1.

How do different levels of control risk in the revenue and collection cycle affect the nature, t
iming and extent of accounts receivable confirmation procedures?
 Specifically. Auditors are more likely to inspect larger samples of receivables with
confirmation dates prior to the fiscal year end date because there is a higher degree of
control risk. In terms of the procedures themselves, higher levels of control risk
encourage auditors to use positive confirmations rather than negative confirmations, and
to consider vouching customers' subsequent payments.

2. What feature(s) of cash receipts internal control system would be expected to prevent (a)
an employee’s absconding with company funds and replacing the funds during
audit engagements with cash from the employee pension fund, and (b) the cash receipts
journal and recorded cash sales from reflecting more than amount shown on the daily deposit
slip?
 The prohibition of one employee getting ownership of both company and non-company
funds is one of the features of a cash receipts internal control scheme that can be
intended to prevent an employee from absconding with company funds and covering with
funds from the employee pension fund. By simultaneously monitoring and counting both
funds, the auditor may detect such a move.
 The internal control system should require receipts to be reported regularly and intact in
order to prevent the cash receipts journal and recorded cash sales from representing
more than the amount shown on the daily deposit slip. Such errors may be detected by a
thorough bank reconciliation performed by a third party.

3. What is the meaning of a strength in the transaction processing controls of the revenue and 
collection cycle? A weakness? Why are the weaknesses not subject to test of controls
auditing?

 A strength is described as a control procedure that can detect, avoid, or correct errors in
accounting records that form the basis of financial statements in a timely manner. The
lack of a control protocol where the auditor believes one should exist is a flaw.
 Since no reliance is put on a flaw, it is not subject to controls auditing. Since the
evaluation process only describes apparent strengths that may or may not exist,
strengths must be audited.

4. Why is it necessary to evaluate the controls after the test of controls audit of

the revenue and collection cycle when an evaluation was already made after the
understanding phase?
 Following the analysis process, the evaluation was conducted to evaluate which controls
appeared appropriate as a basis for justifying a low control risk assessment. Following
the test of controls auditing, the final assessment is to see if the controls are working as
well as they seemed to be.

5. Describe the processing of transactions in the sales and collections cycle in the following functions:
a. Order entry
- An order entry department generally receives customers’ requests to purchase merchandise either
by telephone or I the form of a written purchase order from the customer. A purchase order is a legal
offer to purchase under the terms specified. In some entities, on receipts of an order, the order entry
department generally prepares a sales order. The sales order is the first document prepared by the
merchandiser in the sales and collections cycle, and it should be prenumbered to facilitate control
over processing transactions. A copy of the sales order, acknowledge that the order has been received
and is being processed, may be mailed to the customer. Four copies of the sales order are sent to the
credit department, which either approves or denies credit and return a copy of the sales order to the
entry department. The credit department then sends a copy bearing credit approval (assuming it is
granted) to the warehouse, the shipping department, and the billing department. The sales order
bearing credit approval serves as authorization to warehouse personnel to release
goods to shipping. Shipping personnel verify that the quantity and description of goods received
from the warehouse match the copy of the sales order received directly from order entry. Billing
matches the customer order, the sales order,and the shipping document before recording the sale. In
some  entities, when an order is received, the purchase order is sent to the credit department for
approval.

b. Credit approval
- Before goods are shipped, the customer’s credit must be approved. The credit department 
maintains a list of unauthorized customers and their credit limits, which an employee must
review to determine whether to accept an order.

c. Warehousing
- Based on the sales order approved by the credit department, warehouse personnel issue
goods to the shipping department. The accounting department, rather than warehouse
personnel, maintains perpetual records for the inventory.

d. Shipping
A document prepared to initiate shipment of the goods, indicating the description of the merch
andise quantity shipped and other relevant data.
The original is sent to the customer and one or more copies are retained. It is also used as a
signal to bill the customer; one type of shipping document is a bill of lading.

e. Customer billing
- Billing of the customer includes preparation of a multi copy sales invoice and simultaneous u
pdating of the sales transactions file, and general ledger master file for
sales and accounts receivable. This information is used to
generate the sales journal and along with cash receipts and miscellaneous credits,
allows preparations of the accounts receivable trial balance.

