Pagaling, Coleen Joy S.

Activity 2 - audit of receivables and revenues

The following is a list of controls (#1-7) in a revenue cycle.

a. For each control identified, briefly indicate the financial misstatement that could occur if
the control is not implemented effectively.
b. Identify a test of control that the auditor can perform to determine the operating
effectiveness of the control.
1. All transactions under P10,000 may be approved by the computer
authorization program. The credit manager must approve all transactions
over P10,000.
a. The recording of all transactions must not be misstated. But, the collectibility of
receivable might be impaired. Hence, it is quite possible that net receivable might
be overstated.
b. 1.For implement the computer program all procedures should be reviewed and
conclude the level that credit department tests and also monitors the accuracy of
the authorization program. 2. Consider program testing by submitting all
transactions against it and tell if the given transactions are correctly processed.
3. Pick a sample of sales transactions over an amount of P10,000 and analysis
to conclude whether there is proper evidence that authorization had been got. 4.
Pick a sample sales transactions less than amount of P10,000 and, conclude for
each transaction whether credit should be given on the basis of the parameters
included in the computer program.
2. All invoices are prized according to the authorized price list maintained on
the computer. Either the regional or divisional sales manager must approve
any exceptions.
a. Overstatement of Sales revenue and profit.
b. 1. Obtain data input procedures, gain an understanding of the authorization
and approval process, and determine whether a review and approval process
exists and has ben communicated to users responsible for obtaining appropriate
approvals. 2. Verify that the application owner or process owner ensures that all
data authorized prior to input. This may be done through granting roles and
responsibilities based on job duties. 3. Obtain a copy of the approval levels and
determine whether responsibility is assigned for verifying that appropriate
approvals are consistently applied. 4. Determine whether appropriate
segregation duties to prevent users from both entering and authorizing
transactions.
3. All shipping documents are pre-numbered and periodically accounted for.
Shipping document references are noted on all sales invoices.
a. Understatement of Revenues & Receivables and overstatement of Inventory.
b.1. Daily sale summaries are compared to daily postings to account receivable
ledger. 2. Verify output is reviewed or reconciled against source documents for
completeness and accuracy, including verification of control totals. 3. Verify the
 existence and operation of manual data entry controls to prevent the entry of
duplicate records. Manual data entry controls may include the pre-numbering of
source documents and the marking of records as “input” after entry.

4. Customer complaints regarding receipt of goods are routed to a customer

service representative. Any discrepancies are immediately followed up to
determine the cause of the discrepancy
a. none
b. Verify or obtain reports on how the customer service representative address
the issue. Obtain report if percentage of customer complaints decreases.

5. All merchandise returns must be received by the receiving department and

recorded on pre-numbered documents for receipts. A document is created
for each item (or batches of like items). Returns are sent to quality control
for testing, and a recommendation for ultimate disposition is made (scrap,
rework and sell as a second, or close out as is), noted, and sent to
accounting for proper inventorying.
a. Misstatement in Income statement with adverse effect.
b. 1. Observed the said control. 2. Obtain a copy of the approval levels and
determine whether responsibility is assigned for verifying that appropriate
approvals are consistently applied. 3. Verify the existence and operation of
manual data entry controls to prevent the entry of duplicate records. Manual data
entry controls may include the pre-numbering of source documents and the
marking of records as “input” after entry.
6. The quantity of items invoiced is reconciled with the packing document
developed on receipt of the order and the shipping notice by a computer
program as the goods are marked for shipment. If discrepancies appear,
the shipping document prevails. A discrepancy report is prepared daily and
sent to the warehouse manager for follow-up.
a. Overstatement of Sales Revenue, Cost of Sale
b. 1. Verify that appropriate segregation of duties exists between data entry
personnel and those responsible for reconciling and verifying that the output is
accurate and complete. 2. Verify that controls exist to prevent unauthorized
changes to system programs such as calculations and tables.3. Verify items that
have discrepancies are reprocessed appropriately in a timely manner in
accordance with the procedures, and errors are corrected before reentering into
the system.
7. The company pays for all freight charges, but the customer is charged a
freight fee based on a minimum amount and a sliding scale as a percentage
of the total invoice. The policy is documented, and the computer
automatically adds the charge.
a. Overstatement of freight.
b. Obtain procedures and verify that detailed information is included on how
automated interfaces are authorized and what triggers the automated processing
event.