Exam (elaborations) ANSWER KEY TO Applied Auditing, Ma. Elenita Balatbat Cabrera, 2011 Edition

Exam (elaborations) ANSWER KEY TO Applied Auditing, Ma. Elenita Balatbat Cabrera, 2011 Edition Auditor’s reports are important to users of financial statements because they inform users of the auditor’s opinion as to whether or not the statements are fairly stated or whether no conclusion can be made with regard to the fairness of their presentation. Users especially look for any deviation from the wording of the standard unqualified report and the reasons and implications of such deviations. 1-2. Other requirements for an effective audit are: a. Comprehensive knowledge of GAAP; b. Understanding of internal control concepts; c. Understanding of the client’s unique system of internal control; and d. Knowledge of evidence gathering and evaluation methodology. 1-3. The scope paragraph tells what the auditor did, and whether or not the examination was conducted in accordance with generally accepted auditing standards (GAAS). The opinion paragraph tells what the auditor found, and whether or not the financial statements conform to generally accepted accounting principles (GAAP) in all material respects. 1-4. An engagement letter is the agreement or understanding between the CPA and his/her client concerning the nature of the engagement. It provides protection for the CPA in the event of subsequent legal action alleging negligence or breach of contract. By committing the agreement to writing, the engagement letter also minimizes future misunderstandings between the CPA and client concerning the services to be performed by the CPA. 1-5. The audit program is an important part of the systematic approach to auditing, and demonstrates that the audit was properly planned. 1-6. The pre-audit conference should be attended by all members of the audit team, including the partner in charge of the examination. The conference should cover the following areas: a. Nature of the client’s activities; b. General nature of the client’s system of internal control; c. Unique accounting practices; d. Duties of individual audit team members; and e. Known areas of high audit risk. CHAPTER 1 OVERVIEW OF THE AUDIT PROCESS 1-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition 1-7. The main feature distinguishing the interim audit phase from the final audit phase is the focal point. In the interim audit, the primary focus is on testing the client’s internal controls as a means for further reduction of assessed control risk. In the final audit, the auditor is primarily concerned with the examination of transactions and balances. 1-8. The accuracy of transactions and balances is a function of the reliability of the information system. An effective control environment, accounting system, and control activities (the information system), together with a system of monitoring such that controls adapt to a changing environment, serves to produce accurate financial data. Weak controls are more likely to produce inaccurate financial data. By first testing the information system, the auditor is able to increase or decrease the nature, timing, and extent of transaction and balance testing according to his/her assessment of control risk. 1-9. The ten generally accepted auditing standards, along with the related statements on auditing standards, provide a framework by defining the requisite quality to be achieved in performing an audit. 1-10. Attestation refers to an expert communicating a conclusion about the reliability of someone else’s assertion. Auditing is a form of attestation in that the auditor communicates, to third party financial statement users, his/her conclusions regarding the fairness of management’s assertions contained in the financial statements. The independent auditor is considered an “expert” in both accounting and auditing. 1-11. In planning an audit, an auditor must be familiar with the client’s industry, business activities, accounting system, and policies and procedures. Once the assertions to be tested have been identified, the auditor must assess the risk of their being misstated. Auditors must be reasonably sure of issuing an appropriate opinion. Hence, they must consider the risk of misstatements and the various procedures available for gathering audit evidence as a basis for forming an opinion. Audit planning includes designing the specific procedures to be performed and assigning personnel to work on the audit. The audit report indicates that auditors conduct audits in accordance with generally accepted auditing standards. Further, the report communicates the role of risk in the audit process by stating that those standards require auditors to plan and perform the audit to obtain reasonable assurance about (not to prove) whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Hence, an audit involves risk. Finally, auditors express an opinion, not a guarantee. However, they believe that their audit provides a reasonable basis for their opinion. Overview of the Audit Process 1-3 1-12. Auditing standards indicate that auditors should report major issues discussed with the entity’s management prior to being retained as auditor, including discussions regarding the application of accounting principles and auditing standards. Discussion of such matters may place pressure on the auditor to yield to management’s view. Making the audit committee members aware of such matters should enable them to better monitor the auditor’s independence. Standards do not preclude clients from making suggestions about audit staff. Clients frequently make requests to have persons on the audit who have experience in the industry. If a client requests that minority persons not be assigned to an audit, however, the auditor must carefully consider the ethical implications of that request. 