Written Questions
Written Questions
Written Questions
1. Following the above conference with Rogers, Abernethy asks Andrews to produce a
memo listing the potential problems that the firm might encounter in this audit. Prepare
this memo for the lakeside engagement. Include all accounts and transactions that seem
to require special attention. Evaluate the possible severity of each of these concerns.
2. Andrews was also assigned to visit the headquarters/warehouse of lakeside to tour the
facility. What should Andrews observe, and what factors should he be especially aware
engagement. How does this qualified opinion differ from a standard auditor’s report?
Answers:
1.
Company.
Inventory Returns Issue – Case Auditors should evaluate the size of the
correctly.
Account Receivable – Mentioned that all Auditors should investigate the value of the
distributorship sales are made on credit accounts receivable related to distribution and
management admits that internal control current internal control system in place, but
Predecessor auditor issued a qualified departures from GAAP so that the issues that
opinion from prior statements caused the preceding opinion are either
business relationship between the to verify that they are clearly disclosed so that
president
Profit-Sharing Incentive – Lakeside Auditors should be concerned that employees
Company has recently begun a profit- will take advantage of this system and find
sharing bonus system for firm ways to cut corners, rush procedures, or
was initiated.
Rental Agreements - Five of the stores Auditors should have to read the various
have been leased and, apparently, agreements to see if any of them qualify as a
Store Seven will be rented from Rogers. capital lease under the criteria established by
2. When visiting the lakeside facility, Andrews would need to assess the possibility of
fraud risk. He needs to take a close look at the inventory and pay close attention to the
Qualified Opinion
We have audited the accompanying financial statements of the Lakeside Company, which
comprise the statement of financial position as at December 31, 1990, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material
respects, the financial position of the Lakeside Company as at December 31, 1990, and its
financial performance and its cash flows for the year then ended in accordance with the
store. This store has failed to reach a break-even sales point to date, and total recovery of
the Company's investment is highly uncertain. In our opinion, the chances are reasonably
possible that the asset's value has been permanently impaired and should be reduced to the
We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Our
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Company in accordance with the Code of Ethics for Professional
Accountants in the Philippines (Code of Ethics) together with the ethical requirements that
are relevant to our audit of the financial statements in the Philippines, and we have fulfilled
our ethical responsibilities in accordance with these requirements and the Code of Ethics.
We believe that our audit provides a reasonable basis for our opinion.
financial statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with PFRSs, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from
going concern and using the going concern basis of accounting unless management either
intends to liquidate the company or to cease operations or has no realistic alternative but to
do so.
Those charged with Governance are responsible for overseeing the company's financial
reporting process.
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance is a high level of
assurance but is not a guarantee that an audit conducted in accordance with PSAs will
detect a material misstatement when it exists. Misstatement can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial
statements.
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting s material misstatement resulting
audit procedures that are appropriate in the circumstances, but not for the purpose
uncertainty exists related to events or conditions that may cast significant doubt on
uncertainty exists, we are required to draw attention in our auditor's report to the
related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusion are based in the audit evidence obtained up to
the date our auditor's report. However, future events or conditions may cause the
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the
planned scope and timing of the audit and significant audit findings, including any
Our audits were conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information for the year ended December
31, 1990 required by the Bureau of internal revenue is presented for the purpose of
additional analysis and is not required part of the basic financial statements prepared in
accordance with PFRS. Such supplementary information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial statements taken as a
whole.
1. Exhibits 2-1 and 2-2 are attached. From the information that has been presented in the
review will be made of the working papers produced by the predecessor auditor.
Prepare a list of the specific contents that should be examined. Indicate each area that
should be reviewed and the purpose of studying these particular working papers.
3. Assume that Abernethy and Chapman audit’s Lakeside’s 1991 financial statements and
mention of the uncertainty. Assume further that lakeside opts to issue comparative
statements showing figures for 1990 and 1991. Write a single audit report that will
inform the render of both opinions, as well as the examination made by the previous
auditors.
