Advanced Auditing – Assignment I

Question - 1
Auditing standards require the auditor to obtain an understanding of the entity and its environment as a
basis for assessing the risks of material misstatements. Business models differ across organizations and
industries, leading to unique business processes needed to account for transactions. While the core
business functions for the sales and collection cycle discussed in this chapter are generally relevant to all
organizations, the underlying business processes and related documents and records are often unique
to each organization. Below are four descriptions of different businesses.

1. The Starbucks Coffee Company sells regular and specialty coffees and teas in over 24,000 stores
spanning more than 70 countries. Customers use cash, debit or credit cards, pre-paid Starbucks
cards, or mobile payment apps to purchase individual drinks that are served to them within
minutes.
2. Amazon.com is one f the world’s largest online retailers of all kinds of products. While the
company was originally known for its huge selection of new and used books, consumers can
now find a wide variety of products available at the Amazon.com
3. Most people have a personal physician who provides medical care when needed, including
annual physicals and other medical services. Patients make appointments to be seen by their
physician, who examines the patient and prescribes treatments and medications when needed.
Insured patients often pay a co-payment, with the balance paid by the insurance company.
4. The majority of universities generate a significant portion of their revenue from tuition.
Universities bill students in advance for classes that will be taken in an upcoming term. For full-
time students, most universities charge a set tuition amount after students enroll in a minimum
number of courses per term.

Required Analyze each of the above independent business scenarios to answer each of the
following
Questions.
A. Using the eight business functions for the sales and collection cycle briefly describe the
underlying business processes related to each of the eight functions for the sales and cash
collections for the above independent scenarios.
B. What documents or other source evidence would you use to test the occurrence transaction-
related audit objective for sales for each of the four scenarios?
C. For which of the four scenarios would the sales returns and allowances business function not be
applicable? Please justify your response.
D. For which of the four scenarios would the write-off of uncollectible accounts and bad debt
expense business functions not be applicable? Please justify your response.

Advanced Auditing – Assignment I

Advanced Auditing – Assignment I

Question – 2
The following is a list of possible errors or fraud (1 through 8) involving sales and controls (a. through k.)
that may prevent or detect the errors or fraud:

Possible Errors or Fraud

1. Invoices are sent for shipped goods, and are recorded in the sales journal, but are not posted to
any customer accounts.
2. Invoices for goods sold are posted to incorrect customer accounts.
3. Invalid transactions granting credit for sales returns are recorded.
4. Goods are removed from inventory for unauthorized orders.
5. Credit sales are made to customers with unsatisfactory credit ratings.
6. Invoices are sent to co-participants in a fraudulent scheme, and sales are recorded for fictitious
transactions.
7. Goods shipped to customers do not agree with goods ordered by customers.
8. Invoices are sent for shipped goods, but are not recorded in the sales journal.

Internal Control
A. Customer orders are compared with an approved customer list.
B. Sales orders are prepared for each customer order.
C. Shipping clerks compare goods received from warehouse with details on shipping documents.
D. Pre-numbered credit memos are used for granting credit for goods returned.
E. Goods returned for credit are approved by the supervisor of the sales department.
F. Approved sales orders are required for goods to be released from the warehouse.
G. Monthly statements are mailed to customers with outstanding balances.
H. Shipping clerks compare goods received from warehouse with approved sales orders.
I. Sales invoices are compared with shipping documents and approved customer orders before
invoices are mailed.
J. Control amounts posted to the accounts receivable ledger are compared with the control totals
of invoices.
K. Daily sales summaries are compared with control total of invoices.

Required For each error or fraud, select one internal control that, if properly designed and
implemented, most likely would be effective in preventing or detecting the errors and
fraud. Each response in the list of controls may be used once, more than once, or not at
all.*

Advanced Auditing – Assignment I