Chapter 14 - Audit of the Sales and Collection Cycle: Tests of

Controls and Substantive Tests of Transactions

 Multiple Choice Questions From CPA Examinations

14-21 a. (4) b. (4) c. (1) d. (3)

14-22 a. (4) b. (2) c. (1) d. (1)

14-23 a. (2) b. (4) c. (4)

14-24
1. a. Recorded sales are for the amount of goods ordered and are correctly
billed and recorded. (Accuracy)
b. Examine indication of internal verification on sales documents.
c. Incorrect prices may be charged, the customer may be billed for the
wrong quantity, or the total amount may be computed incorrectly.
d.Recompute information on the sales invoices. Trace details on sales invoices
to shipping records, price lists, and customers' orders.

2. a. Recorded sales and credit transactions are for shipments actually made
and existing sales transactions are recorded. (Existence and
Completeness)
b. Account for the numerical sequences of sales orders, invoices, and credit
memoranda.
c. Shipments or returns are not recorded. Orders from customers are
misplaced and not filled.
d. Examine correspondence concerning credit memoranda to assure that
they were properly issued. Trace sample of shipping documents to related
sales invoices and entries into the sales journal and accounts receivable
master file. Confirm accounts receivable.

3. a. Existing transactions are recorded; recorded transactions exist.

(Completeness and Existence)
b. The auditor should observe the employees and discuss the procedures
with personnel.
c. Sales could be made and not recorded, with the employee keeping the
proceeds of the sale.
d. Trace selected shipping documents to related duplicate sales invoices,
the sales journal, and accounts receivable master file.
4. a. Existing transactions are recorded. (Completeness)
b. The auditor should observe the activities of those employees and discuss
the procedures with personnel.
c. These unusual sales could be made but not recorded and the proceeds
kept from the company.
d. Examine sales documents for these sales and trace the entries into the
cash receipts journal.
14-24, continued
5. a. Existing transactions are recorded and recorded sales are for the amount
of goods ordered and are correctly billed. (Completeness and Accuracy)
b. The auditor should observe the activities of employees and discuss the
procedures with personnel.
c. A receivable might intentionally not be recorded, allowing the cash to be
kept from the company.
d. Trace from the shipping records to the sales invoice, to the accounts
receivable master file, and to the cash receipts journal.
6. a. Sales and cash receipts transactions are properly included in the
accounts receivable master file and are correctly summarized. (Posting
and summarization)
b. Observation of procedures and examination of indication of internal
verification.
c. Unintentional errors could be posted in the control accounts and left
undetected for long periods of time.
d. Perform tests of clerical accuracy--foot journals and trace postings from
journal to general ledger and accounts receivable master file.
7. a. Existing cash receipts transactions are recorded. (Completeness)
b. Observation and discussion of procedures with employees.
c. Cash could be received, not recorded, and kept from the company by an
employee or lost prior to deposit.
d. Trace receipts recorded on a list such as from a prelisting of cash to the
books of original entry. Confirm accounts receivable.
8. a. Transactions are recorded on the correct dates. (Timing)
b. Compare date per books to the date that the deposit appears on the bank
statement.
c. Cash receipts might be recorded in the wrong accounting period, lost, or
stolen.
d. Trace cash recorded on a list, such as a prelisting of cash, to the cash
receipts journal and to the bank statement.
9. a. Existing transactions are recorded.
b. Online shipping documents are prenumbered and accounted for weekly.
c. Online sales could be made but not recorded.
d. Select a sample of online shipments (using the prenumbered online
shipping documents), and trace to a sales invoice, sales journal or listing,
and the accounts receivable master file.
14-25

1. a. Test of control
b. Recorded sales returns are for returns from existing customers. (Existence)
c. Documentation

2. a. Test of control
b. Existing sales transactions are recorded. (Completeness)
c. Documentation

3. a. Test of control
b. Recorded sales are for shipments actually made to existing customers.
(Existence)
c. Documentation

4. a. Substantive test of transactions

b. Recorded sales are for the amount of goods shipped. (Accuracy)
c. Documentation

5. a. Substantive test of transactions

b. Sales transactions are properly included in the accounts receivable master
file and are correctly summarized. (Posting and summarization)
c. Reperformance

6. a. Test of control
b. (1) Cash received is recorded in the cash receipts journal. (Completeness)
(2) Cash receipts are recorded on the correct dates. (Timing)
c. Observation or documentation

7. a. Substantive test of transactions

b. (1) Recorded receipts are for funds actually received by the company.
(Existence)
(2) Cash received is recorded in the cash receipts journal. (Completeness)
(3) Cash receipts are deposited at the amount received. (Accuracy)
(4) Cash receipts are recorded on the correct dates. (Timing)
c. Documentation
14-29 a.
DEFICIENCY
1. Financial secretary exercises too much
control over collections.
2. Finance committee is not exercising its
assigned responsibility for collection.
3. The auditing function has been assigned
to the finance committee, which also has
responsibility for the administration of the
cash function. Moreover, the finance
committee has not performed the
auditing functions.
4. The head usher has sole access to cash
during the period of the count. One
person should not be left alone with the
cash until the amount has been recorded
or control established in some other way.
5. The collection is vulnerable to robbery
while it is being counted and from the
church safe prior to its deposit in the
bank.
6. The head usher's count lacks usefulness
from a control standpoint because he
surrenders custody of both the cash and
the record of the count.
7. Contributions are not deposited intact.
There is no assurance that amounts
withheld by the financial secretary for
expenditures will be properly accounted
for.
8. Members are asked to draw checks to
"cash," thus making the checks
completely negotiable and vulnerable to
misappropriation.
9. No mention is made of bonding.
RECOMMENDED IMPROVEMENT
To extent possible, financial secretary's
responsibilities should be confined to record
keeping.
Finance committee should assume a more
active supervisory role.
An audit committee should be appointed to
perform periodic auditing procedures or
engage outside auditors.
The number of counters should be increased to
at least two, and cash should remain under
joint surveillance until counted and recorded so
that any discrepancies will be brought to
attention.
The collection should be deposited in the
bank's night depository immediately after the
count. Physical safeguards, such as locking
and bolting the door during the period of the
count, should be instituted. Vulnerability to
robbery will also be reduced by increasing the
number of counters.
The financial secretary should receive a copy
of the collection report for posting to the
financial records. The head usher should
maintain a copy of the report for use by the
audit committee.
Contributions should be deposited intact. If it is
considered necessary for the financial
secretary to make cash expenditures, he
should be provided with a petty cash fund. The
fund should be replenished by a check based
upon a properly approved reimbursement
request and satisfactory support.
Members should be asked to make checks
payable to the church. At the time of the count,
ushers should stamp the church's restrictive
endorsement (For Deposit Only) on the back of
the check.
Key employees and members involved in
receiving and disbursing cash should be

10. Written instructions for handling cash
collections apparently have not been
prepared.
11. The envelope system has not been
encouraged. Control features that it
could provide have been ignored.
bonded.
Especially because much of the work involved
in cash collections is performed by unpaid,
untrained church members, often on a short-
term basis, detailed written instructions should
be prepared.
The envelope system should be encouraged.
Ushers should indicate on the outside of each
envelope the amount contributed. Envelope
contributions should be reported separately
and supported by the empty collection
envelopes. Prenumbered envelopes will permit
ready identification of the donor by authorized
persons without general loss of confidentiality.