1-13. Auditing standards require auditors associated with financial statements to issue a report on them. An auditor is associated with financial statements when he or she (a) “has consented to the use of his [her] name in a report, document, or written communication containing the statements,” or (b) has prepared or assisted in preparing the financial statements. An auditor who prepares or assists in preparing financial statements is associated even if his or her name is not included with the statements. Typing the financial statements on plain paper rather than on the auditor’s letterhead therefore cannot be used to avoid association and the requirement to issue a report. 1-14. In determining whether financial statements are presented fairly in conformity with GAAP, the auditor should consider whether:  The accounting principles selected and applied have general acceptance. The accounting principles followed in preparing the financial statements must have general acceptance, which means that the principles must be GAAP. Auditing standards define GAAP as a “technical accounting term which encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.” No single reference source exists for GAAP. Rather, auditing standards establish a hierarchy of sources to be followed when determining which principle applies to a particular situation.  The accounting principles are appropriate in the circumstances.  The statements contain appropriate disclosures.  The financial statements reflect the underlying events and transactions in a manner that presents the financial position, results of operations, and changes in financial position within a range of acceptable limits; that is, limits that are reasonable and practicable to attain in financial statements. 1-15. Auditing standards require the auditor to disclose the effects of deviations from GAAP on the financial statements. As a result, clients often choose to adjust the financial statements for the deviations. 1-16. An auditor may not offer reasons for the lack of independence since such explanations might mitigate the lack of independence in the view of the reader. 2-1. Audit risk: The risk that the auditor may unknowingly fail to appropriately modify his/her opinion of financial statements that are materially misstated. Inherent risk: Relates to the susceptibility of an account balance or class of transactions to error that could be material. . .assuming that there were no related internal controls. Control risk: The risk that material errors or irregularities are not prevented or detected by the system of internal control. Detection risk: The risk that errors or irregularities which are not prevented or detected by the system of internal control, are not detected by the independent auditor. 2-2. Study of the business and industry, and application of analytical procedures during the planning stage of the audit assist in evaluating inherent risk. These procedures may permit the auditor to assess inherent risk below the initial 100% assumed level. 2-3. Sources of business and industry information are the following: a. Management inquiry b. Permanent audit workpaper file c. Internal client documents (e.g. correspondence files, minutes, accounting manuals, and policy and procedures manuals) d. PICPA audit and accounting guides e. Industry trade publications f. Government publications g. Credit reports (Dunn & Bradstreet, banks, etc.) h. Computer data bases i. Business periodicals 2-4. a. The audit risk model is Audit risk (AR) = Inherent risk (IR) x Control risk (CR) x Detection risk (DR) b. The audit risk model is useful in managing audit risk for assertions. By determining planned audit risk for an assertion, assessing inherent and control risks, an auditor can determine the allowable detection risk (the amount of CHAPTER 2 AUDIT PLANNING 2-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition detection risk an auditor can allow) for an assertion. Allowable detection risk is used to determine the nature, timing, and extent of audit procedures for the assertion. 2-5. The amount of audit evidence an auditor must gather varies inversely with allowable detection risk. As allowable detection risk decreases, the amount of evidence required increases, and vice versa. Chapter 2 introduces audit procedures and discusses how auditors modify audit procedures to obtain sufficient competent evidential matter by changing (1) the nature, (2) the timing, or (3) the extent of procedures. 