(b) List the internal control over sales for each of the six transaction-related audit objectives.

The Six Transaction-Related Audit Internal Control

Objectives
1) Recorded sales occurred - Bill of lading and sales order form are
The auditors is concerned with the attached to invoice. Sales are initiated
possibility of three types of by sales order form from customer.
misstatement; sales being included in the - Credit is approved by credit
journals for which no shipment was department by comparison to
made, sales recorded more than once authorized credit limit before shipment
and shipment being made to of merchandise is authorized.
nonexistence customers and recorded as
sales.
2) Existing sales transaction - Bill of lading and invoices are pre-
In many audits, no substantive test of numbered and prepared before
transactions are made for the merchandise is shipped.
completeness objectives on the grounds
that overstatements of assets and income
are a greater concern in the audit of sales
transactions than their understatements.
3) Sales are accurately recorded - Control totals are prepared and
The accurate recording of sales checked by computer.
transactions concerns shipping the
amount of goods ordered, accurately
billing for the amount of goods shipped
and accurately recording the amount
billed in the accounting record.

4) Recorded sales are properly classified - None

 Charging the correct general ledger
account is less of a problem in sale than
in some other transaction cycles, but it is
still of some concern.
5) Sales are recorded on the correct dates - None
Sales should be billed and recorded as
soon after shipment takes place as
possible to prevent the unintentional
omission of transactions from the record
and to make sure that sales are recorded
in the proper period.
6) Sales transaction are correctly included - Sales transactions are recorded in
in the master file and correctly sales, accounts receivable, cost of
summarized sales, and relieved from the perpetual
The proper inclusion of all sale inventory.
transaction in the accounts receivable
master file is essential because the
accuracy of these records affect the
client’s ability to collect outstanding
receivables.
(c) For each control, list a useful test of control to verify the effectiveness of the control
The Six Transaction-Related Audit
Objectives
1) Recorded sales occurred
2) Existing sales transaction
3) Sales are accurately recorded
4) Recorded sales are properly classified
5) Sales are recorded on the correct dates
6) Sales transaction are correctly
included in the master file and
correctly summarized
Test Of Control
- Examine sales invoice for supporting
bill of lading and customer order form
- Examine sales order form for evidence
of credit approval. Review client's
credit approval system for
effectiveness.
- Account for numerical sequences of
bills of lading and sales invoices and
determine that all have been recorded.
- Examine computer edit reports to detect
the errors and disposition.
- Not applicable.
- Not applicable.
- Trace sales transactions to sales journal.
 Question (d) : For each transaction-related audit objective for sales, list appropriate
substantive tests of transactions audit procedures, considering internal controls.
TRANSACTION-RELATED AUDIT
OBJECTIVE
1) recorded sales are for shipments
actually made to existing
customers .
(existence/occurrence)
2) existing sales transaction are
recorded.
(completeness)
3) recorded sales are for the
amount of goods shipped and
are correctly billed & recorded.
(accuracy)
4) recorded sales transaction are
properly classified.
(classification)
5) sales are recorded on the
correct dates.
(timing)
6) sales transactions are properly
included in the master file and
are correctly summarized.
(posting and summarization)
SUBSTANTIVE TESTS OF TRANSACTIONS
- Select sample of sales from sales journal
- Trace sales journal entries to supporting
documents & examine customer’s purchase
order, sales order form & bill of lading to
make sure that the goods were ordered and
shipped.
- Trace selected shipping documents to the
sales journal to be sure that each one is
included.
- Perform analytical tests to assess the
accounts and other relevant information are
consistent.
- Trace entries in sales journal to sales invoice
to compare sales price to price list to make
sure that the total sales are correctly billed.
- Examine customer correspondence
indicating pricing disputes.
- Trace details on sales invoices to shipping
documents, sales order &customer order to
make sure that the amount of goods shipped
are correctly recorded.
- examine sales documents to determine that
sales transactions are properly classified.
- Examine duplicate sales invoice for proper
account classification.
- Compare date of recording of sale in sales
journal with sales invoice as well as bill of
lading to determine that sales are recorded on
a timely basis.
- Compare sales month to month and
investigate any significant fluctuations.
- Trace selected sales invoice to the account
receivable master file and test for amount,
date and invoice number.
- Foot and cross-foot the sales journal and
trace totals to the general ledger.
Question (e) : Combine the audit procedures from parts (c) and (d) into an efficient audit
program for sales.

SIHAT PHARMACEUTICAL COMPANY

AUDIT PROGRAM FOR TESTS OF CONTROL AND SUBSTANTIVE TESTS OF

TRANSACTIONS AUDIT PROCEDURE FOR SALES

1- Obtain the sales journal for the year.

