Chapter 11A, Problem 1P

a.

To determine

Identify the error or fraud which could be prevented with the given controls over sales.

Explanation of Solution

Tests of controls:

Tests of controls form the part of audit procedures to be performed to address the risk of material misstatements and is one of the important objectives as determined by the auditors while doing an audit of receivables and revenues. Tests of controls are included in the further audit procedures which are performed after assessing the risk of material misstatements.

Error or fraud:

When the statements of the company are misstated without any intention then it is known as error. When the misstatement is intentional then it is known as fraud.

Fraud risks:

Fraud risk is defined either as management fraud or misstatement giving emerging from assets misappropriation. Fraud risk factors identified by performing various analytical procedure and discussion with personnel from management.

Identify the error or fraud which could be detected with the following controls of sales:

Sales controls	Error or fraud controlled
1. Application controls are applied when customerorders are entered by the sales order clerk.	Errors in the transactions of delivery and sales billing can be controlled.
2. The computer assigns numbers to sales invoiceswhen they are prepared.	Error in the completeness of sales records can be controlled.
3. Monthly statements are mailed to customers.	Inappropriate and unreal sales transactions can be controlled.

Table: (1)

b.

To determine

Identify the error or fraud which could be prevented with the given controls over cash receipts.

Explanation of Solution

Internal control:

Internal control is a process of controlling the activities within the organization. Business deals with a various set of activities. To perform every activity effectively, the management of the company should control and manage the activities. The control of the activities is known as an internal control.

Internal control on cash receipts:

The internal control policies and procedures if followed accurately the possibility of error or fraud that could occur through inappropriate collections by cash receipts can be prevented. Cash receipts will also affect the control over collection transaction along with accounts receivables balances.

Identify the error or fraud which could be detected with the following controls of cash receipts:

Cash receipts controls	Error or fraud controlled
1. Cash receipts are prelisted by the receptionist.	Cash transactions recorded and misappropriation of cash can be controlled.
2. The accounting manager reconciles control totalsgenerated by the accounts receivable computerprogram.	Posting of cash transactions and completeness of records can be controlled.
3. The computer summaries of cash collections andcash sales are reconciled to pre-listings of cash receipts and cash deposits by the accounting manager.	Inappropriateness in the cash transactions recording of cash sales and cash receipts can be controlled.

Table: (2)