ACC 403 Homework Week 6

ACC 403

Week 6 Homework

10-27

Answer: A. Fraud B. Internal controls of more than one person opening mail. C. Verification of accounts by accounts receivable.

• A material sale was recorded on the last day of the year even though the goods were not shipped until three days later.
• Answer: A. Fraud B. Sales invoices are not recorded until receipt of shipping document indicating that the goods have been shipped. C. For sales before and after year end, examine shipping documents to verify the sale was recorded in the proper period. Confirm accounts receivables at year-end.
• Merchandise was shipped to a customer, but no bill of lading was prepared. Because billings are prepared from bills of lading, the customer was not billed.
• Answer: A. Error B. No merchandise may leave the plant without the preparation of a bill of lading. C. Trace credit entries in the perpetual inventory records to bills of lading and the sales journal. Confirm accounts receivable at year-end.
• The controller approved a payment to a consulting firm owned by his sister. The consulting firm did not actually perform any services for the company.
• Answer: A. Error B. Internal review and verification of account classification by an independent person. C. Test accuracy of invoice classification.
• The shipping clerk included several additional valuable items in a shipment that were not included in the customer’s order and were not invoiced to the customer. The shipping clerk has an arrangement with the customer to share the proceeds from sales of the additional items shipped.
• Answer: A. Fraud B. Independent verification of packing slip. C. Reconcile inventory items on hand to perpetual inventory records and investigate any shortages.
• Cash paid on accounts receivable was stolen by the mail clerk when the mail was opened.

Answer: A. Fraud B. Cash receipts should be compared to the postings in the accounts receivable master file and to the validated bank deposit slip. C. Trace cash received from cash receipts journal. Confirm accounts receivable.

• A sales invoice was miscalculated by $1,000 as a result of a key-entry mistake.
• Answer: A. Error B. Internal verification of invoice preparation and posting by an independent person. C. Test clerical accuracy of sales invoices.
• Cash paid on accounts receivable that had been prelisted by a secretary was stolen by the bookkeeper, who records cash receipts and accounts receivable. He failed to record the transactions.

10-33

• 10-32
• The auditor must conduct the audit to detect errors and fraud, including embezzlement that is material to the financial statements. It is more difficult to discover embezzlements than most type of errors, but the auditor still has significant responsibility. In this situation, the deficiencies in internal control are so evident that it should alert the auditor to the potential for fraud. On the other hand, the fraud may be immaterial and therefore not be of major concern.
• 1. The person who reconciles the bank account does not compare payees on checks to the cash disbursements journal. 2. The president signs blank checks, thus providing no control over expenditures. 3. No one checks invoices to determine that they are canceled when paid.
• 1. Comparison of payee on checks to cash disbursements journal. 2. Follow up all outstanding checks that did not clear the bank during the engagement until they clear the bank. Compare payee to cash disbursements journal.

A. Fraudulent financial reporting.

• The company engaged in channel stuffing by shipping goods to customers that had not been ordered.
• A. Fraudulent financial reporting.
• B. N/A
• C. Confirm receivables, including the existence of any special terms with customers.
• The allowance for doubtful accounts was understated because the company altered the aging of accounts receivable to reduce the number of days outstanding for delinquent receivables.

B. N/A

C. Test the accuracy of the aging by recalculating the number of days outstanding for a sample of accounts receivable.

A. Fraudulent financial reporting.

• The accounts receivable clerk stole checks received in the mail and deposited them in an account that he controlled. He issued credit memos to the customers in the amount of the diverted cash receipts.
• A. Misappropriation of assets
• B. Credit memos are approved by an appropriate person independent of accounting for sales and cash receipts.
• C. N/A
• The company contacted a major customer and asked them to accept a major shipment of goods before year-end. The customer was told that they could return the goods without penalty if they were unable to sell the goods.

B. N/A

C. Confirm with Receivables including the existence of any special terms with customers. Examine sales returns after year-end to see if they relate to sales recorded before year-end.

A. Fraudulent Financial reporting

• A cashier stole cash receipts that had been recorded in the cash register.
• A. Misappropriation of assets
• B. Reconcile cash to amount recorded in the cash register.
• C. N/A
• The company recorded “bill-and-hold sales” at year-end. Although the invoices were recorded as sales before year-end, the goods were stored in the warehouse and shipped after year-end.
• A. Fraudulent financial reporting.
• B. N/A
• C. Confirm accounts receivable at year end, including any special sales terms. Inquire about the existence of goods held for customers during inventory observation
• The company did not record credit memos for returns received in the last month of the year. The goods received were counted as part of the company’s year-end physical inventory procedures.

B. N/A

C. Confirm accounts receivable at year end. Obtain last receiving reports for returned goods from receiving department and trace to credit memos.

A. Misappropriation of assets

• A cashier stole cash receipts by failing to record the sales in the cash register.

