Professional Documents
Culture Documents
14-1
14-3 The sales journal contains the record of each sales transaction that
includes the customer name, date, amount, and the account classification for
each transaction. The sales journal generally represents the record of each
individual transaction. Typically, the sales journal accumulates transactions for a
period of time, which is often monthly. Transactions recorded in the sales journal
are then posted to the general ledger, and if the transaction is for sales on
account the accounts receivable master file is updated for each transaction.
The accounts receivable master file is used to record individual sales,
cash receipts, and sales returns and allowances for each customer and to
maintain customer account balances. The master file is updated using data from
the sales journal, sales return journal, cash receipts journal. The total in the
accounts receivable master file equals the total in the accounts receivable general
ledger account.
14-4 BestSellers.com could integrate its online ordering system with its
inventory system so that a book shipment is made only after the customers
credit card company approves the customers purchase. Because credit card
issuers often transfer funds electronically almost immediately after a sale,
BestSellers.com could also set up their system to ship books only after payment
has been received by the credit card issuer. Finally, BestSellers.com could
arrange with an online credit service bureau to run credit checks on customers
purchasing over a preset minimum amount. Although BestSellers.com sells its
goods through the Internet, the company should still record sales revenue
when the books are shipped to customers.
14-5
TRANSACTION-RELATED
AUDIT OBJECTIVE KEY INTERNAL CONTROLS
1. Recorded sales are for Recording of sales is supported by authorized
shipments actually made shipping documents and approved customer
to existing customers orders.
(occurrence). Credit is authorized before shipment takes
place.
Sales invoices are prenumbered and properly
accounted for.
Only customer numbers existing in the
computer data files are accepted when they
are entered.
Monthly statements are sent to customers;
complaints receive independent follow-up.
2. Existing sales Shipping documents are prenumbered and
transactions are recorded accounted for.
(completeness). Sales invoices are prenumbered and
accounted for.
14-2
14-5 (continued)
TRANSACTION-RELATED
AUDIT OBJECTIVE KEY INTERNAL CONTROLS
3. Recorded sales are for the Determination of prices, terms, freight, and
amount of goods shipped discounts is properly authorized.
and are correctly billed and Internal verification of invoice preparation.
recorded (accuracy). Approved unit selling prices are entered into
the computer and used for sales.
Batch totals are compared with computer
summary reports.
4. Sales transactions are Regular monthly statements sent to customers.
properly included in the Internal verification of accounts receivable
accounts receivable master master file contents.
file and are correctly Comparison of accounts receivable master file
summarized (posting and or trial balance with general ledger balance.
summarization).
5. Sales transactions are Use of adequate chart of accounts.
properly classified Internal review and verification of the account
(classification). classifications.
6. Sales are recorded on the Procedures requiring billing and recording of
correct dates (timing). sales on a daily basis as close to the time of
occurrence as possible.
Internal verification of timely recording of
transactions.
14-6
Tests of controls:
14-3
14-7 The most important duties that should be segregated in the sales and
collection cycle are:
14-8 The use of prenumbered documents is meant to prevent the failure to bill
or record sales as well as to prevent duplicate billings and recordings. An example
of a useful control to provide reasonable assurance that all shipments are billed
is for the billing clerk to file a copy of all shipping documents in sequential order
after a shipment has been billed. Periodically, someone can account for all
numbers in the sequence and investigate the reason for missing documents.
Computer programs can be used to identify gaps and duplicates in the sequence.
The same type of a useful test in this area is to account for the sequence of
duplicate sales invoices in the sales journal, watching for omitted numbers,
duplicate numbers, or invoices outside the normal sequence. This test simultaneously
provides evidence of both the occurrence and completeness objectives.
14-4
14-9 1. Credit is authorized before a sale takes place.
14-10 The purpose of footing and crossfooting the sales journal and tracing the
totals to the general ledger is to determine that sales transactions are properly
included in the accounts receivable master file and are correctly summarized.
