Chapter 14

REVIEW QUIZ
14-1 (Objective 14-2) Describe the nature of the following documents and records and
explain their use in the sales and collection cycle: bill of lading, sales invoices, credit note,
remittance advice, and monthly statement for clients.
Bill of Lading: This is the entry of the merchandise, detailing the material, its quantity and price; In
addition, it is important to highlight which warehouse this arrived at, since there are companies that
have several delivery locations for the merchandise.

Sales Invoice: This is the supporting document for the delivery of the merchandise for subsequent
payment, it details everything shipped.

Credit Note: It is the document of an amount in favor of the client for errors in the price or discounts
that favor the total accounts payable of the client.

Consignment notice: This is the document supporting the arrival of the merchandise to the expected
destination, supporting its receipt.

Monthly statement for clients: This statement is presented to clients of outstanding accounts
payable until the end of the month, presented to clients in order to show them what they have going
for them.

14-2 (Objective 14-2) Explain the importance of proper credit approvals for sales. What
effect do adequate controls in the credit function have on the auditor's accumulation of
evidence?
The importance of credit approvals is to avoid the loss of company assets when transferring
merchandise to fictitious customers or those who do not pay their invoices since the company is not
ensuring payment of their credit.

If the company is going to provide a credit, it must be reliable and insurable. Before the sale occurs,
the goods must be shipped after due authorization, the prices must be authorized, the freight and
transportation items must also be considered. discounts.

Poor credit approval practices consistently result in a high volume of bad sales and accounts
receivable that could become uncollectible.

This approval may be provided by an independent department or person within the framework
established by institutional policies supported by adequate information about the particular client.
This latter information covers the client's financial position and its ability to comply; It also includes
the organization's experience with the customer and its current portfolio position. The approval
itself is made by properly authorized individuals, depending on the amount involved in the
operation.

The accumulation of evidence based on appropriate controls is:

Function manual for those in charge of the credit department

Credit policies established by the company: amounts, discounts and time

Compliance with policies based on the functions of those in charge.

 Physical examination of credit agreement, promissory notes, guarantee deeds, signed and legalized
between the client and the company.

 Sales auxiliary books

 Monthly credit sales records
 Balance confirmation
 Physical examination of credit invoices pending collection

14-3 (Objective 14-2) Distinguish between bad debt expense and the write-off of bad
debts for a company that uses the estimation method for recording bad debts receivable.
Explain why they are audited in completely different ways.
Uncollectible expenses and their cancellation are covered by the estimate made in the margin of the
current sales period that the company makes in the future; For companies, the estimate represents
the remainder that comes from the administrative adjustment at the end of the period and the
estimate of uncollectible accounts.

14-4 (Objective 14-3) BestSellers.com sells fiction and nonfiction literature books to
customers through its Web site. Customers place orders for books via the Web site and
provide their name, address, credit card number and expiration date. What internal
controls could BestSellers.com implement to ensure that books are shipped only to
customers who have already paid for those books? Until when will BestSellers.com be
able to record the sale as income?
 As a first point, the invoicing of the customer's order must be carried out where the value of
the good is clearly stated. This must be done correctly and in a timely manner. Invoicing
must verify that all shipments have been correctly invoiced.
 All functions must be verified, including the entire collection process, the recording of cash
and returns, cancellation and provision of bad debts, and discounts made on sales.
 The company must prepare the account statement that must later be sent to the client,
indicating the initial balance of the accounts receivable for the actual amount, the expiration
date, the payment received in cash, the credit notes issued, and the final balance payable
These functions are adequate to get the goods into the hands of the customer, invoice them
appropriately in this way the accounting records will be true and confirmed.
 Implement a monitoring program for their respective orders so that they can review them
until they have reached their destination.
 Internal control of responses to visitors who leave their comments and concerns on the
website.
 Hiring an electronic intermediary company with security software for secure credit card
collection
 Verify that the income from the sale is registered in the BestSellers.com bank accounts
 Internal control of correct shipment of books according to the order and payment
 Hire a reliable courier company for safe delivery of books.
 Verification by the company that the order has reached its customers

