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Problem 14-21, p. 490, 11 th . Canadian Edition. The following errors or fraud and other irregularities are included in the accounting records of Joyce Manufacturing Ltd.: The credit limit for a new customer was entered as $20,000 rather than $2,000 in the customer master file.
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Problem 14-21, p. 490, 11th. Canadian Edition The following errors or fraud and other irregularities are included in the accounting records of Joyce Manufacturing Ltd.: • The credit limit for a new customer was entered as $20,000 rather than $2,000 in the customer master file. • A material sale was unintentionally recorded for the second time on the last day of the year. The sale had originally been recorded two days earlier. • Cash paid on accounts receivable was stolen by the mail clerk when the mail was opened. • Cash paid on accounts receivable that had been prelisted by a secretary was stolen by the bookkeeper who enter cash receipts and accounts receivable in the accounts receivable system. He failed to enter the transactions. • A shipment to a customer was not billed because of the loss of the bill of lading. • Merchandise was shipped to a customer, but no bill of lading was prepared. Since billings are prepared from bills of lading, the customer was not billed. • A sale to a retail customer was unintentionally classified as a commercial sale. REQUIRED • Identify whether each misstatement is an error, a fraud, or other irregularity. • For each misstatement, state a control that should have prevented it from occurring on a continuing basis. • For each misstatement, state an audit procedure that could uncover it.
Problem 12-22, page 403 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.
Other audit procedures that could be performed are: • test extensions on attached sales invoices for clerical accuracy (Valuation) • test time delay between warehouse removal slip date and billing date for timeliness of billing (Timing) • trace entries into perpetual inventory records to determine that inventory is properly relieved for shipments (Posting and summarization) • The test performed in part c. cannot be used to test the existence of sales because the auditor already knows that inventory was shipped for these sales. To test the validity of sales, the sales invoice entry in the sales journal is the sampling unit. Since the sales invoice numbers are not identical to the warehouse removal slips it would be improper to use the same sample.
Problem 12-27, page 405 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?
Problem 12-27, page 405 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?
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 4 and 5 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.
