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Misstatements and Controls: Internal Control Procedure

*10-59 (Misstatements and Controls) Field, CPA, is auditing the financial statements of
Miller Mailorder, Inc. (MMI) for the year ended January 31, 2006. Field has compiled a list of possible errors and fraud that may result in the misstatement of MMI's financial statements, and a corresponding list of internal controls that, if properly designed and implemented, could assist MMI in preventing or detecting the errors and fraud.

Required
For each possible error and fraud numbered 1 through 15, select one internal control procedure from the lettered answer list that, if properly designed and implemented, most likely could assist MMI in preventing or detecting the errors and fraud. Each response in the list of controls may be selected once, more than once, or not at all.

Possible Errors and Fraud
1. Invoices for goods sold are posted to incorrect customer accounts.
2. Goods ordered by customers are shipped, but are not billed to anyone.
3. Invoices are sent for shipped goods, but are not recorded in the sales journal.
4. Invoices are sent for shipped goods and are recorded in the sales journal, but are not posted to any customer account.
5. Credit sales are made to individuals with unsatisfactory credit ratings.
6. Goods are removed from inventory for unauthorized orders.
7. Goods shipped to customers do not agree with goods ordered by customers.
8. Invoices are sent to allies in a fraudulent scheme, and sales are recorded for fictitious transactions.
9. Customers' checks are received for less than the customers' full account balances, but the customers' full account balances are credited.
10. Customers' checks are misappropriated before being forwarded to the cashier for deposit.
11. Customers' checks are credited to incorrect customer accounts.
12. Different customer accounts are each credited for the same cash receipt.
13. Customers' checks are properly credited to customer accounts and are properly deposited, but errors are made in recording receipts in the cash receipts journal.
14. Customers' checks are misappropriated after being forwarded to the cashier for deposit.
15. Invalid transactions granting credit for sales returns are recorded.

Internal Control Procedures
a. Shipping clerks compare goods received from the warehouse with the details on the shipping documents.
b. Approved sales orders are required for goods to be released from the warehouse.
c. Monthly statements are mailed to all customers with outstanding balances.
d. Shipping clerks compare goods received from the warehouse with approved sales orders.
e. Customer orders are compared with the inventory master file to determine whether items ordered are in stock.
f. Daily sales summaries are compared with control totals of invoices.
g. Shipping documents are compared with sales invoices when goods are shipped.
h. Sales invoices are compared with the master price file.
i. Customer orders are compared with an approved customer list.
j. Sales orders are prepared for each customer order.
k. Control amounts posted to the accounts receivable ledger are compared with control totals of invoices.
l. Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed.
m. Prenumbered credit memos are used for granting credit for goods returned.
n. Goods returned for credit are approved by the supervisor of the sales department.
o. Remittance advices are separated from the checks in the mailroom and forwarded to the accounting department.
p. Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.
q. The cashier examines each check for proper endorsement.
r. Validated deposit slips are compared with the cashier's daily cash summaries.
s. An employee, other than the bookkeeper, periodically prepares a bank reconciliation.
t. The same employee who issues receiving reports evidencing actual return of goods approves sales returns.

Solution Preview

Possible Errors and Fraud: The internal control preocedure is suggested under each error,

1. Invoices for goods sold are posted to incorrect customer accounts.
k. Control amounts posted to the accounts receivable ledger are compared with control totals of invoices.

2. Goods ordered by customers are shipped, but are not billed to anyone.
g. Shipping documents are compared with sales invoices when goods are shipped.

3. Invoices are sent for shipped goods, but are not recorded in the sales journal.
f. Daily sales summaries are compared with control totals of invoices.

4. Invoices are sent for shipped goods and are recorded in the sales journal, but are not posted to any customer account.
k. Control amounts posted to ...

Solution Summary

This discusses the internal control preocedure for finding fraud and errors.

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