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12-11
12-21 (continued)
system. She must obtain an understanding of internal control to
determine whether it is possible to conduct an audit at all. Auditing
standards require, at a minimum, an understanding of internal
control.
The auditor must understand the control environment and
the flow of transactions. It is not necessary, however, for the
c. Collier’s approach is not acceptable when auditing either a public
or nonpublic company. Collier must obtain an understanding of
internal controls over financial reporting in all audits. When the
auditor assesses control risk below the maximum, which is
companies.
d. While Pherson’s approach includes procedures similar to those
that would be performed to obtain an understanding of internal
controls, if Pherson is auditing a public company, he may need to
for accelerated filer public companies.
12-22 1. a. Supplying the receiving department with electronic
access to the purchase order is regarded as a
deficiency in that the department may be less careful
be received.
The failure to have the storekeeper receipt for the
materials when they are sent to him or her from the
receiving department or to tie in the items placed in
storage with the acquisition constitutes a deficiency
12-12
12-22 (continued)
stores department might fraudulently convert some
of the materials and because of the lack of a
record of responsibility, the company would be
unable to determine which department was
responsible.
inventory actually received and recorded.
The failure to isolate responsibility for shortages also
increases the likelihood of obsolescence in that
employees are likely to be less concerned when they
the goods.
2. a. The payroll checks should not be returned to the
computer department supervisor but should be
part in generating the payroll data.
There is a lack of internal verification of the hours,
rates, extensions, or employees by above.
There may be misstatements in hours, rates,
extensions, and the existence of nonworking
employees.
person and not returned to Strode.
Internal verification of that information by Webber or
someone else.
12-13
12-22 (continued)
3. a. The bank statement and cancelled checks should not be
disbursements or inflate other reported disbursement
amounts.
c. Have all bank statements sent directly to the home office
testing of IT security and software changes that might be
necessary in the current year audit due to the auditor’s reliance on
them to prevent changes to the underlying automated
reconciliation control.
year’s audit.
3. Testing is required in the December 31, 2016, audit because the
control is designed to mitigate a significant risk. Controls that
4. Testing is required in the December 31, 2016, audit because the
year.
5. No testing is required in the December 31, 2016, audit because
the auditor has determined that the automated controls have not
been changed since the prior year. The auditor obtains
12-14
12-23 (continued)
extent of testing of IT security and software changes that might be
12-24 The following are deficiencies of internal control, by transaction-related
audit objective.
Occurrence
The receiving report is not sent to the stores department. A copy
of the receiving report should be sent from the receiving room
directly to the stores department with the materials received. The
The controller should not be responsible for cash disbursements.
The cash disbursement function should be the responsibility of the
The purchase requisition is not approved. The purchase
requisition should be approved by a responsible person in the
stores department. The approval should be indicated on the
Preliminary review should be made before preparing purchase
orders. Prior to preparation of the purchase order, the purchase
Completeness
Purchase orders and purchase requisitions should not be
combined and filed with the unmatched purchase requisitions, in
There is no indication of control over vouchers in the accounts
payable department. A record of all vouchers submitted to the
12-15
12-24 (continued)
There is no indication of any control over prenumbered
Accuracy
Purchase requisitions and purchase orders are not compared in
the stores department. Although purchase orders are attached to
that:
a. Prices are reasonable;
b. The quality of the materials ordered is acceptable;
c. Delivery dates are in accordance with company needs;
Because the requisitioner will be charged for the materials
The purchase office does not review the invoice prior to
processing approval. The purchase office should review the
vendor’s invoice for overall accuracy and completeness,
The copy of the purchase order sent to the receiving room
generally should not show quantities ordered, thus forcing the
There is no indication of control over dollar amounts on vouchers.
Accounts payable personnel should prepare and maintain control
Note: Classification, timing, and posting and summarization are
12-16
12-25 Following are the appropriate reporting formats for the six independent
situations:
INDEPENDENT
SITUATION
APPROPRIATE
AUDIT REPORT
REASON FOR REPORT
1.
Adverse
The presence of a material misstatement
not detected by the company’s internal
controls is considered at least a
significant deficiency, if not a material
weakness, for purposes of reporting on
internal controls.
2.
Qualified or
disclaimer
The auditor’s inability to obtain any
evidence about the operating
effectiveness of internal controls
represents a scope limitation.
3.
Adverse
The auditor considers the combination of
the several significant deficiencies to be
a material weakness requiring an
adverse opinion.
4.
Adverse
The detection of a deficiency that will not
prevent or detect a material
misstatement in the financial
statements meets the definition of a
material weakness, which requires an
adverse opinion.
