Question

11-32 (Objective 11-3) The

following is the description of sales and cash receipts for the Lady’s Fashion Fair, a retail store dealing in expensive women’s clothing. Sales are mainly on account using the store’s own billing rather than credit cards; however, some customers prefer to pay cash.

Salesclerks assist customers and then direct them to the central desk for payment. The computer used to enter sales is operated by the store supervisor, who has been employed for 10 years by Alice Olson, the store owner. The desk and computer are located at the store entrance to control theft of clothes.

When the sale is for cash, the supervisor enters the sale in the computer and generates two copies of a receipt, keeping one copy for the store’s records and providing one copy to the customer. The supervisor also enters the code for the salesclerk who assisted the customer into the computer in order to keep track of the sales by each clerk. If no salesclerk assisted the customer, the supervisor leaves the field blank.

If the customer would like to purchase merchandise on credit, the credit sale is approved by the supervisor from an approved credit list. The supervisor then enters the sale into the computer, and generates two copies of an invoice, keeping one for the store’s records and giving the second copy to the customer. The supervisor enters the code for the salesclerk, if the customer was assisted.

At the end of the day, the supervisor recaps the sales on credit and cash sales according to the invoice and receipt copies and compares the totals to a daily computer-generated summary. The supervisor deposits the cash at the end of each day in the bank’s deposit box. The supervisor’s copies of the invoices are sent to the accounts receivable clerk along with copies of the receipts and a summary of the day’s receipts. The bank electronically sends the deposit slip directly to the accounts receivable clerk.

A daily summary of sales for each sales clerk is generated from the computer and is used in part to calculate employees’ sales commissions. Marge, the accountant, who is prohibited from handling cash, receives the daily sales summary and the invoice and receipt copies. Daily, she generates a complete printout of all input and summaries. The accounting summary includes sales by salesclerk, cash sales, credit sales, and total sales. Marge compares this output with the invoice and receipt copies and reconciles all differences.

The computer updates accounts receivable, inventory, and general ledger master files. After the update procedure has been run on the computer, Marge’s assistant files all sales invoices and receipts by customer number. A list of the invoice numbers in numerical sequence, and a list of receipt numbers in numerical sequence, are included in the sales printout.

The mail is opened each morning by a secretary in the owner’s office. All correspondence and complaints are given to the owner. The secretary prepares a prelist of cash receipts. He totals the list, prepares a deposit slip, and deposits the cash daily. A copy of the prelist, the emailed deposit slip, and all remittances returned with the cash receipts are given to Marge. She uses this list and the remittances to record cash receipts and update accounts receivable, again by computer. She reconciles the total receipts on the prelist to the deposit slip and to her printout. At the same time, she compares the deposit slip received from the bank for cash sales to the cash receipts journal.

A weekly aged trial balance of accounts receivable is automatically generated by the computer. A separate listing of all unpaid bills over 60 days is also automatically prepared. These are given to Mrs. Olson, who acts as her own credit collector. She also approves all write-offs of uncollectible items and forwards the list to Marge, who writes them off.

Each month Marge mails statements generated by the computer to customers. Complaints and disagreements from customers are directed to Mrs. Olson, who resolves them and informs Marge in writing of any write-downs or misstatements that require correction.

The computer system also automatically totals the journals and posts the totals to the general ledger. A general ledger trial balance is printed out, from which Marge prepares financial statements. Marge also prepares a monthly bank reconciliation and reconciles the general ledger to the aged accounts receivable trial balance.

Because of the importance of inventory control, Marge prints out the inventory perpetual totals monthly, on the last day of each month. Salesclerks count all inventory after store hours on the last day of each month for comparison with the perpetuals. An inventory shortages report is provided to Mrs. Olson. The perpetuals are adjusted by Marge after Mrs. Olson has approved the adjustments.

Required

a. For each sales transaction-related management assertion based on AICPA auditing standards (see Table 6-3), identify one or more existing controls.

b. For each cash receipts transaction-related management assertion based on AICPA auditing standards (see Table 6-3), identify one or more existing controls.

c.Identify deficiencies in internal control for sales and cash receipts.

Page < 37 > of 550 - ZOOM + x Table 6-3 Management Assertions for Each Category of Assertions PCAOB Auditing Standards Assertions Assertions About Transactions, Balances, and Presentation and Disclosure Existence or occurrence-Assets or liabilities exist at a given date, and recorded trans- actions have occurred during the period Completeness—All transactions and accounts that should be presented in the financial scacements are so included. Valuation or allocation Assets. liability equicy, revenue, and expense components have been included in the financial state- mencs at appropriate amounts. International Auditing Standards and AICPA Auditing Standards Assertions Assertions About Classes of Assertions About Account Balances Transactions and Events and and Related Disclosures Related Disclosures Occurrence Transactions and events that have ExistenceAssets. liabilities, and equity been recorded or disclosed have occurred interests exist. and pertain to the entity Completeness—All transactions and events Completeness-All assecs liabilities, and equi that should have been recorded have been Interests that should have been recorded recorded and all related disclosures that have been recorded and all related disclo- should have been included in the financial sures that should have been included in the statements have been included. financial statements have been included. Accuracy Amounts and other daca relating to Accuracy. valuation, and allocation Assecs. recorded transactions and events have been liabilities, and equicy interests have been recorded appropriately, and related disclo Included in the financial statements ac sures have been appropriately measured and appropriate amounts, any resulting valua- described. tion adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described Classification Transactions and events have Classification Assecs, liabilities, and equicy been recorded in the proper accounts Interests have been recorded in the proper accounts Cutoff-Transactions and events have been recorded in the correct accounting period. Rights and obligations—The entity holds or controls the rights to assets, and liabilities are the obligation of the entity Rights and obligations—The company holds or controls rights to the assets, and liabilities are obligations of the company at a given date. Presentation and disclosure—The components of the financial statements are property classified, described, and disclosed. PresentationTransactions and events are ap- propriately aggregated or disaggregated and clearly described and related disclosures are relevant and understandable in the context of the requirements of the applicable finan- cial reporting framework Presentation Assets. liabilities, and equicy Interests are appropriately aggregated or dis- aggregated and clearly described and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.

Answer 1

For each sales transaction related audit objective, identifies one or moreexisting controls.
Controls existing in sales are as follows:

1. Completeness: Sales book is pre numbered
2. Occurreness- The supervisor then enters the sale into the computer, and generates two copies of an invoice, keeping one for the store’s records and giving the second copy to the customer.

3. Accuracy- A daily summary of sales for each sales clerk is generated from the computer and is used in part to calculate employees’ sales commissions. Marge, the accountant,she generates a complete printout of all input and summaries. Marge compares this output with the invoice and receipt copies and reconciles all differences.

For each cash receipts transaction-related management assertion based on AICPA auditing standards (see Table 6-3), identify one or more existing controls.

1. Completeness/Valuation - At the end of the day, the supervisor recaps the sales on credit and cash sales according to the invoice and receipt copies and compares the totals to a daily computer-generated summary. The supervisor deposits the cash at the end of each day in the bank’s deposit box.

2. Existence Occurence: The secretary prepares a prelist of cash receipts. He totals the list, prepares a deposit slip, and deposits the cash daily. A copy of the prelist, the emailed deposit slip, and all remittances returned with the cash receipts are given to Marge. She uses this list and the remittances to record cash receipts and update accounts receivable, again by computer. She reconciles the total receipts on the prelist to the deposit slip and to her printout. At the same time, she compares the deposit slip received from the bank for cash sales to the cash receipts journal.