Explore BrainMass

question in auditing

I'm having problems in the attached case study. Will you please have a look on that?


Solution Preview

What aspects of the current manual sales accounting system create risks that increase the likelihood of material misstatements in the financial statements? Specifically, identify each risk and how it might lead to a misstatement.

To process a sale, the cashier manually records the salesclerk's name, the product number,
quantity sold, and sales price on a prenumbered sales ticket using information on the clothing
price tag. The sales ticket is in duplicate form. For special sale items, the cashier refers to
newspaper clippings of advertisements.

This increases the risk of material misstatements because it increases the risk of random mathematical errors by the cashier. However, there is a possibility that when the customer returns the sales ticket to the salesperson the error might be detected by the salesperson.

. Occasionally, the cashier has to rely on the salesperson to determine the sales price.

This increases the risk of material misstatements because it increases the risk of price determination error by the sales person. In this case the detection risk is very low and the error may remain undetected in the records of the company.

The cashier manually extends the price times quantity to compute the sales amount and then adds the sales tax to arrive at the total sale amount.
This increases the risk of material misstatement because it increases the risk that the cashier may make a calculation error. In this case the detection risk is higher because the sales person may not do the calculation again and verify the total sale amount. In this case the control risk is almost 100%. There is no chance that such an error may be detected by the internal control system of the store.

The cash drawer is generally only opened when a sale is entered; however, the drawer can also be opened by pressing the "Total" button.

The opening of the cash register by pressing the total button can expose the cash to pilferage or theft. However, in this case the detection risk is almost nil because if the cash does not tally with the total of the cash tickets then either the store accountant or the store manager will detect it.

John Thornberg, the store's manager, counts the cash in the cash register each night and the deposit slip.
This increases the risk of material misstatement because at this stage the money in the cash box can be much lower than what had actually been collected. The money could have been reduced by pushing the total button or by entering details of a sale. However, in this case also the detection ...

Solution Summary

A question in auditing is thoroughly explored.