Answers:
1. See Exhibit 2-1 and 2-2
2. The Auditor has to assess and review the audit document prepared by the predecessor
auditor through series of steps. The goal is to examine the types of information that
proposed adjustments.
Look Through Work Papers Regarding To evaluate if internal controls have any
contingencies
Qualified Opinion
We have audited the accompanying financial statements of the Lakeside Company, which
comprise the statement of financial position as at December 31, 1990, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for the
year then ended, and notes to the financial statements, including a summary of significant
accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material
respects, the financial position of the Lakeside Company as at December 31, 1990, and its
financial performance and its cash flows for the year then ended in accordance with the
During 1989, the Lakeside Company made a large investment in a retail store in the sixth
store. This store has failed to reach a break-even sales point to date, and total recovery of
the Company's investment is highly uncertain. In our opinion, the chances are reasonably
possible that the asset's value has been permanently impaired and should be reduced to the
We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Our
Responsibilities for the Audit of the Financial Statements section of our report. We are
independent of the Company in accordance with the Code of Ethics for Professional
Accountants in the Philippines (Code of Ethics) together with the ethical requirements that
are relevant to our audit of the financial statements in the Philippines, and we have fulfilled
our ethical responsibilities in accordance with these requirements and the Code of Ethics.
We believe that our audit provides a reasonable basis for our opinion.
financial statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with PFRSs, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free from
going concern and using the going concern basis of accounting unless management either
intends to liquidate the company or to cease operations or has no realistic alternative but to
do so.
Those charged with Governance are responsible for overseeing the company's financial
reporting process.
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or error, and to issue
an auditor's report that includes our opinion. Reasonable assurance is a high level of
assurance but is not a guarantee that an audit conducted in accordance with PSAs will
detect a material misstatement when it exists. Misstatement can arise from fraud or error
and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial
statements.
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion. The risk of not detecting s material misstatement resulting
audit procedures that are appropriate in the circumstances, but not for the purpose
uncertainty exists related to events or conditions that may cast significant doubt on
uncertainty exists, we are required to draw attention in our auditor's report to the
related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusion are based in the audit evidence obtained up to
the date our auditor's report. However, future events or conditions may cause the
Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the
planned scope and timing of the audit and significant audit findings, including any
Our audits were conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The supplementary information for the year ended December
31, 1990 required by the Bureau of internal revenue is presented for the purpose of
additional analysis and is not required part of the basic financial statements prepared in
accordance with PFRS. Such supplementary information has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our opinion, is
fairly stated in all material respects in relation to the basic financial statements taken as a
whole.
1. Discuss the predecessor auditor's evaluation of the integrity of the management of the
potential client.
Rogers and all of the members of his organization appear to be people of integrity
according to the King and Company.
2. Did the predecessor auditor reveal any disagreement with management as to
accounting principles, auditing procedures, or other similarity significant matters? If so,
fully describe these disagreements.
Rogers didn’t want his shareholders or the banks to know about the impairment of
value problem. He didn’t want to write down the reported value of the 6th store.
According to him, no real impairment existed even if it did the potential loss is not
material.
3. What was the predecessor auditor's understanding as to the reasons for the change in
auditors?
King and Company indicated that their qualified opinion in the audit report was the
reason that Lakeside Company wanted to seek a new independent auditor. Also, he
mentioned that Rogers always complained about the audit fees.
4. Did the predecessor auditor give any indication of other significant audit problems
associated with the potential client?
King and Company mentioned the Lakeside’s internal control system is outdated. An
ineffective internal control system will result in less reliable information and even
create opportunity for fraud with the failure of detection by an auditor. In addition,
King talked that Rogers do not understand an auditor’s work and is unwilling to spend
money. Without sufficient fees, A&C might face problem in their future auditing work
especially in Lakesides’ expansion.
5. Did the predecessor auditor indicate any problem in allowing Abernethy and Chapman
to review prior years working for the potential client? If yes explain.
King and Company stated that the audit documents could be reviewed.
6. Was the predecessor auditor's response limited in any way?
King and Company stated that no limitation was indicated.
