Ch 11 HW

Customers' checks are credited to incorrect customer accounts.

Monthly statements are mailed to all customers with outstanding balances.

An auditor's working papers include the following narrative description of the cash receipts and billing portions of Southwest Medical Center's internal control. Evaluate each condition following the narrative as being either (1) a strength, (2) a deficiency, or (3) not a strength or a deficiency. Southwest is a health care provider that is owned by a partnership of five physicians. It employs 11 physicians, including the five owners; 20 nurses; five laboratory and X-ray technicians; and four clerical workers. The clerical workers perform such tasks as reception, correspondence, cash receipts, billing, accounts receivable, bank deposits, and appointment scheduling. These clerical workers are referred to as office manager, clerk #1, clerk #2, and clerk #3. Assume that the narrative is a complete description of the system. About two-thirds of Southwest's patients receive medical services only after insurance coverage is verified by the office manager and communicated to the clerks. Most of the other patients pay for services by cash or check when services are rendered, although the office manager extends credit on a case-by-case basis to about 5 percent of the patients. When services are rendered, the attending physician prepares a prenumbered service slip for each patient and gives the slip to clerk #1 for pricing. Clerk #1 completes the slip and gives the completed slip to clerk #2 and a copy to the patient. Using the information on the completed slip, clerk #2 performs one of the following three procedures for each patient: Clerk #2 files an insurance claim and records a receivable from the insurance company if the office manager has verified the patient's coverage, or Clerk #2 posts a receivable from the patient on clerk #2's PC if the office manager has approved the patient's credit, or Clerk #2 receives cash or a check from the patient as the patient leaves the medical center, and clerk #2 records the cash receipt. At the end of each day, clerk #2 prepares a revenue summary. Clerk #1 performs correspondence functions and opens the incoming mail. Clerk #1 gives checks from insurance companies and patients to clerk #2 for deposit. Clerk #2 posts the receipt of patients' checks on clerk #2's PC patient receivable records and insurance companies' checks to the receivables from the applicable insurance companies. Clerk #1 gives mail requiring correspondence to clerk #3. Clerk #2 stamps all checks "for deposit only" and each day prepares a list of checks and cash to be deposited in the bank. (This list also includes the cash and checks personally given to clerk #2 by patients.) Clerk #2 keeps a copy of the deposit list and gives the original to clerk #3. Clerk #3 personally makes the daily bank deposit and maintains a file of the daily bank deposits. Clerk #3 also performs appointment scheduling for all of the doctors and various correspondence functions. Clerk #3 also maintains a list of patients whose insurance coverage the office manager has verified. When insurance claims or patient receivables are not settled within 60 days, clerk #2 notifies the office manager. The office manager personally inspects the details of each instance of nonpayment. The office manager converts insurance claims that have been rejected by insurance companies into patient receivables. Clerk #2 records these patient receivables on clerk #2's PC and deletes these receivables from the applicable insurance companies. Clerk #2 deletes the patient receivables that appear to be uncollectible from clerk #2's PC when authorized by the office manager. Clerk #2 prepares a list of patients with uncollectible balances and gives a copy of the list to clerk #3, who will not allow these patients to make appointments for future services. Once a month, an outside accountant posts clerk #2's daily revenue summaries to the general ledger, prepares a monthly trial balance and monthly financial statements, accounts for prenumbered service slips, files payroll forms and tax returns, and reconciles the monthly bank statements to the general ledger. This accountant reports directly to the physician who is the managing partner. All four clerical employees perform their tasks on PCs that are connected through a local area network. Each PC is accessible with a password that is known only to the individual employee and the managing partner. Southwest uses a standard software package that was acquired from a software company and that cannot be modified by Southwest's employees. None of the clerical employees are able to write checks on the company's account. For each of the following conditions, indicate whether they represent an internal control "strength" or "deficiency." If the condition is not an internal strength or deficiency, respond that the condition is "neither." Southwest is involved only in medical services and has not diversified its operations.

Neither

Southwest extends credit rather than requiring cash or insurance in all cases.

Neither

Recorded receivables are at appropriate net realizable values.

Review the aged trial balance for significant past due accounts.

Invoices are sent to allies in a fraudulent scheme and sales are recorded for fictitious transactions.

Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed.

The physician who renders the medical services documents the services on a prenumbered slip that is used for recording revenue and as a receipt for the patient.

Strength

You received no reply to a positive confirmation request to Blake Co. Subsequently you recalled that Blake Co. has a policy of not responding to confirmations—in writing or orally.

