Audit 2 Week 6 Assignment [PDF]

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Selly Kurniawati Ervina Dilasanti Dewi Renitasari Alvin Ilham N



041611333072 041611333107 041611333123 041611333262



CASE 14-33 The Kwan Pharmaceutical Company 1. All customers requests for credits are documented in a log and are forwarded to the controller. 2. The controller review each credit request for reasonableness and discusses it with the appropriate personnel related to the initial sale. 3. The controller documents the credit memo on a form explaining the reason for the credit and the amount on credit. 4. The controller and the CFO both physically sign the credit memo paperwork. 5. The credit is issued by a separate department prior to the reduction of the A/R Allowance for the Costumer, or is refunded by check. 6. The controller updates the accounting software for the credit memo. 7. On a quarterly basis, the controller evaluates the adequacy of the A/R Allowance. a. Audit Program for Sales Returns No 1



Transaction Related Audit Objectives The recorded sales are those that are actually sent to non fictitious customers (occurrence)



Key Existing Controls 1. All customer request for credits are documented in a log and are forwarded to the controller. (C1) 2. The controller review each credit request for



Test of Controls /TOC 1. Check return requests regarding return approval. 2. 2. Check request documents whether permitted or not. 3. Check whether all return requests have been recorded



Substantive Tests of Transactions/ STOT Review journal and master transaction files for unusual transactions and amounts. Browse back and forth journal entries and AR to supporting documents (credit memo).



reasonablen ess and discusses it with the appropriate personnel related to the initial sale. (C3) 3. All customer request for credits are documented in a log and are forwarded to the controller. (C4). 4. All customer request for credits are documented in a log and are forwarded to the controller. (C5) 5. The controller documents the credit memo on a form explaining the reason for the credit and



the amount on credit. (C6) 2



The existing A / R Allowance & Sales Return transactions have been recorded (Completeness)



1. All customer request for credits are documented in a log and are forwarded to the controller. (C1) 2. All customer request for credits are documented in a log and are forwarded to the controller. (C2) 3. All customer request for credits are documented in a log and are forwarded to the controller. (C4) 4. The controller documents the credit memo on a



1. Check the order of the return request document number in order or not. 2. Check whether the return request document already has permission and has been authorized. 3. Is the latest accounting software able to access all existing or not existing accounts.



Searching for sample credit memos has been inputted into the main journal and file.



form explaining the reason for the credit and the amount on credit. (C6) 3



The A / R Allowance & Sales Return recorded is the amount of the items returned and set aside and correctly recorded (Accuracy)



1. All customer request for credits are documented in a log and are forwarded to the controller. (C2) 2. The controller review each credit request for reasonablen ess and discusses it with the appropriate personnel related to the initial sale. (C3) 3. All customer request for credits are documented in a log and are Forwarded



1. What is the reason given for return requests is correct or not. 2. Are the numbers entered in returns are in accordance with the returns in the account. 3. Is the memo that has been signed by the authorization party is difficult according to or not with a memo each return. 4. Has the updated accounting software reached the goal of the software in each account 5. Have the receivables set



1. Browse the journal entry to the credit memo. 2. Recalculate the amount stated in the credit memo. 3. Browse the return details to credit memos and customer return requests. 4. Check the checking account for refund



to the controller. (C5) 4. The controller documents the credit memo on a form explaining the reason for the credit and the amount on credit. (C6)



4.



Return Transactions are correctly entered into the parent file A / R Allowance & Sales Return and summarized correctly (Posting & Summarizing)



1. All customer request for credits are documented in a log and are forwarded to the controller. (C5) 2. The controller documents the credit memo on a form explaining the reason for the credit and the amount on credit. (C6)



aside been recorded with the numbers considered by the relevant department.



1. Whether the amount of the set aside that has been deducted has been posted in the correct account.



Trace sample memo returns to the return / credit master file and test the credit memo number, date and number.



5.



6.



Transactions A / R Allowance & Sales Return are classified correctly (Classification)



A / R Allowance & Sales Return is recorded on the correct date (Timing)



1. All customer request for credits are documented in a log and are forwarded to the controller. (C4) 2. On a quarterly basis, the controller evaluates the adequacy of the A/R Allowance. (C7) On a quarterly basis, the controller evaluates the adequacy of the A/R Allowance.



1. whether returns that have been given authorization have been included in the proper classification of accounts.



Check copies of credit memos for the right classification of accounts.



2. whether the control assessment on the quarter of the month is feasible or not on the receivables set aside.



