The following are common audit procedures for tests of sales and cash receipts:
- Examine the sales journal for related-party transactions, notes receivable, and other unusual items.
- Select a sample of customer orders and trace the document to related shipping documents, sales invoices, and the accounts receivable master file for comparison of name, date, and amount.
- Examine duplicate sales invoices for an indication that unit selling prices were compared to the approved price list.
- Examine duplicate sales invoices to determine whether the account classification for sales has been included on the document.
- Compare the quantity and description of items on duplicate sales invoices with related shipping documents.
- Perform a proof of cash receipts.
- Examine a sample of remittance advices for approval of cash discounts.
- Account for a numerical sequence of remittance advices and determine whether there is a cross-reference mark for each one, indicating that it has been recorded in the cash receipts journal.
- Trace recorded cash receipts in the accounts receivable master file to the cash receipts journal and compare the customer name, date, and amount of each one.
- Identify whether each audit procedure is a test of control or a substantive test of transactions.
- State which transaction-related audit objective(s) each of the audit procedures fulfills.
- For each test of control in part a., state a substantive test that could be used to determine whether there was a monetary misstatement.
14-33: YourTeam.com is an online retailer of college and professional sports team memorabilia, such as hats, shirts, pennants, and other sports logo products. Consumers select the college or professional team from a pull-down menu on the company’s Web site. For each listed team, the Web site provides a product description, picture, and price for all products sold online. Customers click on the product number of the items they wish to purchase. The following are internal controls YourTeam.com has established for its online sales:
1. Only products shown on the Web site can be purchased online. Other company products not shown on the Web site listing are unavailable for online sale.
2. The online sales system is linked to the perpetual inventory system, which verifies quantities on hand before processing the sale.
3. Before the sale is authorized, YourTeam.com obtains credit card authorization codes electronically from the credit card agency.
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 button 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 shipments. 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.
a. For each control, identify the transaction-related audit objective(s) being fulfilled if each control is in effect.
15-29: The following is a partial audit program for the audit of sales transactions.
1. Foot the sales journal for one month and trace the postings to the general ledger.
2. Review the sales journal for any large or unusual transactions.
3. Examine sales order for evidence of credit approval prior to shipment.
4. Vouch entries in sales journal to sales invoice and shipping document.
5. Examine evidence on sales invoice that the prices were agreed to the approved price list.
6. Recompute extensions of price and quantities on the sales invoice.
7. Trace entries in sales journal to entry in accounts receivable master file.
a. Identify which audit procedures can be tested by using attributes sampling.
b. What is the appropriate sampling unit for the tests in part a.?
c. List the attributes for testing in part a.
d. Assume an ARO of 5% and a TER of 6% for tests of controls and 5% for substantive tests of transactions. The EPER for tests of controls is 1.0%, and for substantive tests of transactions it is 0.5%. What is the initial sample size for each attribute?
15-33: Annie Zhao is using attributes sampling in testing controls over sales transactions. She is testing five attributes related to sales invoices using an ARO of 5% (confidence level of 95%), and zero expected deviations for each attribute based on prior experience with the client. Annie has determined that the tolerable exception rate for each attribute is 5%. Using her firm’s audit software, she entered the population size (number of invoices), desired confidence level, TER, and EPER, and determined a sample size of 60 invoices. She used the audit software to select a random sample of invoices and performed the control tests. She found zero deviations for four of the five attributes and concluded that the control can be relied upon for each of those attributes. For the remaining attribute, she found one control deviation. In projecting the sample results to the population for the attribute with one control deviation identified, Annie entered the confidence level, sample size, and one deviation into the audit software sampling module and determined that the computed upper exception rate for the attribute is 7.92%.
a. Explain how Annie should interpret the CUER of 7.92%.
b. What should Annie conclude about the effectiveness of the control attribute with one identified deviation?
c. What are the alternatives for Annie if she concludes the control cannot be relied upon?
d. Assume Annie discusses the deviation with the controller and learns this deviation occurred while a temporary employee was covering for the regular clerk, who was on vacation. Would this information be relevant in determining which of the alternatives in answer c. would be the most appropriate response? What testing and documentation would be needed to conclude this control can be relied upon?