14-5 (Objective 14-4) State the audit objectives related to operations for the verification
of sales operations. For each objective, indicate an internal control that the client can use
to reduce the probability of errors.
  The auditor needs a framework to evaluate control risk. This audit looks at the 6 operations
audit objectives in sales audits.
 Second, the auditor must identify key internal controls and sales deficiencies. Controls and
deficiencies are identified in a flowchart and verification of internal control.
 After controls and deficiencies are identified, they are associated with objectives.
 The auditor evaluates the control risk for each objective by assessing the controls and
weaknesses of each. This step is important because it affects the auditor's decisions
regarding tests of controls and substantive tests; it is a subjective decision.

14-6 (Objective 14-4) List a test of control and a substantive test of operations that the
auditor uses to verify the following audit objectives related to sales operations: Recorded
sales are reported in the appropriate amount.
noun test

Physically confirm the sales balances per day and carry out the respective reconciliations with the
bank account statement and thus corroborate that the deposit has been made.

Control test

Examine the sales process and when the respective transactions carried out are reported

14-7 (Objective 14-4) State the most important tasks that should be separated in the sales
and collections cycle. Explain why it is desirable that each activity be separated.
 Appropriate separation of responsibilities.
 Appropriate authorization.
 Appropriate documents and records.
 Prenumbered documents.
 Sending monthly account statements.
 Internal verification procedures.

It is important that activities and responsibilities are separated in order to avoid intentional and
unintentional errors, prevent fraud, and avoid approval of convenient processes.

14-8 (Objective 14-4) Explain how prenumbered shipping documents and sales invoices
can be useful controls to prevent sales errors.
Pre-numbering consists of assigning continuous numbering to the form in the original and copies,
simultaneously with its printing.

The objective is to maintain records of specific operations to avoid the improper use of forms, and to
achieve order in the development of operations.

Something important that can be considered in the sales documents is that they are pre-numbered
in order to avoid billing or sales registration errors, for example duplicate billing or erroneous values.

14-9 (Objective 14-4) What are the three types of authorizations typically used in an
internal control structure for sales? For each authorization, indicate a substantive test that
the auditor uses to verify whether the control was effective in preventing errors.
 It must be authorized before the sale occurs;
 They must be shipped after proper authorization;
  Prices must be authorized, including basic conditions, freight and discounts.

The substantive test of control looks at partial things, what they see is the fulfillment of the
processes in the appropriate way.

14-10 (Objective 14-4) Explain the purpose of sales journal totaling and cross-totaling in
tracking totals in the general ledger.
The purpose of applying crossing by totals is:

 Facilitate agile working

 Time saving
 Do not hinder the work

14-11 (Objective 14-5) What is the difference between the auditor's approach to verifying
sales returns and allowances, and the approach to sales? Explain the reasons for the
difference.
The auditor's focus on returns and discounts versus sales is materiality, since for the auditor what
was sold, and its receipts, is more important than what a customer returned, since the objective is to
see that what was entered in the system is the same as what was entered, the same in the sales, not
the returns made.

14-12 (Objective 14-6) Explain why auditors generally emphasize the detection of fraud in
the cash audit. Is this consistent or not with the auditor's responsibility in the audit?
Explain.
Because cash handling constitutes a very delicate and attractive topic for cashiers, sellers and those
in charge of direct cash collection, therefore the auditor looks for a more fragile type of control to be
able to violate fraud.

In accounts receivable, the auditor's responsibility is to apply confirmation of balances, etc.