The auditor will make a sample selection from the sales journal to perform tests
of controls and substantive tests of transactions, so he or she must determine
that the general ledger agrees with the sales journal.
14-11 The verification of sales returns and allowances is quite different from
the verification of sales for three primary reasons:
14-12 Cash is the most liquid asset that a company owns and thus it is the
most likely target of misappropriation. The emphasis the auditor places on the
possibility of misappropriation of cash is not inconsistent with his or her responsibility,
which is to determine the fairness of the presentation of the financial statements.
If material fraud has occurred, and it is not fully disclosed in the financial
statements, those statements are not fairly presented.
14-5
14-13
TRANSACTION-RELATED
AUDIT OBJECTIVE KEY INTERNAL CONTROLS
1. Recorded cash receipts are for Separation of duties between
funds actually received by the handling cash and record keeping.
company (occurrence). Independent reconciliation of bank
accounts.
2. Cash received is recorded in the Separation of duties between
cash receipts journal handling cash and record keeping.
(completeness). Use of remittance advices or a
prelisting of cash.
Immediate endorsement of incoming
checks.
Internal verification of the recording
of cash receipts.
Regular monthly statements to
customers.
3. Cash receipts are deposited and Same as 2 above.
recorded at the amounts received Approval of cash discounts.
(accuracy). Regular reconciliation of bank
accounts.
Batch totals are compared with
computer summary reports.
4. Cash receipts are properly included Regular monthly statements to
in the accounts receivable master customers.
file and are correctly summarized Internal verification of accounts
(posting and summarization). receivable master file contents.
Comparison of accounts receivable
master file or trial balance totals with
general ledger balance.
5. Cash receipts transactions are Use of adequate chart of accounts.
properly classified (classification). Internal review and verification.
14-6
14-14 Audit procedures that the auditor can use to determine whether all cash
receipts were recorded are:
14-15 Proof of cash receipts is a procedure to test whether all recorded cash
receipts have been deposited in the bank account. In this test, the total cash
receipts recorded in the cash receipts journal for a period of time, such as a
month, are reconciled to the actual deposits made to the bank during the same
time period. The procedure is not useful to discover cash receipts that have not
been recorded in the journals or time lags in making deposits, but it is useful to
discover recorded cash receipts that have not been deposited, unrecorded
deposits, unrecorded loans, bank loans deposited directly into the bank account,
and similar misstatements.
14-17 The audit procedures most likely to be used to verify accounts receivable
charged off as uncollectible and the purpose of each procedure are as follows:
14-7
14-17 (continued)
14-18 The primary objective of the tests of controls and substantive tests of
transactions for sales and cash receipts is to determine whether or not the auditor
may rely on internal controls to produce accurate information. If it is determined
through tests of controls and substantive tests of transactions that the system
provides reliable information as to accounts receivable balances, the auditor may
reduce the sample size for the confirmation of accounts receivable and adjust the
type of confirmation and timing of the tests. If the system is not considered
effective because of deficiencies in internal control, the sample size must be
increased, positive confirmations will probably be necessary, and the confirmations
will most likely be as of the balance sheet date.
14-8
Multiple Choice Questions From CPA Examinations
14-24 1. a. Recorded sales are to valid customers who are able to pay
(Occurrence).
b. Select a sample of sales recorded in the sales journal
and determine if the appropriate individuals approved the
corresponding customer order.
c. Sales may be overstated if customer is unable to pay for the
goods.
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. Online sales are recorded in the sales system (Completeness).
b. Review online sales system documentation and make inquiries
of client personnel to determine that the automatic interface is
a part of the system design. Enter a sample of test transactions
of online sales to determine if test data included in the sales
journals. Reverse all test data items.
c. Online sales may not be recorded in the sales account, which
would understates sales.
d. Trace a sample of online sales transactions to the sales journal.
3. a. Recorded sales are billed using approved prices (Accuracy).
b. Obtain a list of pre-approved unit prices in the master file.