2-6. a. Analytical procedures are used for these broad purposes: To assist the auditor in planning the nature, timing, and extent of other auditing procedures. As a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions. As an overall review of the financial information in the final review stage of the audit. b. An auditors’ expectations are developed from the following sources of information: Financial information for comparable prior periods giving consideration to know changes. Anticipated results--for example, budgets, forecasts, and extrapolations. Relationships among elements of financial information within the period. Information regarding the industry in which the client operates. Relationships of financial information with relevant nonfinancial information. c. The factors that influence an auditor’s consideration of the reliability of data for purposes of achieving audit objectives are whether the Data were obtained from independent sources outside the entity or from sources within the entity. Sources within the entity were independent of those who are responsible for the amount being audited. Data were developed under a reliable system with adequate controls. Data were subjected to audit testing in the current or prior year. Expectations were developed using data from a variety of sources. 2-7. a. (4) b. (4) 2-8. a. (1) b. (1) c. (1) 2-9. a. (1) b. (2) c. (3) Audit Planning 2-3 2-10. a. The audit risk model gives the following results: AR = IR x CR x DR (or) DR x AR / (IR x CR) (1) 2.5% (4) 3.33% (2) 0.67% (5) 2.5% (3) 1 In the third situation, the auditor does not have to accumulate any evidence because inherent risk and control risk give the appropriate level of planned audit risk. b. (1) 3 (tied) (4) 2 (2) 5 (5) 3 (tied) (3) 1 2-11. a. 1. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify an opinion on financial statements that are materially misstated. 2. Inherent risk is the susceptibility of an account balance or class of transactions to error that could be material, when aggregated with error in other balances or classes, assuming that there were no related internal controls. Control risk is the risk that error in an account balance or class of transactions that could be material, when aggregated with error in other balances or classes, will not be prevented or detected on a timely basis by controls. Detection risk is the risk that an auditor’s procedures will lead the auditor to conclude that error in an account balance or class of transactions that could be material, when aggregated with error in other balances or classes, does not exist, when in fact such error does exist. 3. Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk relates to the auditor’s procedures and can be changed at the auditor’s discretion. Detection risk should bear an inverse relationship to inherent and control risk. The less inherent and control risk the auditor believes exists, the greater the acceptable detection risk. b. 1. Materiality is the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. This concept recognizes that some matters, either 2-4 Solutions Manual to Accompany Applied Auditing, 2006 Edition individually or in the aggregate, are important for the fair presentation of financial statements in conformity with generally accepted accounting principles whereas other matters are not important. 2. Materiality is affected by the nature and amount of an item in relation to the nature and amount of items in the financial statements under examination, and by the auditor’s judgment as influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements. 2-12. The primary issue raised here is how friendly an auditor should be with client personnel. This situation is especially interesting in light of the auditor’s view of the relationship prior to being assigned significant responsibility. The issue is whether Josie is trying to become friendly in order to try to manipulate the auditor’s decisions. 3-1. Directly. Higher levels of control risk induce auditors to audit larger samples of receivables, with confirmation date closer to the fiscal year end date. As for nature of the procedures: higher levels of control risk induce auditors to use positive confirmations instead of negative confirmations, and to consider vouching subsequent payments by the customers. 3-2. The features of a cash receipts internal control system which would be expected to prevent an employee from absconding with company funds and covering with funds from the employee pension fund is the prohibition against one employee having custody of company funds and noncompany funds. The auditor can detect such transfers by controlling and counting both funds simultaneously. To prevent the cash receipts journal and recorded cash sales from reflecting more than the amount shown on the daily deposit slip, the internal control system should provide that receipts be recorded daily and intact. A careful bank reconciliation by an independent person could detect such errors. 