You are auditing the financial statements of a client for the year ending Decemb

Question

You are auditing the financial statements of a client for the year ending December 31, 20X3. You have compiled a list of possible errors or fraud that could result in the misstatement of the client's financial statements and a list of controls that, if properly designed and implemented, could assist the client in preventing or detecting the errors or fraud. REQUIRED: For each of the possible errors or fraud that are listed below, select one internal control procedure from the answer list that, if properly designed and implemented, most likely could assist the client in preventing or detecting the errors or fraud. You may select a control once, more than once, or not at all.

Explanation / Answer

1.Invoices for goods sold are posted to incorrect customer accounts :-

C. Monthly statement are mailed to all customers with outstanding balance

Monthly statement are documents that can be used to control customers' accounts. They are important to know whether customer accounts is up to date or not. They provide an overview of all outstanding payment owed to our business by customers, this will help us to prepare accurate and correct customer account so that there will be no incorrect recording of customer transaction. This enables us to know whether company's customer outstanding balance is matched with their outstanding balance.

2.Goods ordered by customer are shipped, but are not billed to anyone :-

G. Shipping documents are compared with sales when goods are shipped

Shipping documents such as Air way bill, Bill of lading , truck bill of lading etc. these documents contains details like Name and address of shipper, Name and address of consignee, description f goods, quantity of goods , value of goods, date of shipping etc. these details can provide information to whom goos have been sold and at which date so if goods have been shipped but not billed to anyone then shipping documents provide all the details regarding sales of goods.

3.Invoices are sent for shipped goods, but are not recorded in the sales journal:-

F. Daily sales summaries are compared with control totals of invoices

Daily sales summaries i.e. a report made every day showing number of items sold at the end of the day based on sales journal and control total of invoices shows total sales shown by invoices raised to customer for selling of goods. Therefore at the end of the day total sales shown by sales journal will be matched with total sales calculated by invoices raised to customers. This will help us to know how many goods have been shipped with invoices but not recorded in the sales journal.

4.Invoices are sent for shipped goods and are recorded in the sales journal, but are not posted to any customer account:-

K. Control amounts posted to the accounts receivable ledger are compared with control total of invoices

Control Total of invoices shows total amount of goods sold to customers and account receivables ledger shows amount due from customer for goods sold. Therefore total of invoices raised for goods sold is matched with total of account receivable books it will help us to know whether all transaction related to goods sold has been entered in account receivable book.

5.Credit sales are made to individuals with unsatisfactory credit ratings:-

L.Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed

6.Goods are removed from inventory for unauthorized orders.

B. Approved sales orders are required for goods to be released from the warehouse.

7.Goods shipped to customers do not agree with goods ordered by customers

A. Shipping clerks compare goods received from the warehouse with the details on the shipping document.

8.Invoices are sent to allies in fraudulent scheme, and sales are recorded for fictitious transactions:-

L. Sales invoices are compared with shipping documents and approved customer orders before invoices are mailed

9.Customers checks are received for less than the customers full account balances, but the customers full account balances are credited.

P. Total amounts posted to the accounts receivable ledger from remittance advices are compared with the validated bank deposit slip.

10.Customers checks are misappropriated before being forwarded to the cashier for deposit.

C. Monthly statements are mailed to all customers with outstanding balances

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