Enter product numbers into the sales system to determine if
the unit price presented is correct. Inquire about access
privileges to the master file. Attempt to login to access the
master file.
c. Sales transactions could be recorded using incorrect amounts.
d. Compare a sample of prices on a sample of sales invoices to
the approved prices lists at the time the sale occurred.
14-9
14-24 (continued)
14-10
14-24 (continued)
2. a. Test of control
b. Recorded sales are for shipments actually made to existing
customers. (Occurrence)
c. Documentation
5. a. Test of control
b. Recorded sales returns are for returns from existing customers.
(Occurrence)
c. Documentation
14-11
14-25 (continued)
6. a. Test of control
b. (1) Cash received is recorded in the cash receipts journal.
(Completeness)
(2) Cash receipts are recorded on the correct dates. (Timing)
c. Observation or documentation
d.
(3)
(1) (2) POSTING AND
OCCURRENCE COMPLETENESS SUMMARIZATION
SUBSTANTIVE Procedure Procedure Procedure
TEST OF 6 1 5
TRANSACTIONS
TEST OF Procedure Procedure Procedure
CONTROL 2 4 3
14-12
14-26 (continued)
e.
NATURE OF
MISSTATEMENT
PROCEDURE CONTROL BEING TESTED TRYING TO PREVENT
2 A shipping document is To prevent billing to a
attached to each duplicate customer or recording a
sales invoice. sale for which no shipment
has been made.
3 An independent person Preventing misstatements
traces from the sales journal in failure to post to the
to the accounts receivable accounts receivable master
master file. A tick mark is file, posting to the wrong
shown in the margin of the customer, at the wrong
sales journal after a amount, or at the wrong
transaction is traced. date.
4 At the time of billing, the The failure to bill customers
duplicate sales invoice for shipments actually
number is written on the made.
bottom left-hand corner of
each shipping document.
Periodically, the entire
sequence of shipping
documents is accounted for
and each is examined to
make certain there is an
invoice number, which
indicates that a given
shipment has been billed.
14-27 a.
14-13
function and administration of the auditing procedures or engage
cash function. Moreover, the outside auditors.
finance committee has not
performed the auditing functions.
4. The head usher has sole access to The number of counters should be
cash during the period of the count. increased to at least two, and cash
One person should not be left should remain under joint
alone with the cash until the surveillance until counted and
amount has been recorded or recorded so that any discrepancies
control established in some other will be brought to attention.
way.
5. The collection is vulnerable to The collection should be deposited
robbery while it is being counted in the bank's night depository
and from the church safe prior to its immediately after the count.
deposit in the bank. Physical safeguards, such as
locking and bolting the door during
the period of the count, should be
instituted. Vulnerability to robbery
will also be reduced by increasing
the number of counters.
6. The head usher's count lacks The financial secretary should
usefulness from a control receive a copy of the collection
standpoint because he surrenders report for posting to the financial
custody of both the cash and the records. The head usher should
record of the count. maintain a copy of the report for
use by the audit committee.
14-14
14-27 (continued)
14-28
14-15
and are properly deposited, but forwarded to the accounting
errors are made in recording department.
receipts in the cash receipts
journal.
2. Customer checks are f. Monthly statements are mailed to
misappropriated before being customers with outstanding balances.
forwarded to the cashier for
deposit.
3. Customer checks are received e. Total amounts posted to the
for less than the customers full accounts receivable subsidiary records
account balances, but the from remittance advices are compared
customers full account balances to the validated deposit slip.
are credited.
4. Customer checks are credited to f. Monthly statements are mailed to
incorrect customer accounts. customers with outstanding balances.
5. Different customer accounts are g. An employee, other than the
each credited for the same cash bookkeeper, periodically prepares a
receipt. bank reconciliation.
14-16
14-29
TEST OF CONTROL
OR SUBSTANTIVE TRANSACTION-
TEST OF RELATED AUDIT
TRANSACTIONS OBJECTIVE(S) SUBSTANTIVE TEST
1. S T of T Accuracy Not applicable
2. S T of T Posting and Not applicable
summarization
3. T of C Accuracy Compare unit selling prices on
duplicate sales invoices to the
approved price list.