3-3. A strength is defined as a control procedure that can detect, prevent or correct errors in a timely matter from entering into the accounting records that form the basis of financial statements. A weakness is the lack of a control procedure where the auditor thinks one should exist. Weaknesses are not subject to test of controls auditing because no reliance is placed on a weakness. Strengths must be audited because the review phase only describes apparent strengths that may not actually exist. 3-4. The evaluation after the review phase was to determine which controls appeared adequate as a basis for justifying a low control risk assessment. The final assessment after test of controls auditing is to determine if the controls are actually operating as well as they appeared to be. 3-5. a. An order entry department generally receives customers’ requests to purchase merchandise either by telephone or in the form of a written purchase order from the customer. A purchase order is a legal offer to purchase goods under the terms specified. In some entities, on receipt of an order, the order entry department generally prepares a sales order. The sales order is the first document prepared by the merchandiser in the sales and collections cycle, CHAPTER 3 AUDIT OF THE REVENUE AND COLLECTION CYCLE: TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS 3-2 Solutions Manual to Accompany Applied Auditing, 2062 Edition and it should be prenumbered to facilitate control over processing transactions. A copy of the sales order, acknowledging that the order has been received and is being processed, may be mailed to the customer. Four copies of the sales order are sent to the credit department, which either approves or denies credit and returns a copy of the sales order to the order entry department. The credit department then sends a copy bearing credit approval (assuming it is granted) to the warehouse, the shipping department, and the billing department. The sales order bearing credit approval serves as authorization to warehouse personnel to release goods to shipping. Shipping personnel verify that the quantity and description of goods received from the warehouse match the copy of the sales order received directly from order entry. Billing matches the customer order, the sales order, and the shipping document before recording the sale. In some entities, when an order is received, the purchase order is sent to the credit department for approval. The credit department’s decision is returned to the order entry department. When the credit department has approved the sale, a multipart sales invoice is prepared. One copy serves as a shipping order, another as the bill of lading, and another is sent to billing. The sale, however, is not recorded (entered in the sales journal) until the bill of lading is received by billing. b. Before goods are shipped, the customer’s credit must be approved. The credit department maintains a list of unauthorized customers and their credit limits, which an employee must review to determine whether to accept an order. A credit department employee signs a copy of the sales order authorizing the credit sale. When an order is received from a prospective customer not on the list or when a customer has exceeded the authorized credit limit, the credit department generally conducts a credit investigation and makes a decision to accept or reject the order. When the order is accepted, a copy of the sales order is sent to the warehouse and a copy is retained in the credit department. c. On the basis of the sales order approved by the credit department, warehouse personnel issue goods to the shipping department. The accounting department, rather than warehouse personnel, maintains perpetual records for the inventory. d. The shipping department verifies that the goods received from the warehouse to be shipped agree with the quantity and description of goods on the sales order. The shipping department then packs the merchandise, arranges transportation with a common carrier, and prepares a shipping document. The shipping document is a multicopy document that lists the items, gives instructions to the common carrier as to whom and to what the address to ship the merchandise, and may serve as a packing slip for the merchandise. Copies of the shipping document are given to the carrier, and copies are sent to the billing department. Sometimes entities use a bill of lading as a AuditoftheRevenueandCollectionCycle: TestsofControlsandSubstantiveTestsofTransactions 3-3 shipping document; it may include a general description of the goods and a quantity or number of pounds. e. Billing involves notifying the customer (by means of an invoice) of the amount due for the goods or services delivered. The billing function is typically performed by a section of the accounting department and should be independent of sales executives. Billing personnel should (1) account for the sequence of shipping documents to determine that all shipments are billed, (2) compare the details included on the sales order with the shipping documents to serve as an independent check on shipping, (3) prepare the sales invoice from data on the shipping document and sales order, (4) price the invoice by reference to an authorized price list obtained from the sales department, (5) extend and foot