CASE 9.

2
Henrico Retail, Inc.
Understanding the IT Accounting System and
Identifying Audit Evidence for Retail Sales
MARK s. BEASLEY • FRANK A. BUCKLESS ■ STEVEN M. GLOVER • DOUGLAS F. PRAWXTT

LEARNING OBJECTIVES
After completing and discussing this case you should be able to
[1] Outline the audit trail for processing retail sales [3] Develop audit plans for gathering evidence to test
transactions the occurrence and accuracy assertions for retail
[2] Recognize when audit evidence must be gathered sales transactions
electronically if a traditional paper trail is absent

INTRODUCTION
Henrico Retail, Inc. is a first year audit client. The audit partner obtained the following description of the
sales system after recently meeting with client personnel at the corporate office.

DESCRIPTION OF THE SALES SYSTEM

Henrico’s sales system is IT-based with computerized cash registers on the floors of all of its stores. At the
point of sale, Henrico’s sales clerks scan the bar code on the price tag of the product being sold to read the
product number. If the quantity of a product being sold exceeds one, sales clerks can either enter the quantity
being sold for that particular product code or scan the bar code for each individual item being purchased. At
that point, the computerized cash register performs the following:
■ Identifies correct unit price for that product number from the online price master file stored on the
store server
■ Notifies the clerk if product number is invalid
■ Calculates total price of purchase (price X quantity)
■ Extends totals, calculates sales taxes, and determines final transaction amount.
Before the sale can be completed, sales clerks must indicate whether this is a cash, debit, or credit
sale. For credit sales, Henrico only accepts VISA or MasterCard credit cards. Customers swipe their credit
card through a card reader directly linked to VISA and MasterCard to initiate the online credit card approval
process, when the credit card agency’s electronic approval is transmitted back to the cash register system,
the credit approval code is electronically recorded on the cash register hard drive before the charge slip is
generated for customer signature, when credit is denied, customers must either pay by cash or the sales clerk
voids the sale. The original signed copy of the credit charge slip is maintained in the cash drawer. Debit card
transactions work virtually in the same manner as credit sales except that the online system seeks
authorization from the customer's bank.

The case was prepared by Mark s. Beasley, Ph.D. and Frank A. Duckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and
Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. Henrico is a fictitious company. All characters and names
represented are fictitious; any similarity to existing companies or persons is purely coincidental.

