Gleim 6

Which of the following controls is most likely to detect an invalid customer number entered into the sales order entry screen?

A validity check.

Upon receipt of customers' checks in the mail room, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the

Accounts receivable bookkeeper to update the subsidiary accounts receivable records. Not CEO because The monthly bank statement should be reconciled by someone outside of the treasury function.

Control Activities Implemented

Access controls, such as passwords, device authorization tables for sales and shipping personnel, and access logs, are used to prevent improper use or manipulation of data files. Preformatted screens are used to avoid data entry errors. The sales order entry screen prompts the Sales Order department to enter complete information concerning an order. Shipping must complete all information concerning a shipment. Field checks are used to test the characters in a field to verify that they are of an appropriate type for that field. Validity tests are used to determine that a customer exists in the accounts receivable master file and that ordered part numbers exist on the inventory master file. Reasonableness tests are used to test inventory quantities and billing amounts. The inventory reasonableness test can be employed in conjunction with a validity check. Thus, the inventory number can be tested against known inventory items in the inventory master file and a reasonable number determined for the reasonableness test. (For example, 100 dozen may be a reasonable order quantity for printer cartridges but not for printers.) Error listings are compiled and evaluated. Errors are corrected and reprocessed.

Sales returns and allowances should have controls

Approval by the sales department to return goods Receipt of the returned goods by the receiving department and preparation of a receiving report The separate approval of the credit memo related to a sales return or allowance, that is, approval by someone not in the sales department

In updating a computerized accounts receivable file, the total used as a batch control to verify the accuracy of posting cash remittances is

Cash deposits plus discounts taken by customers.

An employee in the receiving department keyed in a shipment from a remote terminal and inadvertently omitted the purchase order number. The best systems control to detect this error is

Completeness test.

Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer record contains the name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow is to

Develop a program to compare credit limits with account balances and print out the details of any account with a balance exceeding its credit limit.

The write-off of bad debts requires strong controls.

Initiation of the write-off by the credit manager and approval by the CFO or other officer. The credit manager will be evaluated, in part, on the amount of bad debts written off and will require significant evidence before initiating a write-off. Maintenance of a separate accounting ledger for accounts written off.

To determine that all credit sales transactions of an entity are recorded.

Match prenumbered shipping documents with entries in sales journal. T

A wholesaling firm has a computerized billing system. Because of a clerical error while entering information from the sales order, one of its customers was billed for only three of the four items ordered and received. Which of the following controls could have prevented, or resulted in prompt detection and correction, of this situation?

Matching line control counts produced by the computer with predetermined line control counts.

Customers' checks are misappropriated before being forwarded to the cashier for deposit. Customers' checks are credited to incorrect customer accounts.

Monthly statements are mailed to all customers with outstanding balances

When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor would be most concerned about the

Potential for computer disruptions in recording sales.

Sound internal control principles dictate that, immediately upon receiving checks from customers by mail, a responsible employee should

Prepare a duplicate listing of checks received./remitance

Which of the following activities most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?

Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Invoices are sent to allies in a fraudulent scheme, and sales are recorded for fictitious transactions where no shipment has been made.

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

Cash receipt Mail room clerck

Safeguard cash receipt Receive initial customer receipt

failure to post to account ledger

Sales invoices

Owner involvement in the process. Responsibilities of Personnel

Sales prepares sales orders based on customer orders. Customer Relations is commonly regarded as a separate operating unit that deals with customers after sales have been made. Thus, it is not involved in the basic transactional functions performed in the sales-receivables-cash receipts cycle. Credit Manager, who should report to the CFO, authorizes credit for all new customers and initiates write-off of bad debts. Credit checks should be performed before credit approval. Inventory Warehouse maintains physical custody of products. Inventory Control maintains records of quantities of products in the Inventory Warehouse. Shipping prepares shipping documents and ships products based on authorized sales orders. Billing prepares customer invoices based on goods shipped. Accounts Receivable maintains the accounts receivable subsidiary ledger. Mail Room receives mail and prepares initial cash receipts records. Cash Receipts safeguards and promptly deposits cash receipts. General Ledger maintains the accounts receivable control account and records sales. Daily summaries of sales are recorded in a sales journal. Totals of details from the sales journal are usually posted monthly to the general ledger. Receiving department prepares receiving reports and handles all receipts of goods or materials, including sales return

The next action to take with the customer remittance advices (refer to symbol C) would be to

Store in a file that is not immediately accessible by computer.

The Document Flow/Cash

The Mail Room receives all customer receipts, opens the mail, separates the checks from the remittance advices, and prepares a daily listing of the checks received (the daily remittance list). If no remittance advice is received, the mail clerks prepare one. A copy of the daily remittance list is sent to the Controller. A remittance advice is part of or a copy of the sales invoice sent to a customer and intended to be returned with the payment. It contains the customer's name, the invoice number, and its amount. Cash receipts and copy 1 of the daily remittance list are forwarded to Cash Receipts for preparation of the deposit ticket and recording in the cash receipts register. The receipts are deposited daily by Cash Receipts. The validated (by the bank) deposit ticket is returned to the Controller. The Controller reconciles the validated deposit ticket with the daily remittance list of cash received from the Mail Room. A journal voucher (entry) prepared by Cash Receipts indicating the debit to cash and credit to accounts receivable is sent to the General Ledger. The remittance advices are sent to Accounts Receivable for posting the reductions in accounts receivable to the individual customers' accounts.

all credit sales transactions of an entity are recorded?