B. Require that all sales be supported by receipts recorded in the cash register.

C. N/A

A. Fraudulent Financial Reporting

• The CFO recorded fictitious credit sales at the end of the year without recording the associated cost of sales and reduction in inventory.

B. N/A

C. Review supporting documentation, including purchase order, shipping document and invoice, for sales occurring at year-end and trace to proper recording of sales and accounts receivable, as well as cost of goods sold and inventory

A. Adequate documents and records

• 11-25
• On the last day of the year, a truckload of beef was set aside for shipment but was not shipped. Because it was still on hand, the inventory was counted. The shipping document was dated the last day of the year, so it was also included as a current-year sale.
• A. Adequate documents and records, independent checks on performance
• B. Transactions are recorded on the correct dates.
• C. The physical count of inventory on the last day of the year must be carefully coordinated with the recording of sales to make sure that billed inventory has not been counted and counted inventory has not been billed.
• The incorrect price was used on sales invoices for billing shipments to customers because the wrong price was entered into the computer master file of prices.

B.

C.

A. Independent checks on performance

• A vendor invoice was paid even though no merchandise was ever received. The accounts payable software application does not require the input of a valid receiving report number before payment can be made.
• A. Adequate documents and records, Physical control over assets and records, Independent checks on performance,
• B. Transactions are stated at the correct amounts.
• C. Make sure the billing clerk has the most recent price list, and design software to require the verification of price changes before the changes are processed.
• Employees in the receiving department took sides of beef for their personal use. When a shipment of meat was received, the receiving department filled out a receiving report and forwarded it to the accounting department for the amount of goods actually received. At that time, two sides of beef were put in an employee’s pickup truck rather than in the storage freezer.

B.

C.

A. Proper authorization of transactions and activities

• An accounts payable clerk processed payments to himself by adding a fictitious vendor address to the approved vendor master file.

B.

C.

A. Adequate documents and records, Independent checks on performance

• During the physical count of inventory of the retail grocery, one counter wrote down the wrong description of several products and miscounted the quantity.

B.

C.

A. Proper authorization of transactions, Adequate documents and records

• A salesperson sold an entire carload of lamb at a price below cost because she did not know the cost of lamb had increased in the past week.

B.

C.

11-27

• A vendor’s invoice was paid twice for the same shipment. The second payment arose because the vendor sent a duplicate copy of the original 2 weeks after the payment was due.
• A. Separation of duties adequately
• B.
• C.

A. Recorded transactions exist, Transactions are properly posted and summarized

• A customer number on a sales invoice was transposed and, as a result, charged to the wrong customer. By the time the error was found, the original customer was no longer in business.

B. Key verification, Check digit, Reconciliation to customer number on purchase order and bill of lading.

A. Recorded transactions exist

• A former computer operator, who is now a programmer, entered information for a fictitious sales return and ran it through the computer system at night. When the money came in, he took it and deposited it in his own account.

B. Input security controls over cash receipts records, Scheduling of computer processing, Controls over access to equipment, Controls over access to live application programs

A. Existing transactions are recorded

• A nonexistent part number was included in the description of goods on a shipping document. Therefore, no charge was made for those goods.

B. Preprocessing review, Programmed controls

A. Recorded transactions exist

• A customer order was filled and shipped to a former customer, which had already filed for bankruptcy.

B. Preprocessing authorization, Preprocessing review, Programmed controls

A. Transactions are stated at the correct amounts

• The sales manager approved the price of goods ordered by a customer, but he wrote down the wrong price.

B. Preprocessing review, Programmed controls

A. Recorded transactions exist, Transactions are recorded on the correct dates

• A computer operator picked up a computer-based data file for sales of the wrong week and processed them through the system a second time.

B. Correct file controls, Cutoff procedures, Programmed controls.

A.

• For a sale, a data entry operator erroneously failed to enter the information for the salesman’s department. As a result, the salesman received no commission for that sale.

B.

A.

• Several remittance advices were batched together for inputting. The cash receipts clerk stopped for coffee, set them on a box, and failed to deliver them to the data input personnel.

B.

11-31

2. Organized criminals- Perpetrators that use sophisticated tools to steal money or private and sensitive information about an entity’s consumers.

• The internet was designed for sharing information, not protecting it. This makes it more difficult to address and mitigate this risk,
• The board of directors needs to understand the organization’s cyber risk profile and must be informed of how the organization is managing the evolving cyber risks that management faces.
• 1. Nation-states and spies- Hostile foreign nations who seek intellectual property and trade secrets for military and competitive advantage.

3. Terrorists- Rouge groups or individuals who look to use the Internet to launch cyber-attacks against critical infrastructure, including financial institutions.

4. Hacktivists- Individuals or groups that want to make a social or political statement by stealing or publishing an organization’s sensitive information.

5. Insiders- Trusted individuals inside the organization who sell or share the organization’s sensitive information.