Has the feasibility control assessment been done with the right time in the A / R Allowance account



Compare the date of return recording in the journal with the ladder in the credit memo.



b. Test for evaluating the sufficiency of sales returns allowances : - Perform analytical tests related to sales accounts and sales returns allowances by comparing the number of accounts in the audit year with the previous year. - Check the amount of returns from sales each year. - Pay attention to the mutations from the previous year on the two accounts, whether significant or not and the value of their plausibility. - If it is significant and is considered unreasonable, ask for an explanation from the client. c. The allowance for immovable uncollectible receivables from last year indicates that the company paid little attention to the reserves of its receivables. To conduct an examination of the allowance for uncollectible accounts:



a. Obtain information on how to calculate / determine the reserves of uncollectible accounts b. Obtain information about the age of the company's receivables c. Calculate the allowance for accounts receivable



CASE 16-35 QUESTIONS You are auditing the sales and collection cycle for the Smalltown Regional Hospital, a small not-for-profit hospital. The hospital has a reputation for excellent medical services and deficient record keeping. The medical people have a tradition of doing all aspects of their job correctly, but because of a shortage of accounting personnel, there is not time for internal verification or careful performance. In previous years, your CPA firm has found quite a few misstatements in billings, cash receipts, and accounts receivable. As in all hospitals, the two largest assets are accounts receivable and property, plant,and equipment. The hospital has several large loans payable to local banks,and the two banks have told management that they are reluctant to extend morecredit, especially considering the modern hospital that is being built in a nearby city. In the past, county taxes have made up deficits, but in the past year, the county has also been incurring deficits because of high unemployment. In previous years, your response from patients to confirmation requests has been frustrating at best. The response rate has been extremely low, and those who did respond did not know the purpose of the confirmations or their correct outstanding balance. You have had the same experience in confirming receivables at other hospitals. You conclude that control over cash is excellent and the likelihood of fraud is extremely small. You are less confident about unintentional errors in billing, recording sales, cash receipts, accounts receivables, and bad debts. A. Identify the major factors affecting client business risk and acceptable audit risk for this audit. B. What inherent risks are you concerned about? C. In this audit of the sales and collection cycle,which types of tests are you likely to emphasized? D. For each of the following, explain whether you plan to emphasize the test and give reasons: 1. Tests of controls 2. Substantive tests of transactions 3. Analytical procedures 4. Tests of details of balances



ANSWER



a. There are four major factors affecting acceptable audit risk for the audit of Smalltown Regional Hospital. 1. There are several large loans to two local banks, both which have said they are reluctant to extend more credit. 2. A modern hospital is being built in a nearby city, which affects the competitive environment, and therefore the likelihood of financial failure. 3. The hospital has been incurring significant deficits in the past. 4. County taxes may not be able to make up the deficits, as they have in the past. Considering the combined effect of these factors, the auditor should set a low acceptable audit risk. b. The following are major inherent risks: 1. In the audit of accounts receivable and property, plant and equipment, the amounts are highly material. 2. Misstatements are common in billings, cash receipts, accounts receivable balances, and bad debts. 3. Due to the high unemployment rate, there is a significant risk of increased bad debts. c. The major difficulty the auditor faces is the ineffective controls over sales and the unreliability of confirmations because of the nature of the customers. The auditor should therefore plan to emphasize substantive tests of transactions for sales and alternative procedures, especially subsequent cash receipts. The controls over cash receipts are such that it is practical to reduce assessed control risk after a proper understanding is obtained of internal control and tests of controls are performed. A likely approach is the following: 1. Test internal controls over cash receipts using tests of controls to make sure that the controls are effective to prevent fraud. 2. Do substantive tests of transactions for revenues, with emphasis on tests for unrecorded revenues, billing misstatements, and recording misstatements. The sample for sales should be traced to subsequent cash receipts to test whether each receipt has been correctly recorded. One important test is to select a sample of patient charts and trace transactions through to the revenue journal. The patient chart is a reliable indicator of services provided to patients. 3. The accounts receivable aged trial balance should be tested for detail tie-in. Minimal confirmations should be sent, with



emphasis on large or unusual balances. The emphasis should be on subsequent cash receipts. 4. A careful evaluation of all older, outstanding accounts is essential due to the likelihood of bad debts. The high unemployment rate in the community increases the likelihood of a material misstatement of the allowance for uncollectible accounts. d. The following emphasis is appropriate for each type of test:



TYPE OF TEST



EMPHASIS



Test of controls



None, except control of cash receipts.



Substantive test of transactions



Extensive



REASON Controls are deficient in all areas except cash receipts. -



-



-



Analytical procedure



Extensive



Tests of details of balances evidence (confirmation) is not reliable, therefore substantive tests of transactions are the most important evidence. Substantive tests of transactions are even more important because of potential for misstatement for the completeness objective. Tests of details of balances are unlikely to uncover any existing misstatements for this objective.



An indication of misstatements may result from these tests.



Tests of details of balances



Reasonably extensive, except confirmations which should be minimal.



-



-



Confirmations are not emphasized because of the lack of reliability in the situation. Tests of details of balances are used most extensively for bad debts and the allowance for uncollectible accounts.