4. T of C Classification Examine a sample of sales
transactions to determine if
each one is correctly classified
in the sales journal.
5. S T of T Classification Not applicable
6. S T of T Completeness Not applicable
Accuracy
Timing
Posting and
summarization
7. S T of T Occurrence Not applicable
Completeness
Accuracy
Timing
8. T of C Accuracy Recalculate the cash
discounts for a sample of
remittances and determine
whether each one was
consistent with company
policy.
9. T of C Completeness Trace from a sample of
remittance advices to the cash
receipts journal to determine if
the related cash is recorded.
14-17
14-31
TRANSACTION-
RELATED
AUDIT POTENTIAL FINANCIAL STATEMENT
CONTROL OBJECTIVE MISSTATEMENT IF CONTROL IS ABSENT
1. Occurrence Sales may be recorded for invalid or non-
existent products.
14-18
14-32
a. b. c.
TRANSACTION
STRENGTH OR RELATED
INTERNAL CONTROL DEFICIENCY AUDIT OBJECTIVE NATURE OF DEFICIENCY
1. Credit is granted by a Strength Occurrence of sales.
credit department.
2. Once shipment occurs and Strength Completeness of sales.
is recorded in the sales
journal, all shipping
documents are marked
recorded by the
accounting staff.
3. Sales returns are Deficiency Prenumbered receiving reports should be
presented to a sales prepared by receiving department clerks
department clerk who immediately upon receipt of returned goods.
14-18
a. b. c.
TRANSACTION
STRENGTH OR RELATED
INTERNAL CONTROL DEFICIENCY AUDIT OBJECTIVE NATURE OF DEFICIENCY
6. The cash receipts journal Deficiency The cash receipts journal represents the primary
is prepared by the accounting record for all cash received. It should
treasurers department be prepared by personnel within the accounting
function, not the treasury function. The treasury
function has primarily responsibilities surrounding
the custody of cash. Thus, they should not have
any recordkeeping responsibilities.
7. Cash is deposited weekly. Deficiency Cash should be deposited at least daily to prevent
loss or theft of cash.
8. Statements are sent Strength Occurrence of sales
monthly to customers.
Accuracy of sales
Posting and
14-19
summarization of sales
Completeness of
cash receipts
Accuracy of cash
receipts
Posting and
summarization of
cash receipts
9. Write-offs of accounts Deficiency This is an inappropriate segregation of duties. The
receivable are approved by controller has recordkeeping responsibilities. The
the controller. write-off of accounts involves authorization
responsibilities. The write-offs should be approved
by the credit department, not the controller.
10. The bank reconciliation is Strength Occurrence of cash
prepared by individuals receipts
independent of cash
Completeness of cash
receipts recordkeeping.
receipts
Accuracy of cash receipts
Case
14-33 a.
a.
c. The fact that the A/R Allowance has not changed in the data table, even though
the total revenue has increased suggests 1) collections have improved or 2) A/R
allowance has not been evaluated with respect to new balance in A/R. As an
auditor, you would pay special attention to adequacy of A/R Allowance during
fieldwork.
14-21
Integrated Case Application
14-34 a., b., c., and d.
PINNACLE MANUFACTURINGPart V
a. b. c. d.
Key Transaction Related Test of Substantive Test
# Internal Control Audit Objectives Control of Transaction
1. Segregation of the Recorded acquisitions are for goods and Discuss Trace entries in the acquisitions
purchasing, receiving, services actually received (occurrence). segregation of journal to related vendors' invoices,
and cash disburse- Recorded cash disbursements are for duties with receiving reports, and purchase
ments functions. goods and services actually received personnel and orders.
(occurrence). observe activities.
2. Use of prenumbered Existing acquisition transactions are Account for a Trace from a file of vendors'
voucher packages, recorded (completeness). sequence of invoices to the acquisitions journal.
properly accounted voucher
for. packages.
