Professional Documents
Culture Documents
13-2
Copyright © 2007 Pearson Education Canada
Classes of transactions in the sales
and collection cycle
Sales (cash and on account)
Cash receipts
Sales returns and allowances
Charge-off (or write-off) of uncollectible
accounts
Bad-debt expense
13-3
Copyright © 2007 Pearson Education Canada
Typical records and transactions in
the sales cycle
Sale is initiated with a customer order;
shipping documents and invoice
accompany the sale, which is recorded
both in a transaction file (sales) and
summarized in a customer master file (or
in a database)
Routine reports include a sales journal and
an aged accounts receivable trial balance
13-4
Copyright © 2007 Pearson Education Canada
Method of recording the transaction
13-5
Copyright © 2007 Pearson Education Canada
Control differences between batch
and online systems: audit trails
Batch systems: Online systems:
Transactions readily Transactions may be
traced from source initiated and recorded
transaction to general without source
ledger posting documents (e.g.
Totals from groups of phone orders)
transactions are Document sequencing
totaled, and these is important to track
totals traced documents.
13-6
Copyright © 2007 Pearson Education Canada
Control differences between batch and online
systems: error detection and correction
Batch systems: Online systems:
If one transaction is in Focus is on
error, the whole batch preventing errors
is rejected Input edit processes
Error followup is check for valid
required to ensure customer data and
timely processing and reasonableness
avoid cutoff errors
13-7
Copyright © 2007 Pearson Education Canada
Control differences between batch and
online systems: segregation of duties
13-10
Copyright © 2007 Pearson Education Canada
Documentation of internal controls
13-11
Copyright © 2007 Pearson Education Canada
Tests of internal controls
Once the key controls have been identified,
the auditor can decide whether the
control(s) will be tested or whether tests of
details will be conducted instead
Tests of internal controls will be devised
for each key control that will be tested
13-12
Copyright © 2007 Pearson Education Canada
Example of internal control:
occurrence assertion (manual)
Key control: credit is approved before
shipment takes place: The sales manager
initials all sales orders over $25 to indicate
approval.
Possible test of control: Examine a sample
of sales orders to ensure that the sales
manager’s initial is present.
13-13
Copyright © 2007 Pearson Education Canada
Example of internal control:
occurrence assertion (automated
batch)
Key control: Orders causing balances to exceed
credit limits are printed on an exception report
and are not processed for shipment.
Possible test of control: Examine a selection of
exception reports and ensure that: these orders
exceed the credit limit and that the orders were
not processed for shipment.
13-14
Copyright © 2007 Pearson Education Canada
Example of internal control:
occurrence assertion (automated
online)
Key control: Orders causing balances to exceed
credit limits are held in a separate transaction file
and are not processed for shipment.
Possible test of control: Request the client to
print off the day’s on-hold transaction file. View
the file to ensure that all orders in the file exceed
the customer’s credit limits.
13-15
Copyright © 2007 Pearson Education Canada
Example of internal control:
occurrence assertion
(interdependent)
Key control: Orders causing balances to exceed
the credit limit are printed on an exception report
and must be approved by a credit manager prior
to shipment by means of entering a password.
Possible test of control: Review an exception
report and ensure that all sales orders there
caused the customers’ credit limit to be exceeded.
Discuss with the sales manager processes
followed to release such held orders.
13-16
Copyright © 2007 Pearson Education Canada
Practice problem 13-22 (p. 412)
Practice identifying
the audit assertion that
goes with a particular
control
How would you test
the control?
13-17
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Manual, automated and
interdependent controls
From the previous examples, you can see
that:
– Manual controls are controls performed
entirely by people
– Automated controls (batch or online) are
performed only by computerized systems
– Interdependent controls rely upon computer
processes (automation) but a person must also
be involved to fully perform the control
13-18
Copyright © 2007 Pearson Education Canada
Frequency of testing of internal
controls
Which type of controls must be tested
annually?
Which type of controls could potentially be
tested every three years? Under what
circumstances?
13-19
Copyright © 2007 Pearson Education Canada
Full testing of interdependent
controls
The interdependent control has two parts:
– A function performed by an automated systems
– A function performed by an individual
It is only possible to rely upon the automated
function if: general controls have been assessed
as good
Then, both parts of the control must be tested to
enable reliance upon the control
13-20
Copyright © 2007 Pearson Education Canada
What if control testing yielded
many errors?
The first step is to determine whether the
errors (exceptions) were due to a particular
circumstance or restricted to a particular
time period
For example, the credit manager was on
holidays, and so no one approved credit, or
the person who approved credit in his/her
absence made many errors
13-21
Copyright © 2007 Pearson Education Canada
Practice problem 13-21 (p. 412)
Practice
differentiating
between what is likely
an error or fraud
How would you
prevent the error or
fraud?
13-22
Copyright © 2007 Pearson Education Canada
What if control testing yielded
many errors? (cont’d)
If it turns out that the errors are systemic (i.e.
throughout the period and cannot be isolated to a
particular cause), then
The auditor first looks for a compensating
(alternative control)
If this alternative control achieves the same
purpose and is functioning correctly, then the
auditor can still rely upon internal controls
13-23
Copyright © 2007 Pearson Education Canada
How do we decide whether there
could be a material error?
If there is no compensating control, then
the auditor needs to investigate to
determine whether there is potential for
this weakness to result in a material error
Conduct dual-purpose or weakness
investigation (detail) tests
These tests help to quantify the extent of
the error
13-24
Copyright © 2007 Pearson Education Canada
Results of quantifying the error
If it turns out that the results of the weakness
could result in immaterial error, the weakness
will be reported in a management letter, and
extended tests of detail may not be required
If a material error could result, the matter needs
to be reported both to management and the audit
committee and the tests need to be sufficient to
provide a reasonable range for the extent of the
error
13-25
Copyright © 2007 Pearson Education Canada
Design versus performance format
of audit program
The initial audit program is organized by audit
assertion, to ensure that controls are assessed
(and possibly tested) for each assertion
It is then organized into a performance format to
maximum efficiency (e.g. all tests for the
shipping document would be grouped)
The use of automated working paper software
facilitates this process
13-26
Copyright © 2007 Pearson Education Canada
Computer-assisted audit tests
Where there are a large number of transactions, it
is effective for auditors to use computer-assisted
audit tests
For example, in internal controls testing, the
auditor could use automated sampling routines to
access the client sales transaction file and select
an attribute sample of sales transactions, printing
details of the transactions
13-27
Copyright © 2007 Pearson Education Canada
Practice problem 13-24 (p. 413)
Look at the sampling
process for sales
How are results
evaluated?
13-28
Copyright © 2007 Pearson Education Canada
Suitability of test data
Batch systems: Test data may be inappropriate,
as the transactions would be processed by the
accounting system. Only transactions that will be
rejected could be used.
Online systems: Test data is useful to verify the
accurate functioning of online input edit controls
(e.g. rejection of invalid customer numbers)
13-29
Copyright © 2007 Pearson Education Canada
Suitability of generalized audit
software
Best suited for analytical review, tests of
detail, or dual-purpose tests, for example:
– Adding up the sales transactions to sum to the
sales for the day, month or year
– Reperformance of tax calculations
– Examination of customer master file to
determine if any balances exceed their credit
limit
13-30
Copyright © 2007 Pearson Education Canada