Problem No. 1.

Explain the following can be implemented to ensure accuracy of customer

orders. (1) validity checks; (2) completeness tests; (3) reasonableness test
 Validity checks may be applied to examine the purchaser and inventory records at the
purchaser request with the records withinside the purchaser and inventory professional
documents. A completeness check can assure that all the crucial records are available at a
purchaser request. A reasonable check can evaluate the quantity asked and the purchaser's
preceding request records.

Problem No. 2. Failure to collect cash on credit sales is a threat in the revenue cycle. What
controls can be used to help neutralize the threat for the following: (1) Accounts Receivable; (2)
Cash
 The data receivable and earning need to be observed. Isolation of responsibility controls
need to continually be done and checked for consistency. Moreover, a control used to
manage debt claims which straightforwardly influences earnings is to utilize a statistics
receivable maturing plan. It can likewise assist with assessing credit score preparations
and specific consumer credit score limits. Likewise, a cash spending plan may be applied
to provide a greater genuine gauge of cash inflows and cash surge. An association can be
made aware of a drawing near income lack, ultimately empowering it to get non-
everlasting financing at costs to govern the issue in a first-rate way.
Problem No. 3. Describe the following threats in the revenue cycle and identify appropriate
controls for each threat: (1) Sales to customers with poor credit; (2) Shipping errors; (3) Theft of
inventory ; (4) Failure to bill customers; (5) Separating shipping and billing and prenumbering of
shipping documents helps along with reconciliation of all sales documents; (5) Billing errors ; (6)
Theft of cash; (7) Posting errors in updating accounts receivable ; (8) Loss of data; (9) Poor
performance .

Threat 1: Sales to customers with poor credit- Controls: Having an unbiased credit score
approval feature and keeping exact purchaser accounting can assist to save you problems.
Threat 2: Shipping errors- Controls: Reconciling delivery notices with selecting tickets; bar-
code scanners; and records access software controls will assist to trap those errors.
Threat 3: Theft of inventory- Controls: Secure the place of stock and file transfers; launch best
with legitimate transport orders; have correct duty for choosing and transport; and finally,
periodically reconcile facts with a bodily count
Threat 4: Failure to bill customers- Controls: Separating transport and billing and pre-
numbering of transport files facilitates in conjunction with reconciliation of all income files.
Threat 5: Billing errors- Controls: Reconciliation of choosing tickets and payments of lading
with income orders; records access edit controls; and charge lists might also additionally save
you billing errors.
Threat 6: Theft of cash- Controls: Segregation of obligations is vital to save you this extreme
problem (the subsequent obligations have to be separate: coping with coins and posting to client
accounts; coping with coins and authorizing credit score memos and adjustments; issuing credit
score memos and retaining client accounts); use of lockboxes for receipts and EFT for
disbursements; mailing client statements monthly; use coins registers in retail operations in
which coins bills are received; deposit coins day by day withinside the financial institution; and
feature the financial institution reconciliation feature finished with the aid of using impartial 1/3
parties
Threat 7: Posting errors in updating accounts receivable- Controls: Use of editing and batch
totals is essential here.
Threat 8: Loss of data- Controls: Regular backups are important with one replica saved off-site;
and logical and bodily get right of entry to controls to save you leakage to competition and
irregularities.
Threat 9: Poor performance- Controls: Regular backups are important with one copy saved off-
site; and logical and bodily get right of entry to controls to save you leakage to competition and
irregularities.

Problem No. 4. Discuss the general control issue of the loss of data, as it relates to the revenue
cycle.

One of the two general objectives that pertain to all sales cycle activities is the lack of records.
The number one threats associated with the records availability objective are the lack of records
and get entry to controls. It is imperative that accurate purchaser account and stock records be
maintained for external and internal reporting functions and for client inquiries. Such
information needs to be included from loss and damage through the usage of backup documents.
One backup report should be stored on-site, while a second need to be saved off-site. Backup
documents of the most current transactions need to additionally be maintained. All disks and
tapes need to have each outdoor and internal report labels to reduce the possibility of accidental
erasure of critical documents. Unauthorized access records also can moreover motive leaks of the
records to competition and the hazard of damage to sensitive and critical facts documents.

Problem No. 5. Explain how to effectively segregate duties in the sales order activity.

Sales orders must be recorded through sales personnel. Credit selections must be made through
the credit manager, not sales personnel. Also, income orders authorize release of products to
delivery. Warehouse and delivery must be separate from sales. A computer does the record and
authorization, it is important to ensure integrity of the programs and to carry out edit checks on
any on-line entries.

Problem No. 6. Discuss the following revenue cycle threats: (1) stockouts; (2) carrying costs; (3)
markdowns.

