Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the operating efficiency of controls in the revenue and cash receipts cycle.
Unit 5 – Individual Assignment
This is a 3 -part assignment
Student Name :_____________________________________
Part 1
Case 5: Test of Controls: The Revenue and Cash Receipts Cycle
Instructions: Answer all the questions that appear below (and also in Exhibit 5-1) regarding accounts receivable control procedures. Use this case and Exhibits 4-4 and 4-5 to complete this questionnaire.
Case 5 – Exercise 1
Abernethy and Chapman
Internal Control Questionnaire – Accounts Receivable
Client: The Lakeside Company
Prepared by:
Date:
Questions Comments on Current System Significance Suggestions
1 Does an independent party on a regular basis reconcile the subsidiary ledger?
2 Are appropriate, established criteria in place for writing off doubtful accounts?
3 Are accounts to be written off properly reviewed and authorized by an independent party?
4 Is an appropriate follow up made on accounts that are written off?
5 Does the company periodically re-evaluate the method in use for estimating bad accounts?
6 Are customers billed regularly by a party separate from the subsidiary ledger?
7 Is an independent verification made of complaints from customers concerning their bills?
8 Was the company’s policy of granting credit changed over the past year?
9 Can a credit sale possibly be made without prior credit approval?
10 Are credit files complete and periodically reviewed?
11 Are invoices verified as to agreement with goods shipped and price of goods?
12 Are extensions and footing recalculated?
13 Are cash discounts recomputed and verified as to actual days?
14 Can a sale possibly be made and goods shipped without an invoice being recorded or mailed?
Part 2
Case 5: Test of Controls: The Revenue and Cash Receipts Cycle
Instructions: Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the operating efficiency of controls in the revenue and cash receipts cycle. For each individual test that appears in Exhibit 5-2, indicate the anticipated results if the control procedure is working properly. Also, if the control is not functioning properly, what potential problems exist? Indicate your responses in the table provided below.
Case 5 – Exercise 2
Abernethy and Chapman
Internal Control Evaluation
Client:
Prepared by:
Date:
Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the operating efficiency of controls in the revenue and cash receipts cycle. For each individual test, indicate the anticipated results if the control procedure is working properly. Also, if the control is not functioning properly, list the potential problems that exist. Use the following format for your response:
Step Anticipated Results Potential Problem(s)
1-A The total listed on the sales invoice should agree with the total on the sales invoice slip. In addition, evidence should be present to indicate that a Lakeside employee has already made this same comparison. If the invoices do not agree, the possibility is raised that fictitious or misstated sales are being recorded. Lack of tangible evidence (e.g., initials) that the matching procedure has been carried out would indicate that the employees are not complying with the requirements of the system.
1-B
1-C
1-D
1-E
1-F
1-G
1-H
1-I
2-A
2-B
2-C
3
4
Part 3
Case 6: Audit Procedures and Audit Documentation: Testing the Inventory Purchasing System
Respond fully to the questions below:
1) What control activities are evident in Lakeside’s inventory procurement system? For each activity, indicate its purpose by reference to management assertions. From the auditor’s perspective, what is the significance of Lakeside acquiring virtually all merchandise from Cypress Products?
2) In the first set of testing procedures listed in this case, the auditor begins with canceled checks and then seeks supporting documentation. In the second, receiving reports are selected, and the recording of subsequent events is traced through the system. Which of the management assertions are being corroborated by each test? Why are the tests performed in these manners?
3) The case mentions some possible purchasing and payment problems. Given the company’s controls, is it possible that Lakeside might pay for goods that were never received? Is it possible that the company might fail to pay for inventory that has been received? Be specific with your answer, describing in detail the nature of the transaction that may result in the error.
4) What is the purpose of an audit document such as the example presented in Exhibit 6-1? Does the audit document belong to Lakeside or to Abernethy and Chapman? Why?
Unit 5 – Individual Assignment
This is a 3 -part assignment
Student Name :_____________________________________
Part 1
Case 5: Test of Controls: The Revenue and Cash Receipts Cycle
Instructions: Answer all the questions that appear below (and also in Exhibit 5-1) regarding accounts receivable control procedures. Use this case and Exhibits 4-4 and 4-5 to complete this questionnaire.
