1.

a. Describe two conditions that might indicate the recording of fraudulent sales.
 Suspicious year-end sales to a single or few customer that is unusually
large compared to other sales transactions.
 Questionably large amount of sales return after the reporting date
b. Define bill and hold transactions and describe the audit significance of such
transactions.
 Sales that are billed by the seller but are not yet delivered to buyer are
known as bill-and-hold transactions. The relevance of these transactions
to audit is the timing of revenue recognition because for the transaction
to qualify as a sale, it must first meet strict accounting criteria.
c. Define channel stuffing and describe the audit significance of this practice. 
 Channel stuffing is a method of artificially boosting a company's revenues
or sales just before a reporting period. It may also mean the process of
providing enormous incentives to resellers to buy significantly more
goods than they can resale in a regular length of time. The significance of
this practice in audit is the level of tests that an auditor should carry out
due to the fallacy that this practice creates making the company looks
better than it actually is and resulting to a substantial amount of sales
returns after the reporting date.

2.
a. For effective control over credit sales, describe four major functions that should
be segregated.
 Authorization of sales.
 Credit approval.
 Billing of accounts.
 Maintenance of accounting records.

b. In addition to adequate segregation of duties, describe two other internal

controls over sales transactions. 
 Purchase order authorization over a certain limit and authorization over
receivables write-offs.
 Pre-numbering shipping documents that are accounted for by the billing
department.

3.
a. Describe three conditions which should exist for the auditors to use the
negative form of request.
 Control risk and inherent risk is low
 Large number of accounts with small balances
 There's reason to believe the individual receiving the confirmation will
consider the request.

b. If a response is not received to an initial positive confirmation request,

describe the action that should be taken by the auditors, including a discussion of
alternative auditing procedures.
 Send another request.
 Consider sending another request or contact the customer
 Perform alternative auditing procedures including:
• Examining subsequent cash receipts.
• Vouching transactions making up the account balance to invoices and
shipping documents.
• Establishing the validity of the customer.