Act-341

Faculty-SJG
Forqan M. A. Bashar 082-622-030

Answer the question no- a Limiting the sales man selling power by imposing some rules which is simply putting an authorized customer list with a credit limits. Which can be possible taken by the owner of the company, who will be give the authorized customer list as well as their credit limit? The reason behind that there is a word call sales commission, which is basically describe the total amount sale by a sales man, and based on that a fair amount of commission will be given to him. Based on the sales people are working for the sales of the product as much as possible to get that reward. In some cases that try to show fraud sales and get the commission. But after the end of the season those fraud customer return the product and also return back their money. So the bottom of the story is the company has to give away money to the fraud commission as well as to the fraud customers. And the end of the year company having a lot of inventory with a huge loss. So to prevent this fraudulence company needs to give an authorized customer list with credit limits. So in this context, it is very important to follow this method in order to give assurance to the owner of the company that all the sales are done according to the list. Automatically there will be a check and balance exists so that no fraudulence can take place. Because they already have three branches and all of them sale their products. Suppose daily they serve hundreds of customer and when we add all the branches it will be around three hundred of customer. So it is very difficult for the owner to look every days customers list by visiting every stall. For this reason they need to find out a specific solution so that owner do not need to visit all the store rather they can only check the list whether the sales people fulfill their target according to the companys rule. In each of the branches they have individual accounting department. So, because of the individual department, employees of that department can easily follow this method by providing credit limit

and credit worthiness of customer, so that any sales man cannot manipulate any number in order to do any fraudulence. Confirmation will be mailed if accounting department may identify any kind of misstatements in any transaction. This kind of misstatement can be happened mostly because of human errors ( as a check is issued in the name of john but while listing it in ledger accounts, accountants mistakenly write josh instead of john). But sometime it also happened because of any emergency occurrence (as any listed customer may want to need more amount of product because of some emergency and if sales people sell that extra amount of product that it will also not be considered as authorized sales.).But whenever the problem emerge confirmation will be posted according to the misstatement. Positive confirmation will be used when the company wants to know more information regarding the transaction. In this statement company will want to know the detail information about the product. In the case of john, this kind of confirmation will be given in order to clarify the situation of accounts. On the other hand, for a specific information company can use a negative confirmation, as we have stated for the emergency selling just send to the customer as they have buy that additional product or not answer will be yes or no. Four accounts need to be circularized, -wholesale, retail-residential, retail-commercial, and water. In order to control of details accounts balances, first things that company needs to do, is to follow same accounting method in every branches. That will help the employees to do only one financial statement for all the branches by considering accounts receivables of all the branches as total A/R .

Segregation of duty is also important here, as different people needs to calculate the revenue from irrigation of water and electricity energy. Because they are sale in different charges. So if one people do both the calculation the their will be some occur any misstatement as human error. So proper concentration should be given here. Next, the internal auditor also need to look the A/R ,as they are function properly or not. On the other hand, A/R substantially turn over every months. So here cutoff periods needs to look carefully.

Ans no 2

Since, Ohio River authority requires a deposit from the customer prior of installation of the meters there are very few chance of receivables to become uncollectable. But even a minor uncollectible is still a loss for the company as because it is deducted as an expense from the profit. The inherent risk of management putting pressure to understate allowance for doubtful accounts/uncollectables in order to report a higher working capital in the face of liquidity problems or going concern doubts, in addition to that certain management may use sales adjustments transaction to conceal thefts of cash received from customers by overstating discounts or by writting off customers balances as uncollectibles. In order to prevent such misstatement specific primary audit objectives for the revenue cycle have been outlined. Under the auditing objective the uncollectible accounts falls under the following assertions; Existance and occurance, which requires the transaction class audit objective of EO3 y y Valuation and allocation, requiring the account balance audit objective of VA5. Presentation and disclosure, requiring transaction class audit objective PD3.

Since, misappropriation of cash could be covered by overstating cash discounts or sales returns or uncollectibles control activities such as proper authorization of all sales adjustments transactions, approved write off authorization memo for writing off uncollectible accounts could be implemented. For example all write offs of uncollectible accounts should be authorized by the treasurers office (EO3).

In evaluating the adequacy of allowance for uncollectible accounts the test of balance includes: Footing and crossfooting the aged trial balance of the accounts receivable and agreeing the total to the general ledger balance. y Testing the aging of the amounts shoun in the aging categories on the aged trial balance. y y Considering the evidence concerning the collectibility of past due amounts. Assesing the reasonableness of the percentages used to compute the allowance component required for each aging category and the adequacy of the overall allowance. The aging of a customers balance can be tested by vouching the amounts shown in each aging category to the subsidiary ledger or master file and detemining the amount length of time between the dates the unpaid sales invoices comprising each aged amount were recorded an the trial balance date. Alternatively auditing software can be used to reperform the entire aging of the clients master file. In addition to that examining correspondence with customers and outside collection agencies, reviewing customers credit reports and financial statements, and discussing the collectibility of specific account with appropriate personnel can also justify the adequacy of allowance for uncollectible accounts. The allowance for uncollectible accounts is an accounting estimate made by the management which contains both subjective and objective estimate. In order to evaluate if it is adequate or not an auditor judges the reasonableness of the allowance and related provision for uncollectible accounts expense. Furthermore the auditor can use his analytical ability and perform

substantative test to calculate ratio of uncollectible accounts expense to net credit sales, ratio of uncollectible accounts expense to actual uncollectibles and compare them with the previous years data.

Answer the question no: c Analytical procedure will be used to determine whether revenue reports of income statement is reasonable or not. The reason is that, the analytical procedure consists of the study and comparison of relationships among data. These processes include the calculation and use of simple ratio, vertical analysis or common size statements, comparison of actual amount with historical data or budget expectations and the use of mathematical and statistical models such as regression analysis. It also compare industry data analysis. So in the context of our case, we have to first consider ratio analysis which is basically the comparison of present year sales to previous year sales in order to identify any kind of misstatement occurs or not.

Industry data analysis will also need to take care. As an auditor he/she must compare the data with industry to find out the compatibility of the companys total revenue with the industry. If the company revenue is very low or high than the industry than there will be something that an auditor needs to think. If the auditor is experience than he/she would looked the economy trend from this year to previous year. If the economy show the downward or upward line according to the companys revenue than auditor will be satisfy. But if the comparison is not accordance with the companys report, than auditor will be go for more audit test such as test of control. In the test of control, we need the following steps - observing inquiring, inspecting and reperformence. In observing part auditor will observe all the activities of managers and employees. In inspecting part auditor will examine the documents valid or not, based on which revenue report are made. In inquiring part, oral and verbal testing will done on third partys as well as clients, and reperformence part vouching and tracing will be held. If than it is not clear than we need to move on test of details transaction as well as test of details balances which basically took place because of the huge differences between plan level and actual level of assessment. And in this case we need to follow all the transaction from beginning to the end in order to identify the misstatement.