(b) List the internal control over sales for each of th e six transaction-related audit objectives.
The Six Transaction-Related Audit
Internal Control
Objectives
1) Recorded sales occurred
-
Bill of lading and sales order form are
The auditors is concerned with the
attached to invoice. Sales are initiated
possibility
by sales order form from customer.
of
three
types
of
misstatement; sales being included in the
-
Credit
is
approved
by
credit
journals for which no shipment was
department
made, sales recorded more than once
authorized credit limit before shipment
and
of merchandise is authorized.
shipment
being
made
to
by
comparison
to
nonexistence customers and recorded as sales. 2) Existing sales transaction
-
Bill of lading and invoices are pre-
In many audits, no substantive test of
numbered
transactions
merchandise is shipped.
are
made
for
the
and
prepared
before
completeness objectives on the grounds that overstatements of assets and income are a greater concern in the audit of sales transactions than their understatements. 3) Sales are accurately recorded The
accurate
transactions
recording
concerns
of
shipping
sales
Control
are
checked by computer.
the
amount of goods ordered, accurately billing for the amount of goods shipped and accurately recording the amount billed in the accounting record.
4) Recorded sales are properly classified
totals
- None
prepared
and
Charging the correct general ledger account is less of a problem in sale than in some other transaction cycles, but it is still of some concern. 5) Sales are recorded on the correct dates
- None
Sales should be billed and recorded as soon after shipment takes place as possible to prevent the unintentional omission of transactions from the record and to make sure that sales are recorded in the proper period. 6) Sales transaction are correctly included in
the
master
file
and
correctly
summarized The
proper
Sales transactions are recorded in sales, accounts receivable, cost of sales, and relieved from the perpetual
inclusion
of
all
sale
transaction in the accounts receivable master file is essential because the accuracy of these records affect the client’s ability to collect outstanding receivables.
-
inventory.
(c) For each control, list a useful test of control to verify the effectiveness of the control
The Six Transaction-Related Audit
Test Of Control
Objectives
1) Recorded sales occurred
-
Examine sales invoice for supporting bill of lading and customer order form
-
Examine sales order form for evidence of credit approval. Review client's credit
approval
system
for
effectiveness. 2) Existing sales transaction
-
Account for numerical sequences of bills of lading and sales invoices and determine that all have been recorded.
3) Sales are accurately recorded
-
Examine computer edit reports to detect the errors and disposition.
4) Recorded sales are properly classified
- Not applicable.
5) Sales are recorded on the correct dates
- Not applicable.
6) Sales transaction are correctly included in the master file and correctly summarized
-
Trace sales transactions to sales journal.
Question (d) : For each transaction-related audit objective for sales, list appropriate substantive tests of transactions audit procedures, considering internal controls.
TRANSACTION-RELATED AUDIT OBJECTIVE 1) recorded sales are for shipments actually made to existing customers . (existence/occurrence)
2) existing sales transaction are recorded. (completeness)
SUBSTANTIVE TESTS OF TRANSACTIONS
-
Select sample of sales from sales journal Trace sales journal entries to supporting documents & examine customer’s purchase order, sales order form & bill of lading to make sure that the goods were ordered and shipped.
-
Trace selected shipping documents to the sales journal to be sure that each one is included. Perform analytical tests to assess the accounts and other relevant information are consistent.
-
3) recorded sales are for the amount of goods shipped and are correctly billed & recorded. (accuracy)
-
-
4) recorded sales transaction are properly classified. (classification) 5) sales are recorded on the correct dates. (timing )
-
6) sales transactions are properly included in the master file and are correctly summarized. ( posting and summarization)
-
-
Trace entries in sales journal to sales invoice to compare sales price to price list to make sure that the total sales are correctly billed. Examine customer correspondence indicating pricing disputes. Trace details on sales invoices to shipping documents, sales order &customer order to make sure that the amount of goods shipped are correctly recorded. examine sales documents to determine that sales transactions are properly classified. Examine duplicate sales invoice for proper account classification. Compare date of recording of sale in sales journal with sales invoice as well as bill of lading to determine that sales are recorded on a timely basis. Compare sales month to month and investigate any significant fluctuations. Trace selected sales invoice to the account receivable master file and test for amount, date and invoice number. Foot and cross-foot the sales journal and trace totals to the general ledger.
Question (e) : Combine the audit procedures from parts (c) and (d) into an efficient audit program for sales.