f. Collecting accounts receivable

- When a company makes a sale but has not yet received payment for it, that sale enters
the accounts receivable cycle. Most businesses allow customers  to receive goods or services
before payment, believing in good faith that they will receive their money after the customer
receive an invoice.

g. Granting credit for returns and allowances

- It is raised as a result of approval for customer's returns or granting allowances
to customer. Its function is like an invoice but acts in the opposite way that it indicates tie
amount to be deducted from a customer’s account.

h. Recording uncollectible accounts expense

- It is frequently recorded to general ledger to estimate the uncollectible accounts expense.

i. Writing off uncollectible accounts
- Write off accounts identified as uncollectible and recorded in the general ledger.

6. Identify features of the following documents that facilitate control and explain how they do

so:
a.  Shipping document
- Businesses often use a bill of lading as a shipping document. The document may be a copy 
of the invoice or a delivery ticket. The signature of the carrier on the shipping document
provides externally created evidence that a sale has occurred. Accounting for the numerical
sequence determines that all shipments are recorded as sales.

b. Remittance advice
- A customer attaches a remittance advice to a check in payment of an invoice. The
document may be a turnaround document, a part of a check, or a statement identifying the
invoices being paid. Remittance advices facilitate recording cash receipts. If a customer does
not return a remittance advice, the employee opening the mail usually prepares one. A
remittance advice indicates the date and amount of payment and the invoices paid.
Remittance advices are separated from cash and given to the accounts receivable clerk for p
osting to accounts receivable
c. Uncollectible account form
- Uncollectible account forms authorize an accounting clerk to write off an account receivable
as an uncollectible account. The form provides permanent written evidence that authorization
was made for writing off an account.

7. Why do people perpetrate fraud involving sales transactions?

 Managers may experience pressure to show high profits and may inflate sales because 
of thepressure to meet target profits established by senior managers, to obtain bonuses,
retain the respect of senior managers, or even to retain their jobs.

8. Why is it difficult to detect the withholding of cash receipts?

 Until a record of cash received has been made, removing cash is one of the
easiest forms of fraud to commit and among the hardest to detect because records do
not reflect what has occured .

9. Identify three ways an employee might misappropriate cash receipts.

 Answers will vary. Three possible examples are the following:
 A cashier in a retail establishment who does not ring up a transaction on the cash
register can generally take the cash without detection. Ringing up the transaction adds
the receipt to the total cash receipts, which can be compared to the cash on hand  
 An employee who has access to cash receipts and maintains
accounts receivable records can record a sale at
an amount lower than the invoice amount. When the customer pays, the employee
takes the difference between the invoice and the amount recorded as a receivable
 An employee who makes the cash deposit and also prepares the bank reconciliation can 
withhold cash and hide the shortage by overstating deposits in transit on the
bank statement, under footing the list of
outstanding checks, or omitting outstanding checks from the outstanding 
check list. Routinely testing bank reconciliations should uncover this form of fraud.

10. Explain why auditors perform test of controls

 Auditors are not required to perform tests of controls. However, when a client has effectiv
e internal control, performing tests of controls is cost effective because it may provide a
basis for the auditor to assess control risk at less than maximum. Assigning a reduced
level of risk to control risk reduces the amount of substantive testing
the auditor must perform. Substantive tests are more expensive to perform than tests of
controls. Hence, auditors perform tests of controls when they believe it will enable them
to reduce the amount of substantive
testing. Also, auditors may perform much of the testing of controls
before year end, thus spreading the audit works.

11. What concerns does an auditor have in auditing adjustment to sales?

 Adjustments to sales include cash discounts, sales allowances or reductions in price, ret
urns of merchandise, volume rebates, corrections of billing errors, and write-offs of
uncollectible accounts. The greatest concern from
a control point of view is that one of these types of transactions will be
recorded to cover a misappropriation of cash receipts.

12. When an entity’s controls for collection are ineffective, what potential misstatements could 
arise in the financial statements?
 The following potential misstatements could arise: Fictitious cash receipts maybe
Fictitious cash receipts may be recorded, or cash receipts may be misappropriated.
Cash may be misappropriated and lapping may occur. Bank reconciliations may cover
shortages. Credits posted to customers’ accounts may be overstated or understated.
Entries may be made o the wrong accounts.