WRITTEN QUESTIONS
Abernethy and Chapman has a policy that all systems must be recorded in a memo and a
flowcharting format. By using both, staff members are able to achieve a better and a
and prepare a written memorandum to accompany and explain this particular system.
2. At the firm of Abernethy and Chapman, after the memo and flowchart have been
prepared, a preliminary analysis is made of the internal control policies and procedures
found in the system. The auditor is searching for weaknesses within the structure of the
system as well as nay particularly strong features that would reduce control risk. To
assist the auditor in evaluating a system, Abernethy and Chapman utilizes the form
presented in Exhibit 3-6. Complete this document based on the flowchart in Exhibit 3-5
representing the Cash Receipts section of the Revenue and Cash Receipts cycle. Be
especially careful to note any internal control weaknesses or strengths that may be
indicated.
3. Rogers has stated that he wants the auditing firm to help improve Lakeside’s accounting
systems. Exhibit 3-4 identifies the revenue recognition procedures currently used in
connection with distributorship sales. List improvements that could be made in this
system.
Exhibit 3-4
CLIENT COMPANY: Lakeside Company
All distributorship sales are made by telephone. Either the customer or a Lakeside
representative calls in each order. The Sales Division immediately records the incoming
data on a prenumbered invoice. The sales invoice is prepared in five copies with the last
three being retained in a temporary file by invoice number. The first copy is sent to Stan
Wisdon in the Inventory Department who verifies the availability of the purchased items. If
the merchandise is in the warehouse, it can be sent out almost immediately. However, if any
items must be ordered from Cypress, the waiting time may be as long as three weeks.
Wisdon estimates the ship-out date, completes and initials the sales invoice, and returns it
to the Sales Division.
The second copy of the sales invoice goes to George Miller, Assistant to the President. Miller
maintains the accounts receivable subsidiary ledger. He also keeps a list of approved
customers with maximum credit limits. However, acceptance of new customers and
changes in available credit are decisions made solely by Mr. Rogers, the president. Before
approving any sale, Miller compares the sales invoice to the list of stores and their credit
limits. He also checks the current age of the customer’s accounts receivable balance. If the
store is on the approved list, is under the credit limitation, and has no overdue balances,
Miller initials the sales invoice and returns it to the Sales Division. If, for any reason, Miller
cannot approve the sale, the invoice is forwarded to Rogers, who reviews all pertinent
information. He then makes a final decision as to whether to accept or reject the order.
Rogers indicates his decision on the invoice and forwards it to the Sales Division. If the
order is rejected, the customer is contacted and all copies of the sales invoice are attached
and placed in a permanent file by invoice number.
For approved orders, the Sales Division matches all five copies of the sales invoice. The
approximate shipping date is indicated on the fifth copy and mailed to the customer as a
confirmation. The first copy is initialed by C. A. Land in the Sales Division and returned to
Wisdon in the Inventory Department as approval for making the shipment. The other three
copies of the sales invoice are stamped "Approved" and remain in the Sales Division in a
temporary file by invoice number.
Upon receiving the approved sales invoice, the Inventory Department packs and ships the
merchandise, and Wisdon prepares a five-copy bill of lading. One copy is included with the
shipment, while the second copy is mailed to the customer. The third copy is routed to the
Controller's Office. The fourth copy of the bill of lading goes to the Sales Division, with the
final copy being retained by the Inventory Department. It is stapled to the first copy of the
sales invoice and placed in a permanent file, by bill of lading number.
When the third copy of the bill of lading is received by Ms. Luck in the Controller's Office,
the quantity of inventory, its description, the bill of lading number, and the date of shipment
are recorded in an inventory sales journal. Having entered the appropriate information,
Luck places the bill of lading in a temporary file by sales invoice number, which has been
manually recorded on the document. Lakeside uses the services of an outside computer
center to maintain a perpetual inventory record. At the end of each week, Luck forwards
information on all sales and purchases to the center, which then processes the data and
returns updated records to the company. When the fourth copy of the bill of lading is
received in the Sales Division, Land matches it with the three approved copies of the sales
invoice. He compares the quantity and description of the order with the items that were
shipped. If they agree, he prices each sale from an updated price list that is maintained by
the Sales Division. The sales invoices are then extended, footed, and the due date is added.
