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14-11
14-23 (continued)
4. a. Online sales are recorded in the sales system (Completeness).
b. Review online sales system documentation and make
c. Online sales may not be recorded in the sales account,
which would understate sales.
journal.
5. a. Recorded sales are billed using approved prices (Accuracy).
b. Obtain a list of pre-approved unit prices in the master file.
master file.
c. Sales transactions could be recorded using incorrect amounts.
d. Compare a sample of prices on a sample of sales invoices
6. a. Recorded sales are for the correct amounts (Accuracy).
is documentation of the independent verification.
c. Sales could be misstated because they are recorded at
inaccurate amounts.
the sales amount.
7. a. Recorded sales are for shipments actually made (Occurrence).
b. Review systems documentation and make inquiries of
transaction is rejected.
c. Sales could be recorded even though goods have not been
shipped to customers, which overstates sales.
entries.
14-12
14-23 (continued)
8. a. Sales transactions are correctly included in the accounts
receivable master file and are correctly summarized (Posting
and Summarization).
receivable.
c. The accounts receivable master file does not reflect
transactions that are included in the ending accounts
receivable general ledger balance.
in the accounts receivable master file.
9. a. All cash sales are recorded (Completeness).
b. Inquire about duties for individuals responsible for cash
collections and observe whether they have access to
accounting or shipping functions.
14-24
a.
Business
Function
Starbucks
Amazon
Physician Practice
University
Processing
customer orders
Baristas receive orders from
customers at the cash
register or through on-line
ordering application.
Customers shop and process
orders online via the
Amazon.com Web site.
Physicians provide medical
treatments based on the
physician’s diagnosis while
patient is at the office.
University registrars have
records of enrolled
students. Students are
billed in advance of a
they are full-time or part-
time students.
Granting credit
No credit approval is
required for cash sales.
Debit or credit card sales
are verified by swiping of
card, which verifies
transaction. Large debit or
credit card sales require
online credit approval from
credit card company.
Customers make purchases
via debit or credit cards.
The Amazon system
verifies credit worthiness
with credit card company
before completing sales
order.
Before services are provided,
patients must present
documentation of health
insurance coverage.
Physician practices
generally are aware of
insurance coverage for
specific health plans. For
those patients without
health insurance, some
practices require prepayment
of services and they often
require patients to sign
legal documents indicating
their obligation to pay.
Many universities do not
grant credit for tuition.
Rather, students seek
credit from outside sources
(e.g., student loans) and
remit the cash to the
university. If tuition is not
paid by a certain date in the
early part of a semester,
the student is no longer
allowed to take classes.
Shipping goods
Goods are delivered to
customer on site just after
order is placed.
Goods are shipped after the
online sale is processed.
Shipment is made via third-
party shippers (e.g., FedEx,
UPS, etc.).
Medical services are
provided to the patient at
the physician’s office. No
shipment of goods is
required.
There is no shipment of
goods. Universities deliver
classes onsite or online.
14-13
Copyright © 2017 Pearson Education, Inc.
14-24 (continued)
Business
Function
Starbucks
Amazon
Physician Practice
University
Billing customers
and recording
sales
All sales are entered in the
cash register upon
ordering.
The Amazon online sales
system captures the sales
order at the point of ordering
and customer debit or
credit card transactions are
approved before order is
complete; payment is
processed by Amazon from
credit card companies,
generally daily. No separate
billing by Amazon is required.
Co-payments are collected
from patient upon exiting
the physician’s offices.
Physician practices bill
insurance companies for
services provided. Any non-
covered services are later
billed to the patient.
Tuition is billed in advance of
providing access to
classes. Tuition is recorded
as a receivable when billed
and the revenue is
recorded once the courses
are delivered.
Processing and
recording cash
receipts
Cash is collected as order is
placed and cash is entered
in the cash register drawer.
Subsequently, cash in
drawer is reconciled to
records generated by the
cash register.
Cash is received
electronically from
customer bank accounts for
debit card transactions and
from credit card company
electronic funds transfer
(EFT) transactions.
A cashier at the physician’s
office collects any co-
payments or other amounts
as patient exits the
physician’s office. Payments
from insurance companies
are sent to the physician’s
offices for processing.
Tuition payments are
typically received at the
university’s cashier’s office
or by mail via a bank
lockbox.
Processing and
recording sales
returns and
discounts
Returns or discounts are
recorded using the cash
register. Most likely, larger
returns or discounts must
be approved by the store
manager.
Customers must ship
merchandise for return
back to specified Amazon
distribution center for
processing. Discounts are
applied electronically by the
Amazon online sales
system at the point of
customer ordering.
Generally, pre-negotiated
discounts associated with
health insurance are
processed at the point of
checkout. However, other
discounts may be required
by the insurance company,
which would be processed
later by the physician’s
billing office.
Any tuition waivers or
scholarships provided by
the university are
processed as part of the
billing process as approved
by the registrar’s office.
14-14
Copyright © 2017 Pearson Education, Inc.
14-24 (continued)
Business
Function
Starbucks
Amazon
Physician Practice
University
Writing off
uncollectible
accounts
The only uncollectible
accounts relate to
purchases made with an
invalid credit card.
The only uncollectible
accounts relate to
purchases made with an
invalid credit card.
Because of the complexities
surrounding health
insurance coverage and
because of the number of
individuals without health
likelihood that patient
receivables may not be
fully collectible. Physician
practices closely monitor
uncollectible accounts and
periodically write-off those
deemed uncollectible.