2- Foot and cross-foot the sales journal including trace and reconcile the totals to the general
ledger balance.
3- Select a sample of sales invoice from the sales journal :
a) Check the customer's purchase order, sales order form, and bill of lading are
available.
b) Compare the quantity, sales price, customer name, and date of shipment to
sales journal. Obtain explanations of any differences.
c) Check the sales order form to make sure that it is granted for credit approval.
d) Compare sales price with price list to examine the approved price list.
e) Test clerical accuracy of sales invoices.
f) Examine that sales transaction are properly classified.
4- Select a sample of bill of lading :
a) Trace them to the sales journal to check for the record of shipments.
b) Compare the dates in the bill of lading to the sales journal to determine the
transactions were recorded accurately.
5- Prepare the schedule of sales, cost of sales and gross margin percentage, showing
comparison between recent years. Compare the sales months to months or to prior years
and obtain explanation if any significant fluctuation occurred.
CASE 14-33

QUESTION:

Sihat Pharmaceutical Company, a drug manufacturer, has the following internal controls for
billing and recording accounts receivable :

1) An incoming customer’s purchase order is received in the order department by a clerk

who prepares a pre-numbered company sales order form in which is inserted the pertinent
information, such as the customer’s name and address, customer’s account number,
quantity and items ordered. After the sales order form has been prepared, the customer’s
purchase order is stapled to it.

2) The sales order form is then passed to the credit department for credit approval. Rough
approximations of the billing values of the orders are made in the credit department for
those accounts on which credit limitations are imposed. After investigation, approval of
credit is noted on the form.

3) Next, the sales order form is passed to the billing department, where a clerk uses a
computer to generate the customer’s invoice. It automatically cross-multiplies the number
of items with the unit price and adds the extended amounts for the total amount of the
invoice. The billing clerk determines the unit prices for the items from a list of billing
prices.

The computer automatically accumulates daily totals of customer account numbers and
invoice amounts to provide “hash” totals and control amounts. These total, which are
inserted in a daily record book, serve as predetermined batch totals for verification of
inputs into the computerized accounting records.
 The billing is done on pre-numbered, continuous, carbon-interleaved forms having the
following designations :
(a) Customer’s copy
(b) Sales department copy, for information purpose
(c) File copy
(d) Shipping department copy, which serve as the shipping order. Bill of lading are also
prepared as carbon copy-products of the invoicing procedure.

4) The shipping department copy of the invoice and the bill of lading are then send to the
shipping department. After the order has been shipped, copies of the bill of lading are
return to the billing department. The shipping department copy of the invoice is filed in
the shipping department.

5) In the billing department, one copy of the bill of lading is attached to the customer’s copy
of the invoice and both are mailed to the customer. The other copy of the bill of lading,
together with the sales order form, is then stapled to the invoice file copy and filed in
invoice numerical order.

6) As the computer is generating invoices, it is also storing the transactions on disk. The
disk is then used to update the computerized accounting records. This update procedure is
run daily, and a summary report is generated. Hard copy output of all journals and
ledgers is prepared.

7) Periodically, an internal auditor traces a sample of sales order all the way through the
system to the journals and ledgers, testing both the procedures and dollar amounts. The
procedures include comparing control totals with output, recalculating invoices and
refooting journals, and tracing totals to the master file and general ledger.
SUMMARY OF FLOWCHART

1- Order department receives customer’s purchase order. Then, prepare pre- numbered sales
order form.
2- Sales order form passed to credit department for credit approval:
- If ok, it is passed to billing department.
- If not approved, the sales will be terminated.
3- Billing dept clerk entered data into computer to generate customer’s invoice. The billing
clerk determines the unit prices for the items from a list of billing prices.
4- The billing is done on pre-numbered, continuous, carbon-interleaved forms having the
following designations :
(e) Customer’s copy
(f) Sales department copy, for information purpose
(g) File copy
(h) Shipping department copy, which serve as the shipping order. Bill of lading are also
prepared as carbon copy-products of the invoicing procedure.
5- Sales invoices and bill of lading are then sent to the shipping department.
6- After the order has been shipped, copies of bill of lading are returned to the billing
department. Then the invoice is filed in shipping department.
7- 1 copy of bill of lading is attached customer invoice to be mail to customer. Another copy
attached with sales order form and then filed in invoice numerical order.
8- The computer generates invoices and store the transaction on disk that will update the
computerized accounting records which is run daily. Then , it generates summary report
and prepare the hardcopy output of all journals and ledgers.
 UNIVERSITI UTARA MALAYSIA
COLLEGE OF BUSINESS

BKAA 2013 – AUDITING & ASSURANCE 1

GROUP C

CASE 14-33

LECTURER’S NAME :

PROF. MADYA SYED SOFFIAN B SYED ISMAIL

GROUP MEMBER :

SHAMSUL ANWAR BIN ALIAS 198473

RIKA TRISNAWATY BINTI ABASRI 205406
NURUL HUSNA BINTI ZULKAFLI 207225
NAZREEN FAZLINA BINTI ABU HANIFA 207845