Internal Control Questionnaires in Revenue Cycle Audit

1. Problem 12-32, p. 421 Items 1 through 8 are selected questions of the type generally found in internal control questionnaires used by auditors to obtain an understanding of internal control in the revenue cycle. In using the questionnaire for a particular client, a “yes” response to a question indicates a possible internal control, whereas a “no” indicates a potential weakness. • Are sales invoices independently compared with customers’ orders for prices, quantities, extensions, and footings? • Are sales orders, invoices, and credit memoranda issued and filed in numerical sequence, and are the sequences accounted for periodically? • Are the selling function and cash register functions independent of cash receipts, shipping, delivery, and billing? • Are all COD, scrap, equipment, and cash sales accounted for in the same manner as charge sales, and is the recordkeeping independent of the collection procedure? • Is the collection function independent of, and does it constitute a check on, billing and recording sales? • Are customer master files balanced regularly to general ledger control accounts by an employee independent of billing functions? • Are cash receipts entered in the accounts receivable system by persons independent of the mail-opening and receipts-listing functions? • Are receipts deposited intact on a timely basis? REQUIRED • For each of the items 1 through 8, state the transaction-related audit objectives being fulfilled if the control is in effect. • For each control, list a test of control to test its effectiveness.. • For each of the items above, identify the nature of the potential financial misstatement. • For each of the potential misstatements in part (c), list an audit procedure to determine whether a material error exists.

2. Solution to Problem 12-32

3. Problem 12-33, page 421 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 university, college, or professional team from a pull-down menu on the company’s website. For each listed item, the website 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. YourTeam.com has established the following internal controls for its online sales: • Only products shown on the website can be purchased online. Other company products not shown on the website are unavailable for online sale. • The online sales system is linked to the perpetual inventory system that verifies quantities on hand before processing the sale. • Before the sale is authorized, YourTeam.com obtains credit card authorization codes electronically from the credit card agency. • Online sales are rejected if the customer’s shipping address does not match the credit card’s billing address. • 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. • 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. REQUIRED: • For each control, identify the transaction-related audit objective(s) being fulfilled if each control is in effect. • For each control, describe potential financial misstatements that could occur if the control were not present. • For each control, identify an important general control that would affect the quality of the control. • For each control, list a test of control to test its effectiveness.

4. Solution to 12-33

5. Problem 12-38, Page 423 You were asked in February 2015 by the board of directors of your church to review its accounting procedures. As part of this review, you have prepared the following comments relating to the collections made at weekly services and recordkeeping for members’ pledges and contributions. • The finance committee is responsible for preparing an annual budget based on anticipated needs of the various church committees and for the annual fall “pledge campaign” during which most members make a commitment to contribute a certain amount to the church over the following year. • The financial records are maintained by the treasurer who has authority to sign cheques drawn on the church’s bank account. • The ushers take up the collection during the services each Sunday and place it uncounted in a deposit bag in the church safe. • The treasurer, who is retired, comes in Monday morning, counts the collection, and deposits it into the church’s bank account. Some members use predated numbered envelopes, but most do not. The treasurer enters members’ contributions into a spreadsheet for the numbered envelopes only. • The treasurer issues receipts to each member every January based on the spreadsheet amounts. The contributions up to 2013 had always exceeded the amounts pledged so that the value of the receipts given out was less than total contributions; the excess was recorded as “loose” or “open” collection. In 2014, the total of the receipts given out by the treasurer exceeded the total funds received by the church. • The church is registered as a charity un the Income Tax Act and is required to file a return each year to comply with its rules. Th chairperson of the finance committee is upset because the church has received a letter from the Canada Revenue Agency in connect with the return for 2014 because the return showed receipts given exceeded the funds actually received. The letter indicated that such differences could result in the removal of the church’s ability to issued income tax receipts. REQUIRED Identify the risks of error or fraud, identify control weaknesses, and recommend improvements in procedures for the following: • Collections made a weekly services. • Recordkeeping for members’ pledges and contributions. (Adapted from AICPA)

6. Solution to Problem 12-38

8. Problem 2 The following are auditor judgments and audit sampling results for six populations. Assume large population sizes. REQUIRED For each population, did the auditor select a smaller sample size than is indicated by using attribute sampling tables for determining sample size? Evaluate, selecting either a larger or smaller size than those determined in the tables. Calculate SER and CUER for each population. For which of the six populations should the sample results be considered unacceptable? What options are available to the auditor? Why is analysis of the exceptions necessary even when the populations are considered acceptable?

9. 12-27 The sample sizes and CUERs are shown in the following table: The auditor selected a sample size smaller than that determined from the tables in population 1 and 3. The effect of selecting a smaller sample size than the initial sample size required from the table is the increased likelihood of having the computed upper exception rate exceed the tolerable exception rate. If a larger sample size is selected, the result may be a sample size larger than needed to satisfy tolerable exception rate. That results in excess audit cost. Ultimately, however, the comparison of CUER to tolerable exception rate determines whether the sample size was too large or too small. The sample exception rate and computed upper exception rate are shown in columns 5 and 6 in the above table. The population results are unacceptable for populations 4 and 6. In each of those cases, the CUER exceeds tolerable exception rate. In population 1, the CUER is marginally more than the TER. The auditor’s options are to change tolerable exception rate or ARACR, increase the sample size, or perform other substantive tests to determine whether there are actually material errors in the population. Increasing sample size would not likely result in improved results for either population 4 or 6 because the CUER exceeds tolerable exception rate by a large amount. Analysis of exceptions is necessary even when the population is acceptable because the auditor wants to determine the nature and cause of all exceptions. If, for example, the auditor determines that an error was intentional, additional action would be required even if the CUER was less than tolerable exception rate.