The fourth copy of t1he bill of lading is attached to the second copy of the sales invoice and
filed in a temporary file by due date. The third copy of the approved sales invoice is sent to
Miller, Assistant to the President, while the fourth copy goes to the Controller's Office.
Miller uses his copy to update the accounts receivable subsidiary ledger and then files the
sales invoice in a permanent file by customer name.
The Controller's Office matches the sales invoice to the bill of lading, verifies the pricing
against an updated price list, and mathematically checks the extensions and footings. The
sales invoice is then recorded in the Sales Journal as a debit to Accounts Receivable and a
credit to Sales. Sales figures are also classified by geographic district so that commissions
can be appropriately accrued. Lakeside representatives receive a percentage of every sale
made within a specified territory. After the sale is recorded, the bill of lading is placed in a
permanent file by customer name.
The controller then mails the sales invoice to inform the customer of the amount payable,
the due date, and the discount terms. According to the invoice, payment should be made by
check (payable to "Lakeside Company"). The customer is also asked to return the bottom
portion of the sales invoice, which indicates the customer's name, the sales invoice number,
b.
the gross amount payable, the discount terms, and the due date.
CLIENT COMPANY: Lakeside Company
The checks and the bank deposit slips are taken to the bank. The checks and the bank
deposit slips are taken to the bank. The second deposit slip is validated and is returned to
the treasurer’s office to be placed along with the fourth cash remittance list in a permanent
file by date. The first validated bank deposit slip is returned by the bank to the Assistant to
president where it is placed in a temporary file by date.
The invoice slips and the first three copies of remittance list from the treasurer’s office are
sent to the sale’s division. Sales invoice 2 and the fourth copy of Bill of Lading were
originally filed by the sales division as the goods were shipped. The individual sales invoice
slips are matched with sales invoice and Bill of Lading. Appropriate discount calculated are
recorded on each copy of cash remittance list. Each invoice slips that are matched with the
appropriate sales invoice and Bill of Lading are placed in a permanent file by invoice
number. The third copy of the cash remittance list is placed in a permanent file by date.
The second cash remittance list is sent to the controller’s office where upon refuting of cash
receipts and sales discounts, journal entry is recorded in cash receipts journal. Ensuring,
the cash remittance list number two is placed in the permanent file by date.
The sales division sends the first copy of cash remittance list to the Assistant to the
President where its total is compared to the first validated bank deposit slip, individual
items are randomly reconciled and accounts receivable subsidiary ledger is updated before
being placed in a temporary file by date. After receiving the monthly bank statement, bank
reconciliation is prepared. The bank reconciliation, bank statement, validated deposit slip
and remittance slip are placed in a permanent file by date.
Exhibit 3-6
Abernethy and Chapman
List each document found in this system, the number of copies, and whether it is prepared
internally or externally.
Invoice Slips (one copy per payment) - prepared internally but returned directly by
outside party. It is bottom portion of the number 4 copy of the sales invoice.
Validated Bank Deposit Slips (two copies per day) – prepared internally but validated
by outside bank and mailed directly to the Assistant to the President.
Cash Remittance List (four copies per day) - prepared internally.
Sales Invoice (second copy) – prepared internally.
Bill of Lading (only fourth copy is a part of this system) - prepared internally, two
copies sent to customer
Bank Statement (one copy per month) – prepared externally.
Bank Reconciliation (one copy per month) - prepared internally.
Answer each of the following questions. For each "No" answer, comment on whether an
internal control weakness is indicated.
2. Is the authority for All processes made by the team are based on
completing each document x standards and so authority and complete.
clearly delineated?
3. Are all documents A number of the documents are reviewed
subsequently reviewed by prior to the beginning of this system such as
an independent party
x
the sales invoice and bill of lading.
within the company?
4. Are appropriate In order for better performance and analysis
procedures clearly spelled of the document. We used procedures to help
out for completing and
x
us complete the review of the documents.
reviewing each document?