SIHAT PHARMACEUTICAL COMPANY AUDIT PROGRAM FOR TESTS OF CONTROL AND SUBSTANTIVE TESTS OF TRANSACTIONS AUDIT PROCEDURE FOR SALES
1- Obtain the sales journal for the year. 2- Foot and cross-foot the sales journal including trace and reconcile the totals to the general ledger balance. 3- Select a sample of sales invoice from the sales journal : a) Check the customer's purchase order, sales orde r form, and bill of lading are available. b) Compare the quantity, sales price, customer name, and date of shipment to sales journal. Obtain explanations of any differences. c) Check the sales order form to make sure that it is granted for credit approval. d) Compare sales price with price list to examine the approved price list. e) Test clerical accuracy of sales invoices. f) Examine that sales transaction are properly classified. 4- Select a sample of bill of lading : a) Trace them to the sales journal to check for the record of shipments. b) Compare the dates in the bill of lading to the sales journal to determine the transactions were recorded accurately. 5- Prepare the schedule of sales, cost of sales and gross margin percentage, showing comparison between recent years. Compare the sales mon ths to months or to prior years and obtain explanation if any significant fluctuation o ccurred.
CASE 14-33 QUESTION:
Sihat Pharmaceutical Company, a drug manufacturer, has the following internal controls for billing and recording accounts receivable : 1) An incoming customer’s purchase order is received in the order department by a clerk who prepares a pre-numbered company sales order form in which is inserted the pertinent information, such as the customer’s name and address, customer’s account number, quantity and items ordered. After the sales order form has been prepared, the customer’s purchase order is stapled to it.
2) The sales order form is then passed to the credit department for credit approval. Rough approximations of the billing values of the orders are made in the credit department for those accounts on which credit limitations are imposed. After investigation, approval of credit is noted on the form.
3) Next, the sales order form is passed to the billing department, where a clerk uses a computer to generate the customer’s invoice. It automatically cross-multiplies the number of items with the unit price and adds the extended amounts for the total amount of the invoice. The billing clerk determines the unit prices for the items from a list of billing prices.
The computer automatically accumulates daily totals of customer account numbers and invoice amounts to provide “hash” totals and control amounts. These total, which are inserted in a daily record book, serve as predetermined batch totals for verification of inputs into the computerized accounting records.
The billing is done on pre-numbered, continuous, carbon-interleaved forms having the following designations : (a) Customer’s copy (b) Sales department copy, for information purpose (c) File copy (d) Shipping department copy, which serve as the shipping order. Bill of lading are also prepared as carbon copy-products of the invoicing procedure.
4) The shipping department copy of the invoice and the bill of lading are then send to the shipping department. After the order has been shipped, copies of the bill of lading are return to the billing department. The shipping department copy of the invoice is filed in the shipping department.
5) In the billing department, one copy of the bill of lading is attached to the customer’s copy of the invoice and both are mailed to the customer. The other copy of the bill of lading, together with the sales order form, is then stapled to the invoice file copy and filed in invoice numerical order.
6) As the computer is generating invoices, it is also storing the transactions on disk. The disk is then used to update the computerized accounting records. This update procedure is run daily, and a summary report is generated. Hard copy output of all journals and ledgers is prepared.
7) Periodically, an internal auditor traces a sample of sales order all the way through the system to the journals and ledgers, testing both the procedures and dollar amounts. The procedures include comparing control totals with output, recalculating invoices and refooting journals, and tracing totals to the master file and general led ger.
SUMMARY OF FLOWCHART
1- Order department receives customer’s purchase order. Then, prepare pre- numbered sales order form. 2- Sales order form passed to credit department for credit approval:
-
If ok, it is passed to billing department.
-
If not approved, the sales will be terminated.
3- Billing dept clerk entered data into computer to generate customer’s invoice. The billing clerk determines the unit prices for the items from a list of billing prices. 4- The billing is done on pre-numbered, continuous, carbon-interleaved forms having the following designations : (e) Customer’s copy (f) Sales department copy, for information purpose (g) File copy (h) Shipping department copy, which serve as the shipping order. Bill of lading are also prepared as carbon copy-products of the invoicing procedure. 5- Sales invoices and bill of lading are then sent to the shipping department. 6- After the order has been shipped, copies of bill of lading are returned to the billing department. Then the invoice is filed in shipping department. 7- 1 copy of bill of lading is attached customer invoice to be mail to customer. Another cop y attached with sales order form and then filed in in voice numerical order. 8- The computer generates invoices and store the transaction on disk that will update the computerized accounting records which is run daily. Then , it generates summary report and prepare the hardcopy output of all journals and ledgers.
UNIVERSITI UTARA MALAYSIA COLLEGE OF BUSINESS BKAA 2013 – AUDITING & ASSURANCE 1 GROUP C
CASE 14-33 LECTURER’S NAME :
PROF. MADYA SYED SOFFIAN B SYED ISMAIL GROUP MEMBER :
SHAMSUL ANWAR BIN ALIAS
198473
RIKA TRISNAWATY BINTI ABASRI
205406
NURUL HUSNA BINTI ZULKAFLI
207225
NAZREEN FAZLINA BINTI ABU HANIFA
207845
