy issue. So,

Assertion: Accuracy

Tests of controls: Test of control is conducted to see whether a policy is

being followed or not, a necessary procedure is performed or not etc. It is a
yes or no issue. Whatever document that you pick to check, you are
checking whether some procedures are done or not on the said document,
as indicated by maybe, an initial, a signature, a matching to another
document etc. etc. For example, in this case, one test of control that you
can do is,
1. Examine sales invoice for proper indication (may be initials) of internal
verification of sales amounts on the sales invoice.

Substantive tests of transactions: Substantive tests is also known as test of

details. It involves checking the details stated in the document chosen or
the financial numbers indicated thereon (i.e. the RM values). So, whatever
document that you pick to check, you are checking on the details like
dates, RM figures etc. In this case, to check on accuracy of billings, you
can,
1. Recompute (involving figures) information on sales invoices.
2. Trace entries in sales journal to related sales invoices (looking for
details and figures)
3. Trace details on sales invoices to shipping documents, approved price
lists, and customers’ orders.

13-7 There are three key points regarding proper authorization throughout a sales
transaction:
 Credit must be properly authorized before a sale takes place;
 Goods should be shipped only after proper authorization; and
 Prices, including basic terms, freight, and discounts, must be authorized.

The first two points are meant to prevent the loss of company assets by shipping to
fictitious customers or those who will fail to pay for the goods, whereas price
authorization is meant to ensure that the sale is billed at the price set by company
policy.

Discussion Questions and Problems

The lists are on control procedures. We are supposed to identify:

1. what audit objectives are being fulfilled by the said controls
2. how to test the said controls
3. what misstatements can occur if such controls are violate/don’t exist
4. if such misstatement occurred, what substantive procedures would have
 detected them

13-20 1. a. This is auditing in an IT environment. Much of it will be covered

in Audit 2. So don’t worry yet if you did not get this correctly. The
control involved is to make sure that Recorded sales are to valid
customers who are able to pay. (Occurrence)
b. To test this, you have to execute procedure using the computer
(because this an auditing in IT environment. Most of what you
have learnt so far are “manual” testing, not yet computerized
testing). You can Enter a sample of test transactions of credit
sales with amounts exceeding the credit limit to determine
whether the system allows processing of such credit sales.
Reverse all test data items. If the system allows, then controls
are not working well because the system should not have
allowed sales beyond the customers credit limit. If the system
rejects that test transaction, then the controls are working well.
For example, let’s say that one of the client’s customers, Jenny,
was granted a credit limit of RM100K. And presently there are
already sales outstanding for RM90K to Jenny. Try to create
another sale for, say RM20K to Jenny. If the system allows, then
the IT system control is not really working well. Additional sales
of RM20K would have caused total sales to Jenny to be more
than the RM100K credit limit, so the system should not have
allowed the additional sales to be processed. Delete the RM20K
sales test. Then try creating a sale of RM5K. This time the
system should allow it because total sales would still be within
the approved RM100K. Got it?
c. Sales may be overstated if customer is unable to pay for the
goods. You may end up with selling to unworthy customers and
later on ended up with bad debts.
d. Examine sales returns and write-offs of accounts during the year
to determine if returns and write-offs are the result of customers
unable to pay. Review aging of accounts receivable to
determine if accounts in older aging categories include sales
transactions that are unlikely to be collected.

2. a. All sales transactions are recorded. (Completeness)

b. Review the client's documentation for the sequence of shipping
documents. (control test. Can also observe. See whether the
necessary procedure is conducted or not)
c. Shipments may not be recorded due to missing shipping
documents which would understate sales.
d. Review the list of shipping documents to determine if there are
missing documents. Trace shipping document to invoice
(looking for the RM figures) and sales journal (substantive test)

3. a. This one is actually to prevent double shipment of the same

customer’s order. So, it is to make sure that Recorded sales are
for shipments actually made to non-fictitious customers.
(Occurrence)
 b. Inquire the procedure for cancellation of shipping documents
and examine evidence for such cancellation by the client. Once
shipment is made, the office copy of the shipping document
should be indicated as “fulfilled” so that no 2 nd or 3rd shipment
are made based on the same shipping document.
c. Sales may be recorded more than once. A shipping document
may be used to record another sale.
d. Trace sales journal entries to shipping document to ensure that
each sale is supported by a proper shipping document.

4. a. Sales transactions are correctly included in the accounts

receivable master file and are correctly summarized. (Accuracy /
Posting and Summarization)
b. Examine evidence such as staff initials performing such
reconciliation, and that the accounts receivable master file is
reconciled to the general ledger.
c. The ending accounts receivable general ledger balance does
not reflect transactions that are included in the accounts
receivable master file.
d. Trace selected sales invoices from the sales journal to the
accounts receivable master file and test for the amount. Foot
and cross-foot (procedure on “RM”) the sales journal and
accounts receivable master files, and trace totals (again, “RM”)
to the general ledger.