5.
Unqualified
The control deficiency was remediated
and the auditor was able to obtain
sufficient appropriate evidence that the
new control operates effectively. Thus,
an unqualified opinion on internal
control is appropriate.
6.
Unqualified
Because the auditor does not believe the
significant deficiency in internal control
is a material weakness, the auditor’s
report would contain an unqualified
opinion.
12-17
12-26 a. The important controls and related sales transaction-related audit
objectives are:
CONTROL
SALES TRANSACTION-RELATED
AUDIT OBJECTIVE
1. Use of prenumbered sales
orders
Existing sales transactions are recorded
2. Segregated approval of sales by
credit department; customer
purchase orders are attached to
sales orders; approval is noted
on form
Recorded sales are for shipments made to
existing customers
3. Segregated entry of approved
sales orders
Recorded sales are for shipments made to
existing customers
Recorded sales are posted to correct
customer account
Prices are entered using an
approved price list
Recorded sales are at the correct price
Sales invoices are prepared from
the data file created from sales
order entry; hash totals are
generated and used; sales
invoices are prenumbered;
control totals are reconciled by
an independent person
Recorded sales are for shipments made to
existing customers
Existing sales transactions are recorded
Recorded sales are at the correct amount
Sales transactions are properly included in
the master files
4. & 5. Bills of lading are produced
with sales invoices and
eventually filed with the sales
invoice in numerical order;
differences in quantities are
corrected and transaction
amounts are adjusted
Existing sales transactions are recorded
Recorded sales are for the correct quantity
of goods shipped
6. Hash totals of daily processing
matched to hash and control
totals generated by independent
person
Existing sales transactions are recorded.
Recorded transactions are for shipments
made to existing customers
12-18
12-26 (continued)
1. Account for the sequence of prenumbered sales order forms.
orders from customers.
appears on all sales order forms.
4. Account for the sequence of prenumbered sales invoices.
invoices and are in agreement therewith.
6. Determine that the price list used by the billing clerk has
7. Ascertain that the sales invoices are in agreement with the
Among the audit procedures to be applied to the data file are the
following:
1. Verify the company’s predetermined “hash” totals and control
2. Compare totals and see that they reconcile.
3. Arrange for a tabulating run to be made of selected test
12-27 a. The use in grocery stores of bar code scanning technologies impacts
a number of financial statement accounts for a grocery. The bar
code scanner is used to retrieve unit prices for each product
scanned, which is then used to calculate the amount to be posted
to the Revenue, Sales Tax Payable, and Cash accounts (and any
overnight Receivable accounts related to sales paid by debit and
12-27 (continued)
b.
Risks Inherent to
Sales Processing
Accounts Affected
How Bar Scanning
Technologies Help Reduce Risk
Wrong unit price is used
to process sale
Revenues
Cash
The system automatically retrieves
the unit retail price from the
approved price list master file.
Calculation of amounts
due from customer for
all items purchased is
inaccurate
Revenues
Cash
Sales Taxes Payable
The system extends price times
quantity and adds each extended
amount to calculate the total
sales price, including sales taxes
due from customer.
Reduction in inventory
accounts for items sold
is inaccurate
Inventory
Cost of Goods Sold
The system tracks the number of
units removed by product
number, which is used to update
perpetual inventory records.
Not all inventory items
taken by customer are
included in the
processing of the
customer’s purchase
amount
Revenues
Cash
Inventory
Cost of Goods Sold
As the system reads each bar
code, it generates a sound to
indicate to the cashier and
customer that each product
scanned has been captured by
the system.
Coupons and discounts
are incorrectly
calculated
Sales Discounts
Cash
The system retrieves coupon and
discount information from the
master file of promotions and
discounts and automatically
calculates discount amounts.
could perform the same kind of test using coupons and other
discount programs.
2. The auditor may be able to use audit software to test the
accuracy of individual customer transactions and to test the
ledger system.
12-20
12-27 (continued)
prices, etc.).
5. The auditor may be able to use audit software to identify
the most recent date of the most recent date of sale by
the auditor’s desktop or laptop computer. Other generalized audit
software exists that contain programs that create or generate
other programs, programs that modify themselves to perform
requested functions, or skeletal frameworks of programs that must
be completed by the user.
machine-readable files in a format specified by the auditor.
b. Ways in which a generalized audit software package can be used
to assist in the audit of inventory of Boos & Baumkirchner, Inc.,
include the following:
cards or the electronic inventory master file. Exclude from
the population items with a high unit cost or total value that
have already been selected for test counting.
3. Access the client’s electronic inventory master file and list
data for determining possible obsolescence.