14-13 (Objective 14-6) State the audit objectives related to operations for the verification
of cash receipts. For each objective, indicate an internal control that the client can use to
reduce the probability of errors.
 Recorded cash inflows are for funds the company actually received.
 Cash receipts are recorded in the cash receipts journal
 Cash inflow is deposited and recorded according to amounts received
 Cash inflow transactions are correctly classified
 Cash receipts are posted to the correct dates
 Cash receipts are correctly included in the accounts receivable master file appropriately.

14-14 (Objective 14-6) State several audit procedures that the auditor can use to
determine whether all cash received was recorded.
 Examine receipts for advances or expenses and any other documents and cash to check if
they are approved.
 Get balance confirmations
 Proof of cash receipts i.e. proof of the total cash receipts recorded in the journal during a
given period
  Compare cash with invoices made
 Get a preliminary list of defective entries
 Values on sales invoices are compared to an approved order list, and the totals indicated on
the invoices must match the records.
 Cross-check collected invoices against bank deposits
 Cash tonnages
 Verify sales against accounts receivable
 Cross-check collected invoices against cash invoices
 Balance confirmations

14-15 (Objective 14-6) Explain what is meant by the term evidence of cash receipts and
indicate its purpose.
It is an audit procedure to prove that all recorded cash receipts have been deposited in a bank
account; such that the total cash receipts recorded in the cash receipts journal for a given cycle
agree with actual bank cash deposits.

14-16 (Objective 16) Explain what overlap means and discuss how the auditor can discover
it. Under what circumstances should the auditor make a special effort to discover the
overlap?
 It is to cover totally or partially the audited account (Accounts receivable)
 The auditor should make greater efforts when:
 Selling performs several functions such as collection
 When the sales value is not reasonable with the accounts payable
 When a client has made his payments in cash and begins to register a delay in them.

14-17 (Objective 14-7) What audit procedures are most likely to be used to identify
accounts receivable written off as uncollectible? State the purpose of these procedures.
The existence of recorded write-offs is the most important transaction-related audit objective that
the auditor should keep in mind when verifying the write-off of individual bad debts. A major
problem in testing uncollectible accounts is the possibility that the client may conceal the
embezzlement by writing off accounts receivable that have already been collected. The primary
control to prevent these types of errors is the proper authorization by a designated management
level of the write-off of bad debts only after a thorough investigation of the reason why the
customer has not paid. Verification of voided accounts generally takes little time. A common
procedure is the review of authorizations by the appropriate people. As proof of voided accounts, it
is also necessary for the auditor to regularly examine correspondence in the client's files in which the
impossibility of collection is established. In some cases, the auditor will also examine credit reports
such as those provided by some companies. After the auditor has concluded that the accounts
reversed by general ledger items are appropriate, the selected items are traced from the master file
to accounts receivable as evidence of the records.

14-18 (Objectives 14-4,14-6) Indicate the relationship between the confirmation of

accounts receivable and the results of tests of controls and substantive tests of
operations.
The accounts receivable confirmation relationship and control results is the balance confirmation
letter that is sent to customers and with the results of the response letter to compare the entity's
general ledger balance.

14-19 (Objectives 14-4,14-6) Under what circumstances is it acceptable to perform tests of

controls and substantive tests of operations for sales and cash receipts on a provisional
date?
They are Acceptable when the accounts receivable are already confirmed, which, the provisional
funds are already there in order to make their movement while the money is being delivered, this
depends directly on the person who makes the provisions who risks the money of the provisional
ones in order to advance expenses and costs that are necessary for the company.

14-20 (Objective 14-4) Diane Smith, a public accountant, performed tests of controls and
substantive tests of operations for sales in March in an audit of the financial statements
for the year ended December 31, 2005. With Based on the excellent results of the tests of
controls and the substantive tests of operations, it decided to significantly reduce its
substantive tests to the details of year-end balances. Evaluate this decision.
Diane Smith is carrying out the audit procedure correctly since the results of the tests applied are
excellent, it is not necessary to apply more tests.

Assuming that the test results were negative, the tests to be applied would have been in greater
quantities.