The risks in the income order access process are stockouts, carrying costs, and markdowns. The
problem with stockouts is that once items aren't available to deliver to customers, the commercial
enterprise risks losing the sale to a competitor that may offer the products in a timely manner.
The opposite problem also can arise wherein excess inventory will increase carrying costs, with
the result that markdown may be essential which will sell the inventory. Two controls may be
carried out to deal with this risk. One control that may be put into place is to set up accurate
inventory control. An AIS with real-time online abilities may be programmed to apply the
perpetual stock method. This will make sure that correct information is maintained
approximately the amount of stock for sale. This will put off errors in setting orders for items
whilst a enough stock quantity is on hand. Periodic bodily counts of stock may even affirm the
perpetual quantities recorded with the aid of using the AIS. Another essential manipulate in this
case is that of correct income forecasting. Proper advertising efforts should be made together
with often reviewing sales forecasts for accuracy. Such forecasts should be revised as essential.
Sales force advertising efforts should be commensurate with inventory levels as well.

Problem No. 7. Listed below are six assertions regarding the financial presentations made in the
revenue process. For each, give an example of how an auditor could use one of the types of
documents contained in the revenue process to test the assertion.

(1) Occurrence - Observation and evaluation of the adequate separation of features Follow-up of
a pattern of transport files to the respective sales invoices and the sales journal
(2) Completeness - Tracing a sample of shipping documents to their respective sales invoices and
to the sales journal
(3) Authorization - Review of client's procedures for granting credit
(4) Accuracy - Checking the bill of sale for evidence that the customer's staff verified the
mathematical correctness
(5) Cutoff - Comparison of the dates on sales invoices with the dates of the relevant shipping
documents.
(6) Classification- Checking the income journal and general ledger for proper classification.

Problem No. 8. The XYZ Company billing department has decided to assign one employee to
each of its customers. This employee will be responsible for granting credit to the client and then
handling the billing. XYZ believes this will result in better customer service, because the client
will only have to deal with one person and that one person will be very familiar with the credit
terms. As an auditor, would you agree with XYZ's decision?

Segregation of duties issue. It may be proper that there will be higher customer support for the
customer, it leaves a large weak point in the company's billing department. It is essential for
responsibilities which includes granting the credit after which managing it to be separated, in
order that problems such as fraud do not occur. With no accountability, the representative can be
more willing to help their single customer gain higher offers on credit if they can benefit from it
in some way. It simply leaves too many negative opportunities open.
Problem No. 9. What inherent risk factors should an auditor consider when auditing the revenue
process of a computer manufacturer?

In a computer manufacturer, there are risk elements that an auditor should consider when
inspecting the sales process. First, industry-related elements which can create danger consist of
enterprise growth, purchaser power, supplier power, aggressive enterprise, alternative products,
and the complexity of an enterprise. Second, technological change, every day there are new
technological modifications in a computer manufacturer, and to preserve up, your company's
regulations and employees should be adaptable. This issue may be useful in addressing some of
the dangers inherent in the computer production enterprise.

Problem No. 10. According to the Certified Fraud Examiners, these are the eight common
methods for committing financial statement fraud. Provide an example on how to commit the
following and the effects of which to the financial statements.

1.Early revenue recognition

2. Holding the books open past the accounting period
3. Fictitious sales
4. Failure to record returns
5. Fraud in the percentage of completion method
6. Related party transactions
7. Overstating receivables and inventory
8. Liability and expense omissions

Problem No. 11. Why is it important to establish and monitor credit limits for customers.

It is important to verify the customer's creditworthiness and set up a credit score rating limit
based mostly on that creditworthiness. Once the issue is set, the organization desires to have
strategies or strategies in the area to ensure that the credit score score limit is not exceeded.
Without a limit or tracking of that limit, the business enterprise runs the chance of not being paid
for goods or services purchased by customers.

Problem No. 12. How can an effective system of internal controls lead to increased sales
revenue?

When an effective structure of internal controls is in place, managers can be able to spend much
less time overseeing operations and can therefore, spend extra time on sales increase techniques
and activities. For example, with a proper set of general authorization techniques for sales, a
supervisor would now no longer want to approve each sale individually. This offers the
supervisor extra time to focus on activities that could cause increased sales.

Problem No. 13. Why should the person responsible for shipping goods to customers not also
have responsibility for maintaining records of customer accounts?

A person responsible for shipping items to client is not responsible for keeping the records of the
customer considering each employee has its own responsibilities to do, and segregation of
responsibilities. Access to client records could allow that person to also alter records to cover the
theft. The alteration to the records could include deleting the sale or writing off the sale as a bad
debt.

Problem No. 14. What is the purpose of a credit memorandum?

The credit memorandum documents the fact that a customer has returned goods. The credit
memorandum is also used to reduce the customer’s receivable account balance based upon the
return of goods.

Problem No. 15. How are sales invoices used (in a manual system) in the preparation of credit
memos?

The sales invoice is matched to the receiving report, which is generated when products are
returned. This match is required to confirm that the goods was sold to the consumer and that the
selling price that should be returned was correct.

Problem No. 16. How could fraud be perpetrated through the sales returns process?