Many are turned over to
collection agencies for
processing.
If tuition is not paid in full, the
student generally is unable
to complete courses. Most
universities require
payment in full before a
When tuition is unpaid, the
student is no longer able
to take the course. While
some private universities
may set up longer-term
receivables, most
universities require the
student to obtain loans
from non-university
sources; thus, they often do
not maintain large long-
term receivable balances.
Write-off of tuition
receivables would be
Providing for bad
Because most sales are
Because most sales are
Because of the high
The university’s accounting
14-15
Copyright © 2017 Pearson Education, Inc.
14-24 (continued)
b.
Transaction
Objective
Starbucks
Amazon
Physician Practice
University
Occurrence of
sales
The auditor would likely
reconcile sales records
generated by the cash
register system to cash
deposited at the bank to
obtain evidence that
recorded sales occurred. If
sales are overstated, no
cash would have been
received from customers
for those invalid sales. So,
cash deposited would be
less than sales in that
situation.
The auditor may perform
substantive analytical
procedures that examine
the relationship between
sales recorded and
inventory usages.
The auditor could inspect
documentation from the
Amazon distribution centers
that goods were shipped for
a sample of sales
transactions recorded.
The auditor could also
examine subsequent
electronic fund transfers
from banks and credit card
companies for sales orders
processed.
The auditor could select a
sample of patient revenue
transactions recorded and
verify that there was
documentation of medical
procedures performed in
the patient’s medical
records.
The auditor could select a
sample of tuition revenue
transactions and verify
payment was received from
the student for the amounts
billed. The auditor could
also verify records in the
registrar’s office that the
student is enrolled and
course grades were issued
for the semester paid.
14-16
Copyright © 2017 Pearson Education, Inc.
14-17
14-24 (continued)
c. Physician offices and universities would generally not have sales
return activities. While Starbucks may receive returns for some
d. Starbucks and Amazon most likely would not have a large volume
14-25
1. a. Test of control
(Completeness)
(2) Cash receipts are recorded on the correct dates.
(Timing)
c. Observation or inspection
2. a. Substantive test of transactions
b. (1) Recorded receipts are for funds actually received by
the company. (Occurrence)
(Completeness)
(3) Cash receipts are deposited at the amount received.
(Accuracy)
(Timing)
c. Inspection
3. a. Test of control
b. Existing sales transactions are recorded. (Completeness)
c. Inspection
4. a. Test of control
customers. (Occurrence)
c. Inspection
5. a. Substantive test of transactions
14-18
14-25 (continued)
6. a. Substantive test of transactions
and summarization)
c. Reperformance
7. a. Test of control
(Occurrence)
c. Inspection
14-26
POSSIBLE ERROR OR FRAUD
CONTROL
1. Goods are removed from inventory
for unauthorized orders.
f. Approved sales orders are required
for goods to be released from
warehouse.
2. Credit sales are made to customers
with unsatisfactory credit ratings.
a. Customer orders are compared with
an approved customer list.
3. Invoices are sent to co-participants
in a fraudulent scheme, and sales
are recorded for fictitious
transactions.
i. Sales invoices are compared with
shipping documents and approved
customer orders before invoices are
mailed.
4. Good shipped to customers do not
agree with goods ordered by
customers.
h. Shipping clerks compare goods
received from warehouse with
approved sales orders.
5. Invoices are sent for shipped
goods, but are not recorded in the
sales journal.
k. Daily sales summaries are
compared with control total of
invoices.
6. Invoices are sent for shipped
goods, and are recorded in the
sales journal, but are not posted to
any customer accounts.
j. Control amounts posted to the
accounts receivable ledger are
compared with the control totals of
invoices.
7. Invoices for goods sold are posted
to incorrect customer accounts.
g. Monthly statements are mailed to
customers with outstanding balances.
8. Invoices for goods sold are posted
to incorrect customer accounts.
e. Goods returned for credit are
approved by the supervisor of the
sales department.
14-19
14-27 a. (2) b. (3) c. (4)
14-28
61% involved improper revenue recognition.
b. The two categories of improper revenue recognition are recording of
fictitious revenue, and recording revenues prematurely.
Premature revenue recognition – These frauds involve an actual
sale, but the company recognized some or all of the revenue in a
period before it was earned. For example, a company might
c. The COSO report describes several techniques to overstate revenue.
Conditional sales – In these transactions, the company recorded
Bill and hold sale - In a bill and hold sale, the company billed the
customer for the goods, but they were held by the fraud company and
shipped at a later date.
14-20
14-29
TEST OF CONTROL
OR SUBSTANTIVE
TEST OF
TRANSACTIONS
TRANSACTION-
RELATED AUDIT
OBJECTIVE(S)
SUBSTANTIVE TEST
1. S T of T
Classification
Not applicable
2. S T of T
Completeness
Accuracy
Timing
Posting and
summarization
Not applicable
3. T of C
Accuracy
Compare unit selling prices on
duplicate sales invoices to the
approved price list.
4. T of C
Classification
Examine a sample of sales
transactions to determine if
each one is correctly classified
in the sales journal.
5. S T of T
Accuracy
Not applicable
6. S T of T
Occurrence
Completeness
Accuracy
Timing
Not applicable
7. T of C
Accuracy
Recalculate the cash discounts
for a sample of remittances
and determine whether each
one was consistent with
company policy.
8. T of C
Completeness
Trace from a sample of
remittance advices to the cash
receipts journal to determine if
the related cash is recorded.
9. S T of T
Posting and
summarization
Not applicable
