Questions
Chapter 10
10-3
When a client does not adequately segregate duties, the possibility of cash being stolen before it is recorded is increased. If the auditor suspects that this type of defalcation is possible, what type of audit procedures can he or she use to test this possibility?
The auditor can review who handles the receiving and preparing customer orders, approving of credit, preparing customer invoice, preparing accounts receivable aged trial balance and if the same person is doing all these duties then the auditor will be able to determine if cash is being stolen.
10-6
What are the two major controls for sales returns and allowances transactions?
First each credit memorandum should be approved by someone other than the individual who initiated it. Second, a credit for returned goods should be supported by a receiving document indicating that the goods have been returned.
10-7
List four analytical procedures that can be used to test revenue-related accounts. What potential misstatements are indicated by each of these analytical procedures?
1) Comparison of sales returns as a percentage of revenue to previous years’ or industry data. The potential misstatement is that it will be under-or overstatement of sales returns.
2) Estimation of sales commission expense by multiplying net revenue by average commission rate and comparison of recorded sales commission expense. The potential misstatement is that the under-or overstatement of sales commission expense and related accrual.
3) Comparison of gross profit percentage by product line with previous years and industry data. The possible misstatement detected would be unrecorded (understated) revenue.
4) Analysis of the ratio of sales in the last month or week to total sales for the quarter or year. The possible misstatement detected would be product-pricing problems.
10-25
Prepare the “Shipments” segment of Taylor’s internal control questionnaire.
Questions Yes
10-3
When a client does not adequately segregate duties, the possibility of cash being stolen before it is recorded is increased. If the auditor suspects that this type of defalcation is possible, what type of audit procedures can he or she use to test this possibility?
The auditor can review who handles the receiving and preparing customer orders, approving of credit, preparing customer invoice, preparing accounts receivable aged trial balance and if the same person is doing all these duties then the auditor will be able to determine if cash is being stolen.
10-6
What are the two major controls for sales returns and allowances transactions?
First each credit memorandum should be approved by someone other than the individual who initiated it. Second, a credit for returned goods should be supported by a receiving document indicating that the goods have been returned.
10-7
List four analytical procedures that can be used to test revenue-related accounts. What potential misstatements are indicated by each of these analytical procedures?
1) Comparison of sales returns as a percentage of revenue to previous years’ or industry data. The potential misstatement is that it will be under-or overstatement of sales returns.
2) Estimation of sales commission expense by multiplying net revenue by average commission rate and comparison of recorded sales commission expense. The potential misstatement is that the under-or overstatement of sales commission expense and related accrual.
3) Comparison of gross profit percentage by product line with previous years and industry data. The possible misstatement detected would be unrecorded (understated) revenue.
4) Analysis of the ratio of sales in the last month or week to total sales for the quarter or year. The possible misstatement detected would be product-pricing problems.
10-25
Prepare the “Shipments” segment of Taylor’s internal control questionnaire.
Questions Yes