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

The Document Flow/Sales Receivable

The Sales Order department receives a customer order and prepares a multi-part sales order. Copy 2 of the sales order is sent to the Credit Manager. The Credit Manager performs a credit check and authorizes the order if appropriate. The approval is conveyed to Sales Order, and an acknowledgment (copy 6) is sent to the customer. Sales Order then releases the remaining copies of the order. Two copies, the invoice copy and accounts receivable copy (copies 4 and 5), are sent to Billing and held awaiting notification of shipment. A copy (the packing slip copy 3) is sent to Shipping pending arrival of the goods from the Inventory Warehouse. A copy (the shipping copy 1) is released to the Inventory Warehouse as authorization to release the goods to be sent to the Shipping department. When the goods and the shipping copy 1 arrive at the Shipping department, the matching packing slip copy 3 is pulled from the file, and shipping documents (e.g., a bill of lading) are prepared. The goods are packed for shipment along with the packing slip copy 3. The shipping copy 1 is marked "shipped" and forwarded to Billing. Billing pulls the matching invoice and accounts receivable copies (4 and 5). Prices are checked and extended based on the quantities shipped. The invoice (copy 4) is completed and mailed to the customer. Billing prepares a journal entry to be posted by the General Ledger department (credit to sales and debit to the accounts receivable control account). The accounts receivable copy 5 is forwarded to Accounts Receivable for posting to the individual account in the accounts receivable subsidiary ledger. The shipping copy 1 is sent to Inventory Control for reduction of quantities for goods shipped.

Control Activities Implemented

The division of the duties of the transaction is as follows: authorization, recording, and custody of assets. Routing the sales order copy through the Credit Manager ensures that goods are shipped only to customers who are likely to pay (i.e., properly valued). Routing the shipping copy through the Inventory Warehouse helps ensure that goods are safeguarded and released only upon proper approval of the order. Matching of the packing slip copy held by Shipping can ensure that all goods released from the Inventory Warehouse are received by Shipping on a timely basis. Matching of the copies held by the Billing department can ensure that all goods shipped are invoiced to customers. Documents are prenumbered to permit detection of unrecorded or unauthorized transactions. For example, sales invoices are prenumbered and accounted for to ensure that all orders are billed. Periodic reconciliation of the accounts receivable subsidiary ledger with the general ledger can ensure that all invoices are recorded in customers' accounts.

Open order file.

The outputs from the credit and edit checks of the customer order are copies of the sales order and an open sales order file.

Cash flow/sales receivable computer enviroment

The sales-receivables computer system flowchart above provides one view of computer processing using online systems. In this case, paper flow is replaced with electronic transmissions, and manual files and ledgers are replaced by computer files. The accounting departments (from the previous flowcharts) of Billing, Inventory Control, and Accounts Receivable are replaced by the Computer Processing department. Furthermore, routine credit decisions are replaced by a computer program. The Sales Order department receives a customer order (beginning at START in the flowchart) and records it into the order acceptance program on a preformatted sales entry screen. Edit checks are used to ensure proper entry. The accounts receivable master file is checked for current customer information and credit limits. Inventory levels are checked for availability from the inventory master file. The accepted order, along with prices determined from the inventory master file, is entered into the sales order master file, and an acknowledgment is printed and sent to the customer. Information is passed to the inventory and shipping program that sends a release authorization to the Inventory Warehouse via a computer workstation. Inventory levels are formally updated upon release of the goods from the Inventory Warehouse. An electronic shipping authorization is sent to the Shipping department. The communication also generates a packing slip and shipping documents (e.g., a bill of lading) that are printed in the Shipping department. Shipping provides the billing program with the information concerning the shipment. The billing program accesses demographic and price data from the sales order file and prepares and prints the invoice. The accounts receivable master file is also updated. (Additionally, the sale and cost of sale are recorded in the general ledger, but this step is not shown on the flowchart.)

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

Control Activities Implemented

Two clerks should be present in the Mail Room during the opening and recording of the receipts. Checks are endorsed "For Deposit Only into Account Number XXXX" immediately upon opening the mail. All cash is deposited intact daily. This procedure ensures that the cash received and recorded on the daily remittance list can be reconciled with the deposit ticket validated by the bank. Periodic reconciliation of the accounts receivable subsidiary ledger and the accounts receivable control account in the general ledger establishes agreement of the total amounts posted. However, the reconciliation cannot determine whether an amount was posted to the wrong account in the subsidiary ledger. Moreover, application of such a control will be ineffective if sales were not recorded in the books of original entry, e.g., the sales journal. Monthly statements are sent to customers to ensure that failure to receive and/or record payments made by customers is detected (not shown on flowchart).

Compensating controls include for segregation of duty:

Use of a cash register or sales terminal to record the sale. Assignment of one clerk to be responsible for sales recording and cash receipts during a work period. Increased supervision. For example, the manager's office may be positioned to observe the clerks' sales recording and cash collection activities. Customer audit of the transaction. Displaying the recorded transaction and providing a receipt to the customer provides some assurance that the recording process was accomplished appropriately by the clerk. Bonding of employees responsible for handling cash. Because the bonding company investigates employees before providing the bond, some assurance is provided concerning their integrity. Also, the bond provides insurance against losses.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of

Va;uation-approval

Segregation of Duties/ AR cycle

aR- post to receivable sub ledger General clerck post tototal credit to accounts receivable

Invoces should prepared

based on shiping document

This control would determine that all information necessary to complete a sales order has been entered.

performance screen

sales invoice- credit memo

remittance advise

Remitance from customer-enter data

sale invoice