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Auditing: Control Risk

If a company's control risk is low, the auditor needs to gather evidence on the operating effectiveness of the controls.

Required
a. For each of the following control activities, indicate the audit procedure the auditor would use to determine its operating effectiveness.

b. Briefly indicate the audit implication; that is, how would direct tests of account balances need to be modified if the auditor finds that the control procedure is not working as planned?

Controls:
1. Credit approval by the credit department is required before salespersons accept orders of more than $5,000 and for all customers who have a past-due balance higher than $3,000.

2. All merchandise receipts are recorded on prenumbered receiving slips. The controller's department periodically accounts for the numerical sequence of the receiving slips.

3. Payments for goods received are made only by the accounts payable department on receipt of a vendor invoice, which is then matched for prices and quantities with approved purchase orders and receiving slips.

4. The accounts receivable bookkeeper is not allowed to issue credit memos or to approve the write-off of accounts.

5. Cash receipts are opened by a mail clerk, who prepares remittances to send to accounts receivable for recording. The clerk prepares a daily deposit slip, which is sent to the controller. Deposits are made daily by the controller.

6. Employees are added to the payroll master file by the payroll department only after receiving a written authorization from the personnel department.

7. The only individuals who have access to the payroll master file are the payroll department head and the payroll clerk responsible for maintaining the payroll file. Access to the file is controlled by computer passwords.

8. Edit tests built into the computerized payroll program prohibit the processing of weekly payroll hours in excess of 55, and the payment to an employee for more than three different job classifications during a one-week period.

9. Credit memos are issued to customers only on the receipt of merchandise or the approval of the sales department for adjustments.

10. A salesperson cannot approve sales return or price adjustment that exceeds 5 percent of the cumulative sales for the year for any one customer. The divisional sales manager must approve any subsequent approvals of adjustments for such a customer.

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Controls:
1. Credit approval by the credit department is required before salespersons accept orders of more than $5,000 and for all customers who have a past-due balance higher than $3,000.
Audit Procedure: Test that credit department is consulted before the orders above the prescribed limit are accepted. That orders above the limits of $5,000 have been accepted only after approval from the credit department and orders from customers who have balances above $3,000 only after approval has been received from the credit department.
Modification of direct tests of account balances: The total credit grated to customers with orders of more than $5,000 should be compared with the total credit approvals given by the credit department. Similarly, the total credit given to customers with past-due balance of more that $3,000 should be compared to the total approvals grated to such customers by the credit department.

2. All merchandise receipts are recorded on pre numbered receiving slips. The controller's department periodically accounts for the numerical sequence of the receiving slips.
Audit Procedure: Ascertain that the numerical sequence of receiving slips is in proper sequence. Also test that all merchandising receipts are recorded on pre numbered receiving slips. Ascertain the whereabouts of and examine the custody of unused pre numbered slips.
Modification of direct tests of account balances: The total of merchandise receipts should be verified with the total of goods returned account.

3. Payments for goods received are made only by the accounts payable department on receipt of a vendor invoice, which is then matched for prices and quantities with approved purchase orders and receiving slips.
Audit Procedure: Test on a sample basis that the payments made match the price on purchase orders and the quantity on receiving slips. Also test that the goods and prices mentioned on ...

Solution Summary

This solution talks about a situation where a company's control risk is low. It then explores the information that an auditor needs to gather to determine its operating effectiveness.

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