Case 5 – Exercise 1
Abernethy and Chapman
Internal Control Questionnaire – Accounts Receivable
Client: The Lakeside Company
Prepared by:
Date:
|
|
Questions |
Comments on Current System |
Significance |
Suggestions |
|
1 |
Does an independent party on a regular basis reconcile the subsidiary ledger? |
|
|
|
|
2 |
Are appropriate, established criteria in place for writing off doubtful accounts? |
|
|
|
|
3 |
Are accounts to be written off properly reviewed and authorized by an independent party? |
|
|
|
|
4 |
Is an appropriate follow up made on accounts that are written off? |
|
|
|
|
5 |
Does the company periodically re-evaluate the method in use for estimating bad accounts? |
|
|
|
|
6 |
Are customers billed regularly by a party separate from the subsidiary ledger? |
|
|
|
|
7 |
Is an independent verification made of complaints from customers concerning their bills? |
|
|
|
|
8 |
Was the company’s policy of granting credit changed over the past year? |
|
|
|
|
9 |
Can a credit sale possibly be made without prior credit approval? |
|
|
|
|
10 |
Are credit files complete and periodically reviewed? |
|
|
|
|
11 |
Are invoices verified as to agreement with goods shipped and price of goods? |
|
|
|
|
12 |
Are extensions and footing recalculated?
|
|
|
|
|
13 |
Are cash discounts recomputed and verified as to actual days? |
|
|
|
|
14 |
Can a sale possibly be made and goods shipped without an invoice being recorded or mailed? |
|
|
|
Part 2
Case 5: Test of Controls: The Revenue and Cash Receipts Cycle
Instructions: Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the operating efficiency of controls in the revenue and cash receipts cycle. For each individual test that appears in Exhibit 5-2, indicate the anticipated results if the control procedure is working properly. Also, if the control is not functioning properly, what potential problems exist? Indicate your responses in the table provided below.
Case 5 – Exercise 2
Abernethy and Chapman
Internal Control Evaluation
Client:
Prepared by:
Date:
Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the operating efficiency of controls in the revenue and cash receipts cycle. For each individual test, indicate the anticipated results if the control procedure is working properly. Also, if the control is not functioning properly, list the potential problems that exist. Use the following format for your response:
|
Step |
Anticipated Results |
Potential Problem(s) |
|
1-A |
The total listed on the sales invoice should agree with the total on the sales invoice slip. In addition, evidence should be present to indicate that a Lakeside employee has already made this same comparison. |
If the invoices do not agree, the possibility is raised that fictitious or misstated sales are being recorded. Lack of tangible evidence (e.g., initials) that the matching procedure has been carried out would indicate that the employees are not complying with the requirements of the system. |
|
1-B |
|
|
|
1-C |
|
|
|
1-D |
|
|
|
1-E |
|
|
|
1-F |
|
|
|
1-G |
|
|
|
1-H |
|
|
|
1-I |
|
|
|
2-A |
|
|
|
2-B |
|
|
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2-C |
|
|
|
3 |
|
|
|
4 |
|
|
Part 3
Case 6: Audit Procedures and Audit Documentation: Testing the Inventory Purchasing System
Respond fully to the questions below:
1) What control activities are evident in Lakeside’s inventory procurement system? For each activity, indicate its purpose by reference to management assertions. From the auditor’s perspective, what is the significance of Lakeside acquiring virtually all merchandise from Cypress Products?
2) In the first set of testing procedures listed in this case, the auditor begins with canceled checks and then seeks supporting documentation. In the second, receiving reports are selected, and the recording of subsequent events is traced through the system. Which of the management assertions are being corroborated by each test? Why are the tests performed in these manners?
3) The case mentions some possible purchasing and payment problems. Given the company’s controls, is it possible that Lakeside might pay for goods that were never received? Is it possible that the company might fail to pay for inventory that has been received? Be specific with your answer, describing in detail the nature of the transaction that may result in the error.
4) What is the purpose of an audit document such as the example presented in Exhibit 6-1? Does the audit document belong to Lakeside or to Abernethy and Chapman? Why?
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