10-63 (Testing Controls) Following is a list of controls typically implemented in the processing of sales transactions.
a. For each control identified, briefly indicate the financial misstatement that could occur if the control is not implemented effectively.
b. Identify an audit procedure to test for effectiveness of the control.
Controls Typically Found in Sales Processes
1. Authorization: All transactions under $10,000 may be approved by a computer authorization program. The credit manager must approve all transactions over $10,000.
2. All invoices are priced according to the authorized price list maintained on the computer. Either the regional or divisional sales manager must approve any exceptions.
3. All shipping documents are pre-numbered and periodically accounted for. Shipping document references are noted on all sales invoices.
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.
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.
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.
7. The company pays 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.
Financial misstatement: In case of the computer authorization program, several non-approved transactions may take place.
The auditors should start by testing 30 transactions with at least 15 transaction of the nature that are not authorized. The computer program should be able to detect and reject at least 14 of the 15 misstatements. If we assume 3% of the transactions as the tolerable limit, if the program does not reject fourteen or more transactions, the program should be upgraded.
The financial misstatements could lead to invoices being under priced. For example if a wrench were priced at $240, the invoices could be made charging $140 for each wrench.
The auditors should run the computer program 60 times and check if the prices are in accordance with the price list. In addition, the auditors should examine every exception made by the regional and divisional sales manager and should check the reasons for the exceptions. If the exceptions made were more than 100, then the auditors should ascertain why the reasons for making exceptions were not incorporated into the computer ...
This posting describes the different tests for sale processes. This is essential for financial audits and highly recommended.