5. Is the record-keeping x Records such as receipts and invoices are
function independent of provided with lots of copies for better keeping
the custody function at all of documents throughout the system.
points throughout the
system?
6. Are all mathematical All computations are independently verified
computations except for the cash discount. The flowchart is
independently verified? x unclear as to the procedures to be applied
when the sales division calculation does not
agree with the customer payment.
7. Does record-keeping begin As stated in revenue and cash receipts cycle
at the origin of the presented by Lakeside Company, we can say
transaction? x that record-keeping began in the origin of the
transaction.
9. In the space below, indicate any other specific internal control features that have been
built into this system.
Checks received are immediately stamped “For Deposit Only” right upon receipt
Spot checking of cash remittance list totals and dates against blank statement
10. In the space below, indicate any other specific internal control weaknesses that appear
to be present in this system.
There might be a difficulty when it comes to locating invoices because these, along
with other related documents are permanently filed by invoice number in the sales division
rather than by customer name.
3. The improvements that could be made in Lakeside’s accounting systems are as follows:
A signed receipt should be received as a proof of transfer when goods are shipped.
Establish a separate accounts receivable department to monitor all changes in each
In order to provide better control over the inventory being removed from the
Rogers must be prohibited or other company personnel from giving credit except
Lakeside Company should use a sales order form different from that of Sales Invoice.
Written Questions
1. Prepare a worksheet to indicate the analytical procedures that Mitchell should perform.
Use the information presented in Exhibits 4-1 through 4-5. Create this worksheet using
three columns. In the first, indicate the procedure that is being applied. In the second,
note the results. In the final column, indicate the significance (if any) of the findings.
Answers:
Accounts misposted.
Determine age of Age as of 12/31/89 – 93.0 Increase in age may indicate that
statement continue to report an overall will make the possibility that the
amount. discontinued.
Scan the balance sheet Nothing unusual
Scan the cash flow Cash flow from operations The cash flow problems,
sales for that store have being reported for Store Three.
50%.
Scan the trial balance Sales Commissions for District Although not necessarily a
figure.
Scan the trial balance Rent expense on vehicles and Such a decrease often serves to
company records.
Scan the trial balance The "Gain on Disposition of Often a company will fail to
appropriately capitalized.
Scan the trial balance The Allowance for Doubtful The auditor should determine if
agreement.
Scan the trial balance The long-term notes payable The auditor should determine the
company.
Scan the trial balance Sales returns have increased The auditors need to ascertain
company stores and the Any change in the trend for sales
treatment.
Scan the trial balance The estimated bonus expense That increase is probably due to
has increased. the profit-sharing plan having
be investigated.
Written Questions
1. Exhibit 5-1 contains the questions that Mitchell is to answer concerning accounts
receivable control procedures. Using this case, as well as Exhibits 3-4 and 3-5,
2. Exhibit 5-2 is a portion of the audit program that Mitchell designed to test the
operating efficiency of controls in the revenue and cash receipts cycle. For each
individual test, indicate the anticipated results if the system is working properly.
Also, list the potential problems if the control is not functioning as designed.
Exhibit 5-2
Abernethy and Chapman
TESTING OF TRANSACTIONS DETAILS AND CONTROLS
LAKESIDE COMPANY AUDIT EXAMINATION
REVENUE AND CASH RECEIPTS CYCLE
(1) From the invoice file in the Sales Division, select five invoices at random.*
(A) Compare the sales invoice with the sales invoice slip.
(B) Compare the sales invoice with the bill of lading.
(C) Trace the amount of the remittance to the cash remittance list filed in the
Controller’s Office.
(D)Recompute the appropriate discount and compare the discount taken according to
the cash remittance list.
(E) Verify the pricing of the invoice against an approved pricing list.
(F) Extend and foot each invoice.
(G) Trace the amount of the remittance to the validated bank deposit slip filed in the
office of the Assistant to the President.
(H)Trace the amount of the remittance to the Account Receivable Subsidiary Ledger.
(I) Verify that each has been initialed by an appropriate official to indicate credit
approval
(2) From the Accounts Receivable Subsidiary Ledger, select three accounts at random. For
each of these accounts, choose one debit entry and one credit entry.