3. Use of prenumbered Existing cash disbursement transactions Account for a Reconcile recorded cash disburse-
14-26
checks, properly are recorded (completeness). sequence of ments with the cash disbursements
accounted for. checks. on the bank statement (proof of
cash disbursements).
4. Use of prenumbered Existing acquisition transactions are Account for a Trace from a file of receiving
receiving reports, recorded (completeness). sequence of reports to the acquisitions journal.
properly accounted for. receiving reports.
5. Internal verification Recorded acquisitions are for goods and Examine Examine supporting documents
of document package services actually received (occurrence). document for propriety and recompute
before check Recorded acquisitions are stated at package for information on the supporting
preparation. indication of documents.
the correct amounts (accuracy).
internal
Acquisition transactions are properly verification.
included in the master files, and are
properly summarized (posting and
summarization).
Acquisitions are properly classified
(classification).
Acquisitions are recorded on the
correct dates (timing).
14-34 (continued)
a., b., c., and d.
a. b. c. d.
Key Transaction Related Test of Substantive Test
# Internal Control Audit Objectives Control of Transaction
5. Internal verification Recorded acquisitions are for goods and Examine Examine supporting documents
of document package services actually received (occurrence). document for propriety and recompute
before check Recorded acquisitions are stated at package for information on the supporting
preparation. indication of documents.
the correct amounts (accuracy).
internal
Acquisition transactions are properly verification.
included in the master files, and are
properly summarized (posting and
summarization).
Acquisitions are properly classified
(classification).
Acquisitions are recorded on the
correct dates (timing).
6. Review of supporting Recorded cash disbursements are for Examine checks Trace the cancelled check to the
14-27
documents and goods and services actually received for signature. related acquisitions journal entry and
signing of checks (occurrence). examine for payee name and
by an independent, amount.
authorized person.
7. Cancellation of Recorded acquisitions are for goods and Examine Examine the acquisitions journal for
documents prior to services actually received (occurrence). indication of duplicate entries to a vendor.
signing of the check. cancellation.
8. Monthly reconciliation Acquisition transactions are properly Inquire of client Foot acquisitions and cash
of the accounts included in the master files, and are about monthly disbursements journals and trace
payable master file properly summarized (posting and reconciliation postings to the general ledger and
with the general summarization). procedures. accounts payable and inventory
ledger. Cash disbursement transactions are master files.
properly included in the master file, and
are properly summarized (posting and
summarization).
9. Independent Existing cash disbursement transactions Examine file Reconcile recorded cash
reconciliation of the are recorded (completeness). of completed disbursements with the cash
monthly bank Recorded cash disbursement bank disbursements on the bank
statements. reconciliations. statement (proof of cash
transactions are stated at the correct disbursements).
amounts (accuracy).
14-34 (continued)
e.
TRANSACTION-RELATED
AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES
Occurrence Compare prices on vendor invoices with approved price limits established by
management.
Review the acquisitions journal, general ledger, and accounts payable master file for
large or unusual amounts.
Completeness Trace a sample of receiving reports to the acquisitions journal.
Trace from a file of vendors' invoices to the acquisitions journal.
14-28
f.
TRANSACTION-RELATED
AUDIT OBJECTIVES SUBSTANTIVE AUDIT PROCEDURES
Occurrence Trace cancelled check numbers in the cash disbursements journal to related
cancelled checks and examine for payee, name, and amount.
Examine cancelled check for authorized signature, proper endorsement, and
cancellation
by the bank.
Review the cash disbursements journal, general ledger, and accounts payable master
file for large or unusual amounts.
14-29
Trace cancelled check to the related acquisitions journal entry and examine for payee
name and amount.
Completeness Trace entries in acquisitions journal to subsequent payment in cash disbursements
journal.
Accuracy Compare cancelled checks with the related acquisitions journal and cash
disbursements journal entries.
Recompute cash discounts.
Posting and Trace individual entries in accounts payable master file to cash disbursements journal.
Summarization
Classification Compare classification with chart of accounts by reference to vendors' invoices and
acquisitions journal.
Timing Compare dates on cancelled checks with cash disbursements journal.
