INTRODUCTION

Henrico Retail, Inc. ¡s a first year audit client. The audit partner obtained the following
description of the sales system after recently meeting with client personnel at the
corporate office.
DESCRIPTION OF THE SALES SYSTEM
Henrico's sales system is IT-based with computerized cash registers on the floors of all of
its stores. At the point of sale, Henricos sales clerks scan the bar code on the price tag of the
product being sold to read the product number. If the quantity of a product being sold
exceeds one, sales clerks can either enter the quantity being sold for that particular product
code or scan the bar code for each individual item being purchased. At that point, the
computerized cash register performs the following:
 Identifies correct unit price for that product number from the online price master
file stored on the store server
 Notifies the clerk if product number is invalid
 Calculates total price ofpurchase (price x quantity)
 Extends totals, calculates sales taxes, and determines final transaction amount.
Before the sale can be completed, sales clerks must indicate whether this is a cash, debit, or
credit sale. For credit sales, Henrico only accepts VISA or MasterCard credit cards.
Customers swipe their credit card through a card reader directly linked to VISA and
MasterCard to initiate the online credit card approval process. When the credit card agency
s electronic approval is transmitted back to the cash register system, the credit approval
code is electronically recorded on the cash register hard drive before the charge sÏip is
generated for customer signature. When credit is denied, customers must either pay by
cash or the sales clerk voids the sale. The original signed copy of the credit charge sÏip is
maintained in the cash drawer. Debit card transactions work virtually in the same manner
as credit sales except that the online system seeks authorization from the customer s bank.
The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North
Carolina State University and Steven M. Glover, Ph.D. and Douglas E. Prawitt, Ph.D. of
Brigham Young Ủniversity, as a basis for class discussion. Henrico is a fictitious company.
All characters and names represented are fictitious; any similarity to existing companies or
persons is purely coincidental.
For all types of sales, the cash register generates a customer paper-based receipt while a
duplicate record of the transaction is stored on the cash registers hard drive in an online
file that is backed up hourly to the stores computer server. This electronic transaction
information documents on the register s hard drive the product number, unit price,
quantity sold, the extended transaction totals, and credit card agency or bank approval
information.
Sales clerks have no access to the transaction electronic file. In addition, sales clerks can
only read unit price information and have no access to change unit prices in the online
price master file. Only the store manager S staff has access to the price master file. Each
week, the store manager s staff approves price changes and new product listings to be
added to the price list master files. And, only the stores human resources manager is
authorized to input changes to the employee master file of valid employee identification
numbers.
Store clerks are allowed to operate any machine on the floor as long as the clerk has a valid
employee identification number. If a cash register is not currently being used, all the sales
clerk has to do is enter his or her employee identification number before scanning any
product being sold. The system will not proceed without a valid employee identification
number. Generally, operation of the cash register is self-explanatory although some
problems have occurred previously. New sales clerks receive two hours of training on the
operation of the cash register before serving customers on the sales floor. Henrico
management believes “on the job experience” is most effective.
At the end of each day, sales clerks select the “register closing” option on the cash register.
That process automatically updates both the transaction online file stored on the cash
registerS hard drive and the backup file stored on the stores server. The closing process
generates a receipt printout at the register that summarizes the total amount of cash sales,
debit and credit sales, sales returns, and any other miscellaneous transactions for the day.
The sales clerks count the cash in the drawer and list the total cash count on a Daily Deposit
Sheet (a preprinted blank form). In addition, sales clerks summarize total debit and credit
sales on the Daily Deposit Sheet by listing total amounts from the debit and credit sales
slips in the register. The sales clerks also record on the Daily Deposit Sheet the cash, debit,
credit, and other transaction totals indicated on the cash register receipt generated by the
register closing process. The sales clerks reconcile their cash, debit, and credit sÏip counts
to these transaction totals and indicate any differences in amount. At that point, the sales
clerks take the cash drawer, which includes debit and credit slips, to the store cashier who
is located in the store cashiers office. The store cashier verifies the Daily Deposit Sheet and
initials the total cash and debit and credit sales columns listed on the Daily Deposit Sheet
for each register closed indicating that the amounts in the drawer reconcile to the amounts
on the Daily Deposit Sheet.