If there aren't sufficient internal controls in place, there are various sorts of fraud that can occur
in sales returns. Customers returning goods that were not originally purchased from the
company, customers requesting a refund more than the original sales amount, customers
requesting refunds for goods that were never returned but submitting false documentation of a
return, and employees stealing returned goods are just a few examples.

Problem No. 17. List the advantages of an EDI system.

Elimination of keying, keying errors, and the time required for keying, elimination of mailing
time and postage expenses, reduction of inventory levels, and competitive advantage and/or
preservation of existing business are all advantages of using an EDI system.

Problem No. 18. What is the purpose of maintaining transaction logs? Why are they especially
important in IT systems?

Transaction log is used to record a transaction that is about to happen, Also, it stores information
the database server needs for restoration if the server fails while writing data to disk. Recovering
Individual Transactions, Recovering Incomplete Transactions as SQL Server begins, Restoration
up to the Point of Failure, Supporting Transactional Replication, Log Shipping and Database
Mirroring.

Problem No. 19. List some advantages of a POS system.

1.Simplification of Operations
2.Better Inventory Management
3.Quick Payments
4.Better Company Organization
5.Regular Updates
6.Simplification of Operations
7.Fewer Errors
8.Increased Revenues
9.Technical & Technological Support
10.24/7 Access to Data

Problem No. 20. (1) Describe what is likely to occur if company personnel erroneously recorded
a sales transaction
for the wrong customer? (2) What if a cash receipt was applied to the wrong customer?; (3)
Identify
internal controls that would detect or prevent this from occurring.

If the sale was traced to the wrong consumer, the wrong client would be billed, which might lead
to unfavorable feelings toward the organization from both the wrong and right customers. It
might also be difficult to determine which customer should be billed if the organization lacks the
necessary documents. As a result, the company may be unable to collect the funds it should have
received. Two customer balances will be incorrect if a cash receipt is utilized for the wrong
customer. The corporation would continue to bill the paying client while failing to bill the
incorrect consumer for the correct amount. In the absence of adequate documentation, Correcting
this problem would be challenging. Maintaining correct documentation, including source
documents such as client orders and reference lists, and matching essential documents prior to
recording are examples of internal controls that could assist prevent these errors. Invoices are
compared and verified against accounts receivable, and supervision is provided.

Problem No. 21. Debate the logic used in the following statement: “The person responsible for
handling cash
receipts should also prepare the bank reconciliation because he is most familiar with the
deposits that have been made to the bank account.”

It is a given that if a person could be completely trusted to perform both tasks, it would be more
efficient. Having both responsibilities, on the other hand, provides the opportunity and
temptation for that person to steal money and cover it up. Furthermore, a single individual
performing both tasks may make an error that affects both the receipts and the reconciliation.
Separating these responsibilities may reduce the efficiency of bank reconciliations marginally,
but the benefits of fraud prevention and detection outweigh any inefficiencies.

Problem No. 22. The following list presents various internal control strengths (S) or risks (R)
that may be found
in a company’s revenues and cash collection processes.
(1) Credit is authorized by the credit manager. (2) Checks paid in excess of $5,000 require the
signatures of two authorized members of
management. (Although this is viewed as an internal control strength, it is not
applicable to the revenues processes.)
(3) A cash receipts journal is prepared by the Treasurer’s department. (This type of
accounting record should be prepared by those with recordkeeping responsibilities
rather than those in a position to perform reconciliations of the cash records.)
(4) Collections received by check are received by the company receptionist, who has no
additional recordkeeping responsibilities.
(5) Collections received by check are immediately forwarded unopened to the accounting
department. (This would place the accounting department in an incompatible role
combining recordkeeping and custody of cash.)
(6) A bank reconciliation is prepared on a monthly basis by the Treasurer’s department. (7)
Security cameras are placed in the shipping dock. (8) Receiving reports are prepared on pre-
printed, numbered forms. (9) The billing department verifies the amount of customer sales
invoices by referring to
the authorized price list. (This price authorization role should be performed before
billing. An approved sales order, including verified prices, should be in place at the time
the documents reach the billing department.)
(10) Entries in the shipping log are reconciled with the sales journal on a monthly basis.
(11) Payments to vendors are made promptly upon receipt of goods or services. (Vendor
payments relate to the expenditures processes rather than the revenues processes.)
(12) Cash collections are deposited in the bank account on a weekly basis. (If cash receipts
occur daily, they should be deposited promptly – preferably on a daily basis.)
(13) Customer returns must be approved by a designated manager before a credit memo is
prepared.
(14) Account statements are sent to customers on a monthly basis.
(15) Purchase returns are presented to the sales department for preparation of a receiving
report. (Receiving reports should be prepared promptly upon receipt of returned items.
This should be done in the receiving area, where the personnel have a custody
function, rather than in the sales department, where the personnel initiate sales
transactions.)

1.S
2N/A
3.R
4.S
5.R
6.S
7.S
8.S
9.R
10.S
11.N/A
12.R
13.S
14.S
15.R