Compare dates on cancelled checks with the bank cancellation date.
14-34 (continued)
General
Acquisitions
14-26
14-34 (continued)
Cash Disbursements
c. There are 588 sales invoices (IN), totaling $525,259.16. The largest
single invoice amount is $5,549.19 and the average invoice amount
is $893.30. (Filter by invoice type = IN; then use Statistics command
on the Amount column.)
14-27
14-35 ACL Problem (continued)
d. Leaving the filter from part c intact, create a computed field with the
following expression: DUE DATE1 and then add this column to
the table view. Several of the invoices have negative results, which
means that possibly the wrong year was used for the due date. Also,
some are 90 days old, which indicates potential collection problems.
e. See the following printout:, which is the result of using the Stratify
command after a filter is applied to isolate IN transactions greater
than or equal to $300.
The following answers are based on the SECs Litigation Release No.
20470 and related press releases associated with the fraud at Bally Total
Fitness Holding Corporation:
14-28
Internet Problem 14-1 (continued)
Initiation fees: Bally fraudulently and prematurely recognized revenue
from initiation fees. Part of the price of a Bally health club
membership was a one-time initiation fee that was either paid in full
when the member joined or was financed over a period of time,
typically 36 months. Regardless of how the initiation fee was paid,
accounting standards prohibit Bally from recognizing all the revenues
from initiation fees immediately. Instead, accounting standards
require that Bally recognize initiation fee revenue over the entire
membership life. This means that for members who maintained
their memberships beyond the financing period, or initial period of
membership, Bally was required to defer initiation fee revenue and
recognize it over the estimated membership life, not over the term
of the initial period of membership. However, Bally prematurely
recognized its members initiation fee revenue over a period that
was not only shorter than the estimated membership life, but in most
instances even shorter than the initial period of membership.
Personal Training Services: In addition to selling health club
memberships, Bally also sold personal training services (i.e.,
exercise sessions with personal trainers). Some customers prepaid
for sessions with personal trainers. Accounting standards require
that revenue from prepaid personal training services be recognized
only when earned, which is when the personal training services
were actually provided. Bally, however, recognized revenue
related to personal training services before those services were
actually provided.
Reactivation Fees: Bally also fraudulently recognized revenue from
unpaid dues on inactive memberships. Not all Bally members who
completed their initial membership contract term renewed their
membership. Instead, they ceased paying dues. Those members
who had paid all amounts due under the initial membership
contract, but who had then stopped paying monthly dues for six
months or longer, were solicited by Bally for reactivation. Under
that offer, lapsed members could rejoin by paying a reactivation
fee, which was lower than an initiation fee.
Accounting standards prohibit Bally from recognizing any
revenue from reactivation fees until after the reactivating members
had entered into binding contracts. Rather than comply with accounting
standards, Bally simply projected the number of reactivating members
that it anticipated rejoining up to three years into the future, and
then recognized those anticipated but hypothetical reactivation fees
as revenue. The company recognized that hypothetical revenue
over a period composed of (a) the average delinquent period (that
is, the period between when members stopped paying their monthly
dues and when they reactivated) plus (b) the average reactivation
14-29
period. In later years, they abandoned this methodology and adopted
a modified cash basis of accounting for reactivation fees.
Internet Problem 14-1 (continued)
b. Students should have located the December 17, 2009 press release.
c. The press release notes that the SECs order against the audit firm
(Ernst & Young) finds that the firm identified Bally as a risky audit
because its managers were former E&Y audit partners who had
historically been aggressive in selecting accounting principles and
determining estimates, and whose compensation plans placed
undue emphasis on reported earnings. Out of more than 10,000
audit clients in North America, E&Y identified Bally as one of E&Ys
riskiest 18 accounts and as the riskiest account in the Lake
Michigan area.
(Note: Internet problems address current issues using Internet sources. Because
Internet sites are subject to change, Internet problems and solutions may change. Current
information on Internet problems is available at www.pearsonglobaleditions.com/arens.)
14-30