14-33 ( Objective 14-4 ) The Meyers 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 prenumbered company sales order form on 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 attached 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 multiplies the number of items times 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. (a) Customer?s copy. (b) Sales department copy, for information purposes. (c) File copy. (d) Shipping department copy, which serves as a shipping order. Bills of lading are also prepared as carbon copy by-products of the invoicing procedure. 4. The shipping department copy of the invoice and the bills of lading are then sent to the shipping department. After the order has been shipped, copies of the bill of lading are returned 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 attached to the invoice file copy and filed in invoice numerical order. 6. As the computer is generating invoices, it is also storing the transactions in an electronic file that is used to update the accounting records daily. A summary report is generated and all journals and ledgers are printed for a hardcopy of the records. 7. Periodically, an internal auditor traces a sample of sales orders 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. Required a. Flowchart the billing function as a means of understanding the system. b. List the internal controls over sales for each of the six transaction-related audit objectives. c. For each control, list a useful test of control to verify the effectiveness of the control. d. For each transaction-related audit objective for sales, list appropriate substantive tests of transactions audit procedures, considering internal controls. e. Combine the audit procedures from parts c and d into an efficient audit program for sales.
Paper#9658 | Written in 18-Jul-2015Price : $25