the invoices, and (6) account for the sequence of sales orders and shipping documents to ensure that all sales are recorded. Some entities prepare a turnaround document simultaneously with the sales invoice. A turnaround document is a form the customer mails back to the merchandiser, along with payment of the invoice that facilitates handling and processing of cash receipts. It contains information, such as the customer’s name and account number, and a place to indicate the amount of the payment. Prior to mailing, each invoice should be reviewed by a person not involved in its preparation. The review should cover the propriety and accuracy of prices, extensions, footings, credit terms, and freight charges. The billing department should develop a total of sales invoices and submit it directly to the clerk responsible for maintaining the accounts receivable control account. The accounts receivable subsidiary ledger clerk or data processing department prepares the sales journal and posts debits to individual accounts in the accounts receivable subsidiary ledger. Subsequent reconciliation of the accounts receivable subsidiary ledger to the accounts receivable control account is an important aspect of internal control. Shipping documents are used by accounting to update perpetual inventory records when they are maintained. f. One of the best controls over cash receipts is a lockbox system in which customers mail their remittances to a post office box controlled by a bank. The bank’s bonded employees obtain the mail from the post office box, make a listing of the amount by customer, mail the remittance advices and a copy of the list to the business, and deposit the cash. When mail containing remittances comes directly to the entity, the first step in the control process is to obtain a listing of the cash and checks. This listing is generally prepared by a receptionist or a mailroom employee designated to open mail. However, the person should have a high level of integrity and not be otherwise involved in handling cash or maintaining accounts receivable records. The listing of cash receipts, referred to as a prelisting, serves to establish control over cash receipts. Remittance advices are prepared if necessary, and when the listing 3-4 Solutions Manual to Accompany Applied Auditing, 2062 Edition has been prepared, the cash and remittance advices are separated. The cash is given to the cashier to prepare the bank deposit, and the remittance advices are given to the accounts receivable clerk for preparing the cash receipts journal and updating the accounts receivable subsidiary records. The employee preparing the prelisting also develops a total of cash receipts to send directly to the accounting department supervisor, who maintains control over the general ledger accounts. g. A business issues a credit memo when a customer returns merchandise or when a price adjustment is allowed. Credit memo authorizations should bear the signature of an employee with authority to issue a credit memo and should be based on a receiving report when merchandise has been returned, or on correspondence between the sales department and the customer when a price adjustment has been authorized. h. The allowance for uncollectible accounts expense is the result of an adjusting entry, which should be approved by the controller or chief accountant. Any entries recording uncollectible accounts expense should bear the written authorization of the controller. i. After exhausting all reasonable efforts to collect accounts, businesses should write off accounts judged to be uncollectible. Frequently, accounts are written off after the customer declares bankruptcy. Accounts written off should be transferred to a separate control account, and statements should continue to be sent to those debtors in an effort to collect the account. 3-6. a. A merchandiser prepares a shipping document that includes the name and address of the customer and a description of the goods. The document is a contract between the seller and the carrier and is signed by the carrier when it accepts the goods. Businesses often use a bill of lading as a shipping document. The document may be a copy of the invoice or a delivery ticket. The signature of the carrier on the shipping document provides externally created evidence that a sale has occurred. Accounting for the numerical sequence determines that all shipments are recorded as sales. b. A customer attaches a remittance advice to a check in payment of an invoice. The document may be a turnaround document, a part of a check, or a statement identifying the invoices being paid. Remittance advices facilitate recording cash receipts. If a customer does not return a remittance advice, the employee opening the mail usually prepares one. A remittance advice indicates the date and amount of payment and the invoices paid. Remittance advices are separated from cash and given to the accounts receivable clerk for posting to accounts receivable. AuditoftheRevenueandCollectionCycle: TestsofControlsandSubstantiveTestsofTransactions 3-5 c. Uncollectible account forms authorize an accounting clerk to write off an account receivable as an uncollectible account. The form provides permanent written evidence that authorization was made for writing off an account. 