Examine shipping documents and/or subsequent cash receipts.

"We returned those goods on December 2." You have been able to determine that the goods were received by the client on December 29, but not recorded until January 2.

Exception; propose an adjustment.

The bank reconciliation is prepared monthly by the outside accountant, who is independent of the revenue-generating and revenue-recording functions.

Strength

Clerk #2 maintains the accounts receivable records and can add or delete information on the PC.

Deficiency

Clerk #2 receives cash and checks and prepares the daily bank deposit.

Deficiency

The office manager approves the extension of credit to patients and also approves the write-offs of uncollectible patient receivables.

Deficiency

The office manager extends credit on a case-by-case basis rather than using a formal credit search and established credit limits.

Deficiency

Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? -Collectibility is reasonably assured. -Delivery has occurred or is scheduled to occur in the near future. -Persuasive evidence of an arrangement exists. -The seller's price to the buyer is fixed or determinable.

Delivery has occurred or is scheduled to occur in the near future.

Cash collection is centralized in that clerk #2 receives the cash (checks) from patients and records the cash receipt.

Deficiency

Compared total bad debts this year with the totals for the previous two years.

Analytical procedure

Auditors may ignore individually immaterial accounts when confirming accounts receivable.

Correct

Computer software cannot be modified by Southwest's employees.

Strength

To test the existence assertion for recorded receivables, the auditors would select a sample from the: -Shipping documents (bills of lading) file. -Customer purchase orders. -Accounts receivable subsidiary ledger. -Sales orders file.

Accounts receivable subsidiary ledger.

Customers' checks are properly credited to customer accounts and are properly deposited, but errors are made in recording receipts in the cash receipts journal.

An employee, other than the bookkeeper, periodically prepares a bank reconciliation.

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low: -And accounts receivable are composed of large accounts. -And the effectiveness of confirmations is absolutely determined. -Or accounts receivable are from extremely reputable customers. -And accounts receivable are immaterial, or the use of confirmations would be ineffective.

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

Goods are removed from inventory for unauthorized orders.

Approved sales orders are required for goods to be released from the warehouse.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? -Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. -Compare receivable turnover ratios to industry statistics for reasonableness. -Inquire about receivables pledged under loan agreements. -Assess the allowance for uncollectible accounts for reasonableness.

Assess the allowance for uncollectible accounts for reasonableness.

Invoices are sent for shipped goods, but are not recorded in the sales journal.

Daily sales summaries are compared with control totals of invoices.

Invalid transactions granting credit for sales returns are recorded.

Goods returned for credit are approved by the supervisor of the sales department.

A combination of positive and negative request forms must be used if receivables are significant.

Incorrect

Accounts receivable are ordinarily confirmed on a standard form developed by the American Institute of Certified Public Accountants and the Financial Executives Institute.

Incorrect

Auditors should always confirm the total balances of accounts rather than individual portions (e.g., if the balance is made up of three sales, all three should be confirmed).

Incorrect

Confirmation of accounts receivable is a generally accepted auditing standard.

Incorrect

The best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the account's tolerable misstatements amounts.

Incorrect

An assistant on the Carter Company audit has been working in the revenue cycle and has compiled a list of possible errors and fraud that may result in the misstatement of Carter Company's financial statements and a corresponding list of controls that, if properly designed and implemented, could assist in preventing or detecting the errors and fraud. For each possible error and fraud numbered a through o, select one internal control from the following answer list that, if properly designed and implemented, most likely could assist management in preventing or detecting the errors and fraud. Each response in the list of controls may be selected once, more than once, or not at all. Invoices for goods sold are posted to incorrect customer accounts.

Monthly statements are mailed to all customers with outstanding balances.

Watched the accounting clerk record the daily deposit of cash receipts.

Observation

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? -Decline in sales due to product obsolescence. -Over-recorded sales due to a lack of control over the sales entry function. -Restrictions placed on sales by laws and regulations. -Decline in sales due to economic declines.

Over-recorded sales due to a lack of control over the sales entry function.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? -Inaccurate billing due to a lack of controls. -Lapping of accounts receivable. -Misbilling a client due to a data input error. -Recording sales when the customer is likely to return the goods.

Recording sales when the customer is likely to return the goods.

Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list.

Reperformance

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: -Send positive confirmation requests. -Send negative confirmation requests. -Examine evidence of subsequent cash receipts. -Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Send positive confirmation requests.

