Apollo Shoes Case Internal Control Audit Project Student Name(s) ACC/490 Date Instructor

Internal Control Questionnaire Sales Transaction Processing

Assertions and Questions Occurrence assertion: 1. Is the credit department independent of the sales department? 2. Are sales of the following types controlled by the same procedures described below? Sales to employees, COD sales, disposals of property, cash sales, and scrap sales. 3. Is access to sales invoice blanks restricted? 4. Are pre-numbered bills of lading or other shipping documents prepared or completed in the shipping department? Completeness assertion: 5. Are sales invoice blanks prenumbered? 6. Is the sequence checked for missing invoices? Yes, No, N/A Comments

YES YES

Marketing Department Salesclerks Treasurers Office Credit Manager

YES

Billing clerk/ locked closet in billing department

YES

Duplicate bill of lading Copy 1 to contract trucker and Copy 2 to AR Department with Copy 4 of matching invoice

YES

Billing Clerk / Billing department Billing Clerk removes invoices in numerical sequence for immediate loading into computer printer Numerical sequence is checked by Accounts Receivable clerk missing invoices must be located and explained No indication that bill of lading numbers are checked

YES

7. Is the shipping document numerical sequence checked for missing bills of lading numbers? Accuracy assertion: 8. Are all credit sales approved by the credit department prior to shipment? 9. Are sales prices and terms based on approved standards? 10. Are returned sales credits and other credits supported by documentation as to receipt, condition, and quantity, and approved by a responsible officer? 11. Are shipped quantities compared to invoice quantities? 12. Are sales invoices checked for error in quantities, prices, extensions and footing, and freight allowances, and checked with customers orders? 13. Is there an overall check on arithmetic accuracy of period sales data by a statistical or product-line analysis? 14. Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting? Classification objective: 15. Does the accounting manual contain instructions for classifying sales?

NO

YES YES NO

Treasurers Office Credit Manager Billing Clerk/ Billing Department checks pricing against approved pricing list Customer relations personnel initiate cash refunds and credit memos for sales returns for Treasurer approval; however no there are no specific indications of proper support documentation. Shipping Employee Shipping Department Accounts Receivable Clerk Accounts Receivable Department

YES YES

YES

Marketing Vice President / Marketing Department General Ledger Supervisor / General Ledger Control Account

YES

YES

Accumulated each month by date of shipment and recorded in the accounts receivable control and sales revenue accounts. General ledger supervisor approves monthly summary

entries before they are posted to the general ledger. Cutoff objective: 16. Does the accounting manual contain instructions to date sales invoices on the shipment date?

YES

Accounts Receivable Clerk Accounts Receivable Department

Internal Control Questionnaire Sales Transaction Processing Revenue Cycle Bridge Working Paper Strength/Weakness S-1 Strength Separation of duties/checks are done S-2 Strength Separation of duties/verifications are done S-3 Strength Matching shipping and invoice dates verified by two departments W-1 Weakness one department has authorization to change quantities without verification & bill of lading numbering sequences are not verified Control Activity Credit Approval (Sales Orders) Authorized Price List (Sales Invoices) Audit Implications Presence of a credit check ensures that sales are only made to creditworthy customers Invoices are numbered in sequence and are mathematically accurate in quantity and pricing. Verifying authorization to move goods from inventory to customer. Verifying quantities ordered, invoiced, and shipped. Control Test Observation of the Sales order to customer approval process. Recalculation of a sampling of invoices to verify quantities to Sales Orders and prices to approved price list. Observation of shipment authorization from inventory to shipping and comparison of shipment date to invoice date. Inquiry regarding shipment amounts that do not match invoice amounts and verify backordered quantities. Compensating Audit Procedures Document findings, verify results, and clarify issues. Sampling matching and recalculating.

Numerical "Pending Shipment" file

Compare the product images billed and shipped.

Check for proper quantities. Alter invoice copies 3 and 4 if necessary.

Confirm with customers the invoice quantities and check inventory counts on questionable items.

MEMORANDUM
DATE:01/08/2008 SUBJECT: A/R work papers (C-series) Revenue Cycle Problems

Based on information we have received from Darlene Wardlaw, which was collected and tested by Bradley it looks that there will be some serious problems with the revenue cycle, especially in Sales and Account Receivable. However, the revenue and collection cycle should consists of customer order processing, credit checking, shipping goods, billing customers and accounting for accounts receivable, and collecting and accounting for cash receipts. Apollo Shoes may reduce control risk by having a suitable separation of authorization, custody, recording, and periodic reconciliation duties. Regular error-checking activities including comparing customer orders and shipping documents is necessary and important in order to bill customers the right prices for the proper delivered quantities. Based on what Bradley found many things went wrongranging from making sales to fictitious customers or customers with bad credit to erroneous billings for the wrong quantities at the wrong prices at the wrong time. However, the big problem of the Apollo Shoes is Accounts Receivable and inventory may be overstated. Not having the right to use previous audited work-papers creates extra risk. Access to previous years audited data will increase the comfort for us. Furthermore, association with an unwelcome environment can potentially be grounds serious problems for our auditing. The integrity of the management should be well thought-out. There are a couple of indications of the lack of integrity. Specifically, there have been comments made by Mr. Lancaster as found up review of the board minutes. On one occasion, he stated that sales should be improved by at least 10% or heads will roll! and in another board meeting, he stated that he did not expect any more Accounts Receivable write offs or heads will roll! Also, the personal loan of $1,000,000 which was made to Mr. Lancaster, will not be paid back until year 2045, and will not be considered Account Receivable. In looking at the trial balance at the end of the year following the meetings, the sales numbers did look like they increased, however it was offset by the greater number of sales returns. In the case of Accounts Receivable, not one item was charged to bad debt, even though the Accounts Receivable balance went up threefold. It seems that the management of Apollo Shoes would not hesitate to do what it needs to do to make their numbers look good without regard to proper work ethics. Temporarily, Apollo Shoes is making the data look more attractive by fabricating the sales numbers. This discovery is based on Bradleys tests of controls where sales transactions were missing bills of lading. This suggests improperly recorded sales and a large amount of sales returns have not been taken in the consideration, which is conflicted with GAAS. In conclusion to this memo Apollo Shoes has not completed the business cycle so far, and our audit team will need to allocate a great deal of time and labor to keep track of each step in the cycle.

Internal Control Questionnaire Sales Transaction Processing Purchasing Cycle Bridge Working Paper Strength/Weakness S-1 Strength - Supervisor approval on all purchase requisitions S-2 Weakness - Receiving department's copy of PO doesn't show quantities S-3 Strength - Disbursement voucher and voucher package are matched W-1 Weakness - Verifying the sequence of purchase order numbers is in order Control Activity Purchase Approval (Purchase Orders) Verification of purchase orders to items received Verification of received items to match Accounts payable invoice Validation of purchase orders Audit Implications Ensures purchases are approved Actual counts of inventory are taken not copied from PO Guarantees that prices and final charges are accurate; no "additional fees" not accounted for. Purchase orders could be used for unauthorized purchases. Control Test Inspection of documents and records Observation Compensating Audit Procedures Tracing the documents to guarantee approvals. Examining certain inventory items to verify counts. Verifying totals are correctly recorded and tie out to general ledger. Determine PO documents in a particular series are accounted for.

Recalculation

Computer-assisted audit techniques