3-7. Managers may experience pressure to show high profits and may inflate sales because of the pressure to meet target profits established by senior managers, to obtain bonuses, to retain the respect of senior managers, or even to retain their jobs. 3-8. Until a record of cash received has been made, removing cash is one of the easiest forms of fraud to commit and among the hardest to detect because records do not reflect what has occurred. 3-9. Answers will vary. Three possible examples are the following:  A cashier in a retail establishment who does not ring up a transaction on the cash register can generally take the cash without detection. Ringing up the transaction adds the receipt to the total cash receipts, which can be compared to the cash on hand.  An employee who has access to cash receipts and maintains accounts receivable records can record a sale at an amount lower than the invoice amount. When the customer pays, the employee takes the difference between the invoice and the amount recorded as a receivable.  An employee who makes the cash deposit and also prepares the bank reconciliation can withhold cash and hide the shortage by overstating deposits in transit on the bank statement, underfooting the list of outstanding checks, or omitting outstanding checks from the outstanding check list. Routinely testing bank reconciliations should uncover this form of fraud. 3-10. Auditors are not required to perform tests of controls. However, when a client has effective internal control, performing tests of controls is cost effective because it may provide a basis for the auditor to assess control risk at less than maximum. Assigning a reduced level of risk to control risk reduces the amount of substantive testing the auditor must perform. Substantive tests are more expensive to perform than tests of controls. Hence, auditors perform tests of controls when they believe it will enable them to reduce the amount of substantive testing. Also, auditors may perform much of the testing of controls before year end, thus spreading the audit work. 3-11. Adjustments to sales include cash discounts, sales allowances or reductions in price, returns of merchandise, volume rebates, corrections of billing errors, and write-offs of uncollectible accounts. The greatest concern from a control point of view is that one of these types of transactions will be recorded to cover a misappropriation of cash receipts. 3-6 Solutions Manual to Accompany Applied Auditing, 2062 Edition 3-12. The following potential misstatements could arise:  Fictitious cash receipts may be recorded, or cash receipts may be misappropriated.  Cash may be misappropriated and lapping may occur.  Bank reconciliations may cover shortages.  Credits posted to customers’ accounts may be overstated or understated.  Entries may be made to the wrong accounts. 3-13. Auditors’ primary concern with regard to uncollectible accounts is that accounts written off have actually become uncollectible, rather than being written off to cover a misappropriation. To prevent accounts from being written off to cover misappropriations, any account written off must be authorized by a responsible official not involved in the granting of credit. The auditor usually tests the effectiveness of this control by examining the approvals of accounts written off. For a sample of accounts written off, the auditor generally examines correspondence indicating that efforts were made to collect the account and that the account is uncollectible. Sometimes the auditor examines credit reports on the accounts. The auditor should trace a sample of the entries to the accounts receivable accounts. 3-14. 1. (c) Mailing monthly statements to customers with outstanding accounts will detect invoices posted to the wrong accounts. Customers whose accounts were misposted for goods not ordered will contest the statements. 2. (g) Each shipping document should have a corresponding invoice when the goods are shipped. The appropriate direction of testing is from the shipping documents to the sales invoices. 3. (f) Daily sales summaries are from the book of original entry – the sales journal. Comparing the summaries with the total of invoices will detect failure to record all invoices. 4. (k) Comparing control total amounts posted to the accounts receivable (subsidiary) ledger with the control total of all invoices for the same period should detect invoices not posted. 5. (i) Credit approval should be received before sales are made. Thus, shipping to customers on an approved list should reduce the risk of sales to customers with unsatisfactory credit. 6. (b) An approved sales order should be presented to the storekeeper before release of goods from the warehouse to prevent goods from being removed for unauthorized orders. AuditoftheRevenueandCollectionCycle: TestsofControlsandSubstantiveTestsofTransactions 3-7 7. (d) Requiring shipping clerks to compare the amounts and types of goods received from the warehouse with approved sales orders ensures that goods shipped agree with those ordered by customers. 