(3) Select 10 customers on the approved customer list and verify that a credit report is on
file and properly completed.
(4) Select two cash remittance lists at random. Foot the list and compare the total to the
posting in the Cash Receipts Journal.
Note: Sample sizes in practice would normally be larger than indicated here. Sample sizes have been kept small so
they will be more manageable.
Abernethy and Chapman
TESTING OF TRANSACTIONS DETAILS AND CONTROLS
LAKESIDE COMPANY AUDIT EXAMINATION
REVENUE AND CASH RECEIPTS CYCLE
1-A Total sales invoice together with sales There are misstated in recording the sales,
invoice slip should have the same this happen when the invoices do not
amount. It should be indicate that they agree. Employees do not comply with the
made comparisons. systems requirements.
1-B Sales invoice and bill of landing should When the sales and bill of landing are
have the same amount. The employees having different balances it notifies the
must leave there initials as it serve to auditor that there are inventory have been
be the proof of the test and there shipped or there are records that have
should be prior comparison. incorrect amounts or incorrect inventory.
1-C There must be consistency in invoices Anyone in the company may have been
of the cash remittance list and the cash engaged in lapping or commit theft
that receive. In addition, for the
purpose of control procedures,
company should encourage its
customer to contain in the invoice slip
the amount of payment.
1-D Calculated cash discounts should be Discounts may be incorrectly recorded to
identical with the amounts recorded by hide cash shortages or as a step in stealing
the client company. In most cases, this cash funds from the company. Also, the
calculated discount figure will be equal company may be allowing customers to
to the difference between the sales take discounts that have not actually been
invoice total and the cash remittance. earned. Allowing these reductions would
indicate lack of efficiency in internal
control.
1-E The approved price list should be Sales income is overstated because of the
follow in pricing the customers and it improper pricing and the customers may
should be the base of the entire price in pay wrong amounts. Because the invoice
the invoice. price don’t less the discounts. Employees
may receive kickbacks because the invoice
price is too high.
1-F The extensions and footings on the Wrong amounts may be paid by customers.
invoice should be correct. Improper footings or extensions, either
intentionally or unintentionally, also leads
to incorrect sales and receivables figures
on the financial statements.
1-G The bank deposited slip and the Test that has been done notifies the
amount received should have the same auditor of the chance that there is lapping
amount and the date of payment and because of the difference on cash receipts
deposit should be the same. it can point out the theft.
1-H All cash remittances should be Since the subsidiary ledger is not well
recorded promptly as credits to the controlled in the Lakeside organization,
specific subsidiary ledger accounts. this procedure may be used to determine
the possibility of errors within the ledger.
This test also may indicate lapping as well
as other manipulations of the accounts so
as to conceal cash shortages.
1-I Each invoice should be initialed by Because the credit system is not well
either Rogers or Miller to indicate documented, the auditor will be searching
credit approval. for evidence that sales can be made
without credit approval. Such evidence
would have an effect on the auditor's
judgment as to the amount of evidence
needed in examining the allowance
account and bad debt expense.
2-A There should be a proper sales invoice The company prepare all sales invoice with
in accordance with each debit entry. other documents internally, the employees
can made up the sales. This test can notify
the auditor to any misinterpretation of the
sales.
2-B Cash remittance list and each credit Employees may commit lapping; tracing
should be the same as to amount can refer to errors in postings within the
depending on the method of posting system.
and probability time of payment.
2-C Bank deposit slips and each specific This test can possibly uncover the
account that is credited should be the employee’s attempts to cover shortage of
same. cash or lapping.
3 Company’s file should contain entire Auditory can find additional evidences
and updated credit reports on the concerning the collectability and validity
individual customers. company’s receivable if the reports they
have are incomplete. Credit reports are
very important in putting a proper credit-
granting system because it shows that the
company’s control is efficiently operating.
4 The total amount and the date must be Two cash remittance are the cash thefts
the same in the balance that is and cash shortages this two are often have
recorded in the cash receipts journal mistake in footing the listing of cash
and it should be correct. transactions.