Which of the following is an example of misappropriation of assets relating to sales? -Accidentally recording cash that represents a liability as revenue. -Holding the sales journal open to record next year's sales as having occurred in the current year. -Intentionally recording cash received from a new debt agreement as revenue. -Theft of cash register sales.

Theft of cash register sales.

Customers' checks are misappropriated after being forwarded to the cashier for deposit.

Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.

Customers' checks are received for less than the customers' full account balances, but the customers' full account balances are credited.

Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.

Different customer accounts are each credited for the same cash receipt.

Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.

The auditors have determined that each of the following objectives will be a part of the audit of SSC Corporation. While several procedures will ordinarily address an audit objective, select the procedure most directly related to the audit objective. Each procedure may be used once, more than once, or not at all. All receivables that should be recorded are recorded as of year-end.

Trace a sample of sales invoices from late in December to the sales journal and to postings in accounts receivable and sales accounts.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: -Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. -Write-offs must be approved by the accounts receivable department. -Write-offs must be authorized by the shipping department. -Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

Confirmations address existence more than they address completeness.

Correct

For each of the procedures described in the table below, identify the audit procedure performed and classification of the audit procedure using the following: (Each of the "Audit Procedures" and "Classification of Audit Procedure" may be used once, more than once, or not at all.) Requested responses directly from customers as to amounts due.

Confirmation

Invoices are sent for shipped goods and are recorded in the sales journal, but are not posted to any customer account.

Control amounts posted to the accounts receivable ledger are compared with control totals of invoices.

An auditor may use confirmations of accounts receivable. Reply as to whether the following statements are correct or incorrect with respect to the confirmation process when applied to accounts receivable. The confirmation requests should be mailed to respondents by the CPAs.

Correct

"While that's what we owe, we didn't owe it on December 31 because we didn't receive the goods until January 2 of year 2."

Examine shipping documents and/or subsequent cash receipts.

You are involved with the audit of Jelco Company for year 1 and have been asked to consider the confirmation reply results indicated below. For each confirmation reply, select the proper action to be taken from the following possible actions: (Each of the "Action" items may be used once, more than once, or not at all.) "We mailed the check for this on December 31."

Examine shipping documents and/or subsequent cash receipts.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? -Lapping of year-end accounts receivable. -Excessive goods returned for credit. -Unrecorded sales discounts. -Inflated sales for the year.

Inflated sales for the year.

Questioned management about likely total uncollectible accounts.

Inquiry

Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval.

Inspection of records or documents

Examined invoice to obtain evidence in support of the ending recorded balance of a customer.

Inspection of records or documents

Customers' checks are misappropriated before being forwarded to the cashier for deposit.

Monthly statements are mailed to all customers with outstanding balances.

"We are very satisfied with Jelco and plan to purchase from them in the future."

Not an exception; no further audit work is necessary.

You received no reply to a negative confirmation request to Adams Co.

Not an exception; no further audit work is necessary.

The presentation and disclosure of receivables are adequate.

Review drafts of financial statements. Disclosure.

Goods shipped to customers do not agree with goods ordered by customers.

Shipping clerks compare goods received from the warehouse with approved sales orders.

Goods ordered by customers are shipped, but are not billed to anyone.

Shipping documents are compared with sales invoices when goods are shipped

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? -Completeness. -Existence or occurrence. -Presentation and disclosure. -Rights and obligations.

Completeness.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: -Accounts receivable subsidiary ledger. -Remittance advices. -Shipping documents file. -Sales journal.

Shipping documents file.

Computer passwords are only known to the individual employees and the managing partner, who has no duties in the revenue-recording functions.

Strength

Insurance coverage for patients is verified and communicated to the clerks by the office manager before medical services are rendered.

Strength

None of the employees who perform duties in the revenue-generating and revenue-recording functions are able to write checks.

Strength

Prenumbered service slips are accounted for on a monthly basis by the outside accountant, who is independent of the revenue-generating and revenue-recording functions.

Strength

Second requests are ordinarily sent for positive form confirmation requests when the first request is not returned.

Correct

The auditors ordinarily should confirm accounts receivable.

Correct

Credit sales are made to individuals with unsatisfactory credit ratings.

Customer orders are compared with an approved customer list.

"We also owe for two more invoices for purchases we made around year-end; I'm not sure of the exact date."

Verify whether the additional invoices noted on the confirmation reply pertain to the year under audit or the subsequent year.

Recorded receivables exist.

Vouch year-end accounts receivable balances to supporting documents. Existence, Rights

The client has rights to recorded year-end receivables.

Vouch year-end accounts receivable balances to supporting documents. Existence, Rights