8. (l) Comparing sales invoices with shipping documents will ensure that each invoice is supported by a shipment. Fictitious sales – i.e., those for which no shipment was made – should be detected. 9. (p) The total receipts credited to customer accounts in the subsidiary ledger should equal the total receipts deposited, given that daily receipts are deposited intact. 10. (c) Checks misappropriated (stolen) prior to forwarding to the cashier will not be posted to customer accounts (assuming that the remittance advices were stolen as well). Thus, customers will complain when their payments fail to be reflected in the balances on the monthly statements. 11. (c) Mailing monthly statements to customers with outstanding accounts will detect receipts posted to the wrong accounts. Customers whose accounts were misposted will contest the statements. 12. (p) If more than one customer account is credited for the same cash receipt, the error will be detected when the total of the amounts posted to the accounts receivable ledger is compared with the total cash receipts. 13. (s) The bank reconciliation will detect errors in recording cash receipts (and disbursements). The balance in the ledger will not reconcile with the amount in the bank statement. 14. (p) If the checks are misappropriated (stolen) prior to deposit, the total of the amounts posted to the accounts receivable ledger will be greater than the validated bank deposit slip. 15. (n) Invalid sales returns are prevented by requiring approval of returns by the sales department supervisor. 3-15. 1) e 2) a 3) c 4) f 3-16. 1) d 2) a 3) c 4) b 3-17. 1) a 2) a 3) d 4) d 3-18. 1) b 2) b 3) c 4) b 3-19. 1) b 2) a 3) c 3-8 Solutions Manual to Accompany Applied Auditing, 2062 Edition 3-21. 1. a. Accounting for shipping documents to determine that all shipments are billed. b. Observe procedure and, for a sample of shipping documents, examine sales invoices. c. Completeness 2. a. Prelisting of cash receipts and cash register procedures are monitored. b. Compare deposit to cash register total and prelisting. c. Completeness 3. a. A monthly statement should be mailed to customers by someone not involved in handling accounts receivable or cash. b. Observe procedure and examine follow-up files. c. Existence or occurrence. 4. a. For goods shipped, goods should be counted and descriptions and quantities should be compared to quantities and descriptions on sales orders and shipping documents prior to shipping. b. Observe procedure. For a sample, examine signature on documents evidencing performance. c. Rights and obligations. 5. a. Accounting for all sales invoice numbers to ensure that all are recorded. b. Observe procedure. For a sequence of invoices, account for the numerical sequence. c. Completeness 6. a. Shipping documents should be accounted for to determine that all items shipped are billed. b. Observe procedures. Examine invoices for a sample of shipping documents. c. Completeness 7. a. For goods shipped, goods should be counted and descriptions and quantities should be compared to quantities and descriptions on sales orders and shipping documents prior to shipping. b. Observe procedure. For a sample, examine signature on documents evidencing performance. c. Rights and obligations 8. a. Prenumbered sales invoices should be used and accounted for to determine that all sales are recorded (in the proper period). b. Observe procedure. Examine entries for a sequence of sales invoices in sales journal. c. Completeness AuditoftheRevenueandCollectionCycle: TestsofControlsandSubstantiveTestsofTransactions 3-9 3-22. 1. a. Existence, completeness b. Cash may be misappropriated or lapping may occur. c. Observe separation of duties and inquire of personnel about their responsibilities. 2. a. Existence, completeness b. Fictitious cash receipts may be recorded or cash receipts may be misappropriated. c. Observe whether a prelisting is prepared and inquire of preparer about the procedures followed. 3. a. Existence, completeness b. Cash may be unrecorded or misappropriated. c. Observe the procedure and inquire of personnel who perform the procedure. 4. a. Existence b. Bank reconciliations may hide shortages. c. Examine bank reconciliations and determine that preparer does not have conflicting interests. 5. a. Valuation b. A customer may take a larger discount than appropriate. c. For a sample of entries in the cash receipts journal, examine remittance advices for approval of discounts taken. 6. a. Existence b. A validated deposit ticket is obtained for daily deposits and compared to the cash receipts summary. c. For a sample of entries in the cash receipts journal, reconcile the total to validated deposit tickets. 3-23. Weakness Recommended Improvement 1. There is no segregation of duties between persons responsible for collecting admission fees and persons responsible for authorizing admission. One clerk (hereafter referred to as the collection clerk) should collect admission fees and issue prenumbered tickets. The other clerk (hereafter referred to as the admission clerk) should authorize admission on receipt of the t