5. a. Recorded cash receipts are for funds actually received by the

company (Occurrence) and cash receipts are deposited and
recorded at the amounts received (Accuracy).
b. Observe whether accountant reconciles bank account.
c. Cash receipts may be recorded at incorrect amounts.
d. Prepare a proof of cash receipts. We will talk more about this
when we test cash later on.

6. a. All cash received is recorded in the cash receipts journal.

(Completeness)
b. Examine file of batch totals for initials of data control clerk.
c. There may be a missing record of cash received in the cash
receipt journal which understates the cash amount.
d. Obtain prelisting of cash receipts and trace amounts to the cash
receipts journal testing for amount. Compare the prelisting with
the deposit slip. Again, we will talk more about this when we test
cash later on.

7. a. Sales transactions are correctly classified. (Classification)

b. Examine document package for internal verification.
c. There may be incorrect posting to the general ledger (e.g.
accounts receivable for a cash sale).
d. Examine duplicate sales invoice (looking for details and RM
figures) for proper account classification.
 8. a. Cash receipts are recorded on the correct dates. (Cut-off /
Timing)
b. Observe unrecorded cash at a point in time to determine when it
is deposited and recorded.
c. Cash receipts may be recorded at an incorrect time or even
missed out from the cash receipts journal (theft of cash).
d. Compare date of deposit per bank statement to the dates in the
cash receipts journal and prelisting of cash receipts.

For 13-22, again, remember the definition of test of control and substantive test as
above. They are different in nature. Then indicate:
1. whether it is a test of control or substantive test
2. the audit objective involved
3. the type of evidence/procedures involve
13-22 1. a. Substantive test of transactions
b. Sales are recorded on the correct dates. (Cut-off / Timing)
c. Inspection of document and records

2. a. Test of control
b. Sales transactions are correctly included in the accounts
receivable master file and are correctly summarized. (Accuracy /
Posting and summarization)
c. Inspection of document and records

3. a. Substantive test of transactions

b. Recorded sales are correctly billed and recorded. (Accuracy)
c. Reperformance

4. a. Test of control
b. (1) Recorded sales are for shipments actually made to non-
fictitious customers. (Occurrence)

(2) Recorded sales are for the amount of goods shipped and are
correctly billed and recorded. (Accuracy)

(3) Sales transactions are correctly included in the accounts

receivable master file and are correctly summarized. (Accuracy /
Posting and summarization)

(4) Cash received is recorded in the cash receipts journal.

(Completeness)

(5) Cash receipts are deposited and recorded at the amounts

received. (Accuracy)

(6) Cash receipts are correctly included in the accounts

receivable master file and are correctly summarized. (Accuracy /
Posting and summarization)
c. Observation or inspection of document and records
 5. a. Test of control
b. Recorded sales returns are for returns from existing customers.
(Occurrence)
c. Inspection of document and records

6. a. Substantive test of transactions

b. (1) Cash received is recorded in the cash receipts journal.
(Completeness)

(2) Cash receipts are recorded on the correct dates (Cut off /
Timing)
c. Inspection of document and records

7. a. Substantive test of transactions

b. Recorded cash receipts are for funds actually received by the
company. (Occurrence)
c. Inspection of document and records

13-23

POSSIBLE ERROR OR FRAUD CONTROL

1. Invoices are sent for shipped j. Control amounts posted to the
goods, and are recorded in the accounts receivable ledger are
sales journal, but are not posted to compared with the control totals of
any customer accounts. invoices.
2. Invoices for goods sold are posted g. Monthly statements are mailed to
to incorrect customer accounts. customers with outstanding
balances.
3. Invalid transactions granting credit e. Goods returned for credit are
for sales returns are recorded. approved by the supervisor of the
sales department.
4. Goods are removed from inventory f. Approved sales orders are required
for unauthorized orders. for goods to be released from
warehouse.
5. Credit sales are made to a. Customer orders are compared
customers with unsatisfactory with an approved customer list.
credit ratings.
6. Invoices are sent to co-participants i. Sales invoices are compared with
in a fraudulent scheme, and sales shipping documents and approved
are recorded for fictitious customer orders before invoices
transactions. are mailed.
7. Goods shipped to customers do h. Shipping clerks compare goods
not agree with goods ordered by received from warehouse with
customers. approved sales orders.
8. Invoices are sent for shipped k. Daily sales summaries are
goods but are not recorded in the compared with control total of
 sales journal. invoices.

13-24 a. (2) b. (3) c. (4)