Section 9: Auditing Cash, Fair Value, and Revenues

For all types of sales, the cash register generates a customer paper-based receipt while a duplicate record of
© 2015 Pearson Education, Inc. 265
 the transaction is stored on the cash register’s hard drive in an online file that is backed up hourly to the
store’s computer server. This electronic transaction information documents on the register’s hard drive the
product number, unit price, quantity sold, the extended transaction totals, and credit card agency or bank
approval information.
Sales clerks have no access to the transaction electronic file. In addition, sales clerks can only read
unit price information and have no access to change unit prices in the online price master file. Only the store
manager’s staff has access to the price master file. Each week, the store manager’s staff approves price
changes and new product listings to be added to the price list master files. And, only the store’s human
resources manager is authorized to input changes to the employee master file of valid employee
identification numbers.
Store clerks are allowed to operate any machine on the floor as long as the clerk has a valid employee
identification number. If a cash register is not currently being used, all the sales clerk has to do is enter his
or her employee identification number before scanning any product being sold. The system will not proceed
without a valid employee identification number. Generally, operation of the cash register is self-explanatory
although some problems have occurred previously. New sales clerks receive two hours of training on the
operation of the cash register before serving customers on the sales floor. Henrico management believes “on
the job experience” is most effective.
At the end of each day, sales clerks select the “register closing” option on the cash register. That
process automatically updates both the transaction online file stored on the cash register’s hard drive and the
backup file stored on the store’s server. The closing process generates a receipt printout at the register that
summarizes the total amount of cash sales, debit and credit sales, sales returns, and any other miscellaneous
transactions for the day. The sales clerks count the cash in the drawer and list the total cash count on a Daily
Deposit sheet (a preprinted blank form). In addition, sales clerks summarize total debit and credit sales on
the Daily Deposit Sheet by listing total amounts from the debit and credit sales slips in the register. The sales
clerks also record on the Daily Deposit Sheet the cash, debit, credit, and other transaction totals indicated on
the cash register receipt generated by the register closing process. The sales clerks reconcile their cash, debit,
and credit slip counts to these transaction totals and indicate any differences in amount. At that point, the
sales clerks take the cash drawer, which includes debit and credit slips, to the store cashier who is located in
the store cashier’s office. The store cashier verifies the Daily Deposit Sheet and initials the total cash and
debit and credit sales columns listed on the Daily Deposit Sheet for each register closed indicating that the
amounts in the drawer reconcile to the amounts on the Daily Deposit Sheet.
The cashier leaves $200 in each cash drawer to begin the following day. Cash drawers are stored
overnight in the store’s vault. Each night, a local Brinks security service picks up the cash , debit transaction
receipts, and credit charge slips collected during the day for delivery to the overnight depository at the store’s
local bank. The next day, the hank immediately gives the store cash credits for all charge slips presented
based on the bank’s arrangement with VISA and MasterCard and funds from debit transactions are
electronically transmitted to Henrico's bank account from the customers' banks. And, the bank automatically
credits the store’s bank account for all cash received. The store cashier can download confirmation of the
deposit processed each day by logging into the bank's online customer account access webpage.
An independent person in accounting for each store verifies that the sum of the cash, debit
transactions, and credit card slip totals on all Daily Deposit Sheets for the prior day reconcile to the
confirmation received from the bank of the deposit processed. After the reconciliation is performed, the
bank’s email confirmation is printed and attached to the Daily Deposit Sheets, which are filed together by
date.
Overnight, the store computer server processes all transactions downloaded from each cash register
through the register closing process and summarizes that information in a Daily Sales Report, which is an
electronic file stored on the store’s server. Each night, an electronic copy of the Daily Sales Report file from
each store is transmitted automatically at midnight to the corporate office
Case 9.2: Henrico Retail, Inc.
main server. The store server also automatically generates a paper copy of the Daily Sales Report for each
store nightly. It summarizes total store sales, as well as subtotals of cash transactions, debit transactions, and
credit sales, by store cash register. These reports are filed by date at each store.
Each night, the store computer server automatically updates perpetual inventory records, which are
stored on the store’s computer server. Once the perpetual inventory records are updated, an electronic copy
of the perpetual inventory record is transmitted to the corporate office main server. No paper reports of daily

266 © 2015 Pearson Education, Inc.

updates to the perpetual inventory record are generated by the computer.
At month end, the store computer server generates an Inventory Report from the perpetual inventory
file. The Inventory Report provides inventory quantity information by product number. Also, the store
computer server uses each day’s Daily Sales Report file to generate a Monthly Sales Report file for each
store. This file contains daily sales totals for the store for each day of the month. This Monthly Sales Report
information is electronically transmitted to the corporate office. Each store’s server generates a printout of
the Monthly Sales Report at month end. The corporate office computer server uses this information to
prepare and print a consolidated General Ledger, which summarizes the postings of monthly sales totals
from each store to the consolidated sales account.

REQUIRED
You are the audit senior assigned to the audit of Henrico Retail Inc. The audit partner recently asked you to
assist in planning the audit of the sales system based on your review of the client-prepared sales system
narrative. The partner has asked you to address the following issues:
[1] Describe the sales transaction audit trail from the point of sale to the general ledger posting to the
consolidated sales accounts at the corporate office. Be sure to emphasize which aspects of the audit trail
are in paper or electronic form.
[2] Describe the difference between a preventative control and a detective control and give an example of
each that are present in the sales system at Henrico.
[3] Develop a proposed strategy for auditing the occurrence assertion for sales transactions. Describe
whether there is a sufficient paper-based audit trail to audit that assertion without relying on IT audit
specialists to test electronic only processes.
[4] What evidence source would you use to select a sample of sales transactions to test the occurrence of
sales transactions at one store? why would you use this source? what evidence would you examine for
each transaction selected?
[5] Develop a proposed strategy for auditing the accuracy assertion for sales transactions. Describe whether
there is a sufficient paper-based audit trail to audit that assertion without relying on IT audit specialists
to test electronic only processes.
[6] Describe whether you can use the same sample of transactions selected to test the occurrence assertion
to also test the accuracy assertion.
[7] How would you select a sample to test the completeness assertion for sales? Explain whether the sample
used to test the occurrence assertion would be effective for testing the completeness assertion.
[8] How do risks related to manual controls differ from risks related to automated controls? Give an example
of each from the sales system at Henrico.
[9] What portion, if any, of the accounting system will likely require the assistance of an IT systems auditor,
who evaluates evidence existing only in electronic form?
[10] What control deficiencies can you identify in the existing sales system?

© 2015 Pearson Education, Inc. 267