109
Accounts Receivable and Internal Control
Please note you have three assignments for this week. The case study, the weekly assignment and continue working on the final draft for the individual research project.
1. Calculate the following ratios for 20×9, 20×8 and 20×7:
a. Sales to total assets b. Sales to production
c. Revenue per unit sold
d. Accounts receivable growth to sales growth
e. Uncollectable accounts expense to net credit sales
f. Uncollectable accounts expense to accounts receivable written off g. Accounts receivable turn days 2. a. Describe the implications of the resulting ratios for the auditor’s audit strategy for year 20×9. b. What specific audit objectives are likely to be misstated? c. How should the auditor respond in terms of potential audit tests?
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14-28 (Controls over cash receipts processing at a church) You have been asked by the board of trustees of a local church to review its accounting procedures. As a part of this review, you have prepared the following comments relating to the collections made at weekly services and recordkeeping for members’ contributions:
1. The church’s board of trustees has delegated responsibility for financial management and audit of the financial records to the finance committee. This group prepares the annual budget and approves major disbursements but is not involved in collections or recordkeeping. No audit has been considered necessary in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years.
2.The collection at the weekly service is taken by a team of ushers. The head usher counts the collection in the church following each service. He then places the collection and a notation of the amount counted in the church safe. Next morning the financial secretary opens the safe and counts the collection again. She withholds about $100 to meet cash expenditures during the coming week and deposits the remainder of the collection intact. To facilitate the deposit, members who contribute by check are asked to draw their checks to “cash.”
Required:
Describe the weaknesses and recommend improvements in procedures for collections made at weekly services. Organize your answer using the following format:
Weakness/ Recommended Improvement(s)
Weakness:
This is a revenue recognition issue that affects gross receipts and all round trip transactions not to mention fund manipulation. Every area of the Auditing Cycle is compromised and carries tremendous inherent risk. The control processes of documents and records along with function and controls activities are jeopardized. All transaction objectives, balance objectives and disclosure objectives need to be re-evaluated. There is not one system that is affected under this scenario. Revenue
b. Describe the implications of the resulting ratios for the auditor’s audit strategy in year 5. What specific audit objectives are likely to be misstated? How should the auditor respond in terms of potential audits tests?
15-27 (Internal control evaluation-Cash disbursements) Management has requested a review of internal control over disbursements for parts and supplies purchased at manufacturing plants. Cash disbursements are centrally processed at corporate headquarters based on disbursement vouchers prepared and approved at the manufacturing plants. Each manufacturing plant purchases parts and supplies for its own production needs. In response to management’s request, a thorough evaluation of internal control over disbursements for manufacturing plant purchases of parts and supplies is being planned. As a preliminary step in planning the engagement, each plant manger has been requested to provide a written description of his or her plant’s procedures for processing disbursement vouchers for parts and supplies. Presented below are some excerpts from one of the written descriptions.
1. The purchasing department acts on purchase requisitions issued by the stores department.
2. A computer system generates prenumbered purchase orders based on information submitted by buyers in purchasing.
3. Receiving has complete access to purchase order information in the computer.
4. When goods are received, the receiving department logs the shipment in the computer by indicating that the purchase order was received and forwards this electronically to accounts payable.
5. When the vendor invoice is received, it is entered into the computer and matched electronically with purchase order and receiving information. Discrepancies are printed on an exception report for follow up by accounts payable personnel.
6. The computer checks the clerical accuracy of information on vendor invoices. Discrepancies are printed on an exception report for follow up by accounts payable personnel.
7. A prenumbered disbursement is prepared and forwarded along with supporting documentation to the plant controller, who reviews and approved the voucher.
8. Supporting documents are returned to accounts payable for filling, and approved disbursement vouchers are forwarded to corporate headquarters for payment.
9. A report listing checks issued by corporate headquarters is received and promptly filed by account payable.
Required:
For each of the disbursement system procedures listed above, state whether the procedure is consistent with good internal controls and describe how each procedure strengthens or weakens internal control.
16-24 (Analytical Procedures) Circuits Technology, Inc. (CTI) resells, installs and provides computer-networking products (client software, gateway hardware and software, and twinax hardware) to other businesses. Exhibit 16-24 provides some summary information from CTI’s financial statements.
Exhibit 16-24 CTI Selected Financial Information ($000)
a. Calculate purchases, gross margin, inventory turn days, accounts receivable turn days, and accounts payable turn days for the years ended 20×2, 20×3, 20×4, 20×5.
b. Describe the trends identified by performing analytical procedures in the gross operating cycle, the net operating cycle, and gross margin.
c. If tolerable misstatement is $ 45,000 for inventory, develop an expectation range for inventory turn days.
d. With respect to inventory, what might these trends indicate about the potential misstatement in inventory?
16-33 (Control Activities in Payroll Processing) As part of the audit of Manor Company, you are assigned to review and test the payroll transactions of the Galena plant. Your tests show that all numerical items were accurate. The proper hourly rates were used, and the wages and deductions were calculated correctly. The payroll register was properly footed, totaled, and posted. Various plant personnel were interviewed to ascertain the payroll procedures being used in the department. You determine that:
1. The payroll clerk receives the time cards from the various department supervisors at the end of each pay period, checks the employee’s hourly rate against information provided by the personnel department, and records the regular and overtime hours for each employee.
2. The payroll clerk sends the time cards to the plant’s data processing department for compilation and processing.
3. The data processing department returns the time cards with the printed checks and payroll register to the payroll clerk on completion of the processing.
4. The payroll clerk verifies the hourly rate and hours worked for each employee by comparing the detail in the payroll register to the time cards.
5. If errors are found, the payroll clerk voids the computer-generated check, prepares another check for the correct amount, and adjusts the payroll register accordingly.
6. The payroll clerk obtains the plant signature plate from the accounting department and signs the payroll checks.
7. An employee of the personnel department picks up the checks and holds them until they are delivered to the department supervisors for distribution to the employees.
Required
a. Identify the shortcomings in the payroll procedures used in the payroll department of the Galena plant and suggest corrective actions. b. Identify the weaknesses, if any, that you believe are material and the reasons why.
Case Study (Knapp book):
Dollar General Stores
Questions 1-4
1- Identify audit procedures that might have detected the improper accounting treatment applied by Dollar General to the transaction with IBM. 2- Identify the accounting concepts or principles violated by Dollar General in this case. Defend each of your choices. 3- Under what circumstances, if any, are “earnings management” techniques acceptable under GAAP? Under what circumstances, if any, are such techniques ethical? Explain. 4- In addition to the parties identified in this case, what other parties bore some degree of responsibilities for the improper accounting applied to the Dollar General-IBM transaction? Explain.
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