The cashier leaves $200 in each cash drawer to begin the following day. Cash drawers are
stored overnight in the stores vault. Each night, a local Brinks security service picks up the
cash „ debit transaction receipts, and credit charge slips collected during the day for
delivery to the overnight depository at the store s local bank. The next day, the
bankimmediately gives the store cash credits for all charge slips presented based on the
bank's arrangement with VISA and MasterCard and funds from đebit transactions are
electronically transmitted to Henrico's bank account from the customers' banks. And, the
bank automatically credits the stores bank account for all cash received. The store cashier
can download confirmation of the deposit processed each day by logging into the bank's
online customer account access webpage.
An independent person in accounting for each store verifies that the sum of the cash, debit
transactions, and credit card slip totals on all Daily Deposit Sheets for the prior day
reconcile to the confirmation received from the bank ofthe deposit processed. After the
reconciliation is performed, the banks email confirmation is printed and attached to the
Daily Deposit Sheets, which are filed together by date.
Overnight, the store computer server processes all transactions downloaded from each
cash register through the register closing process and summarizes that information in a
Daily Sales Report, which is an electronic file stored on the stores server. Each night, an
electronic copy of the Daily Sales Report file from each store is transmitted automatically at
midnight to the corporate office main server. The store server also automatically generates
a paper copy of the Daily Sales Report for each store nightly. It summarizes total store
sales, as well as subtotals of cash transactions, debit transactions, and credit sales, by store
cash register. These reports are filed by date at each store.
Each night, the store computer server automatically updates perpetual inventory records,
which are stored on the stores computer server. Once the perpetual inventory records are
updated, an electronic copy of the perpetual inventory record ¡s transmitted to the
corporate office main server. No paper reports of daily updates to the perpetual inventory
record are generated by the computer.
At month end, the store computer server generates an Inventory Report from the perpetual
inventory file. The Inventory Report provides inventory quantity information by product
number. Also, the store computer server uses each day s Daily Sales Report file to generate
a Monthly Sales Report file for each store. This file contains daily sales totals for the store
for each day of the month. This Monthly Sales Report information is electronically
transmitted to the corporate office. Each stores server generates a printout ofthe Monthly
Sales Report at month end. The corporate office computer server uses this information to
prepare and print a consolidated General Ledger, which summarizes the postings of
monthly sales totals from each store to the consolidated sales account.
REQUIRED
You are the audit senior assigned to the audit of Henrico Retail Inc. The audit partner
recently asked you to assist in planning the audit of the sales system based on your review
of the client-prepared sales system narrative. The partner has asked you to address the
following issues:
[1] Describe the sales transaction audit trail from the point of sale to the general ledger
posting to the consolidated sales accounts at the corporate office. Be sure to emphasize
which aspects of the audit trail are in paper or electronic form.
[2] Describe the difference between a preventative control and a detective control and give
an example of each that are present in the sales system at Henrico.
[3l Develop aproposed strategy for auditing the occerrence assertion for sales transactions.
Describe whether there is a sufficient paper-based audit trail to audit that assertion
without relying on IT audit specialists to test electronic onÏy processes.
[4] Whatevidence source would you use to select a sample of sales transactions to test the
0ccerrence of sales transactions at one store? Why would you use this source? What
evidence would you examine for each transaction selected?
[5l Develop a proposed strategy for auditing the accuracy assertion for sales transactions.
Describe whether there is a sufficient paper-based audit trail to audit that assertion
without relying on IT audit specialist to test electronic only processes.
[6] Describe whether you can use the same sample of transactions selected to test the
occurrence assertion to also test the accuracy assertion.
[7] How would you select a sample to test the completeness assertion for sales? Explain
whether the sample used to test the occerrence assertion would be effective for testing the
completeness assertion.
[8] How do risks related to manual controls differ from risks related to automated
controls? Give an example of each from the sales system at Henrico.
[9] What portion, if any, of the accounting system will likely require the assistance of an IT
systems auditor, who evaluates evidence existing only in electronic form?
[10] What control deficiencies can you identify in the existing sales system?