Please number them as shown
Appliances Repair and Service Company bills all customers rather than collecting in cash when services are provided. All mail is opened by Tom Gyders, treasurer. Gyders, a CPA, is the most qualified person in the company who is in the office daily. Therefore, he can solve problems and respond to customers’ needs quickly.Upon receipt of cash, he immediately prepares a listing of the cash and a duplicate deposit slip. Cash is deposited daily. Gyders uses the listing to enter the financial transactions in the computerized accounting records. He also contacts customers about uncollected accounts receivable. Because he is so knowledgeable about the business and each customer, he grants credit, authorizes all sales allowances, and charges off uncollectible accounts. The owner is extremely pleased with the efficiency of the company. He can run the business without spending much time there because of Gyders’ effectiveness.
Imagine the owner’s surprise when he discovers that Gyders has committed a major theft of the company’s cash receipts. He did so by not recording sales, recording improper credits to recorded accounts receivable, and overstating receivables.
a. What weaknesses in the company’s processes might have permitted the fraud?
b. What suggestions do you have for changing the process to reduce the future potential for fraud?
The following are various potential frauds in the sales and collection cycle:
1. The company engaged in channel stuffing by shipping goods to customers that had not been ordered.
2. 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.
3. 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.
4. 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.
5. A cashier stole cash receipts that had been recorded in the cash register.
6. 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.
7. 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.
8. A cashier stole cash receipts by failing to record the sales in the cash register.
9. The CFO recorded fictitious credit sales at the end of the year without recording the associated cost of sales and reduction in inventory.
a. Indicate whether the fraud involves misappropriation of assets or fraudulent financial reporting.
b. For those frauds that involve misappropriation of assets, state a control that would be effective in preventing or detecting the misappropriation.
c. For those frauds that involve fraudulent financial reporting, state an audit procedure that would be effective in detecting the fraud.
The following audit procedures are included in the audit program because of heightened risks of material misstatements due to fraud.
1. Use audit software to search purchase transactions to identify any with nonstandard vendor numbers or with vendor names reflecting related parties.
2. Search sales databases for missing bill of lading numbers.
3. Use audit software to search for journal entries posted to the sales revenue account from a nonstandard source (other than the daily sales journal).
4. Use audit software to search cash disbursement master files for missing check numbers.
5. Search the accounts receivable master file for account balances with missing or unusual customer numbers (e.g., “99999”).
6. Use audit software to create a list of all credits to the repair and maintenance expense account for follow-up testing.
7. Engage an actuarial specialist to examine management’s assumptions about average length of employment and average life expectancy of retirees used in pension accounting decisions.
8. Send confirmations to customers for large sales transactions made in the fourth quarter of the year to obtain customer responses about terms related to the transfer of title and ability to return merchandise.
For each audit procedure:
a. Describe the type of fraud risk that is likely associated with the need for this audit procedure.
b. Identify the related accounts likely affected by the potential fraud misstatement.
c. Identify the related audit objective(s) that this procedure addresses.
The following are misstatements that have occurred in Fresh Foods Grocery Store, a retail and wholesale grocery company:
1. 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.
2. 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.
3. 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.
4. 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.
5. An accounts payable clerk processed payments to himself by adding a fictitious vendor address to the approved vendor master file.
6. During the physical count of inventory of the retail grocery, one counter wrote down the wrong description of several products and miscounted the quantity.
7. 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.
8. A vendor’s invoice was paid twice for the same shipment because the vendor sent a duplicate copy of the original 2 weeks after the payment was due.
a. For each misstatement, identify one or more types of controls that were absent.
b. For each misstatement, identify the transaction-related audit objectives impacted.
c. For each misstatement, suggest a control that may have prevented or detected the misstatement.
The following are misstatements that can occur in the sales and collection cycle:
1. A customer order was filled and shipped to a former customer, which had already filed for bankruptcy.
2. 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.
3. 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.
4. 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.
5. A nonexistent part number was included in the description of goods on a shipping document. Therefore, no charge was made for those goods.
6. The sales manager approved the price of goods ordered by a customer, but he wrote down the wrong price.
7. A computer operator accessed a computer-based data file for sales of the wrong week and processed them through the system a second time.
8. 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.
a. Identify the transaction-related management assertion(s) in the AICPA auditing standards (seeTable6-3on p.166) to which the misstatement pertains.
b. Identify one automated control that would have likely prevented each misstatement.
Here is the table for 11-27
Management Assertions for Each Category of Assertions
PCAOB Auditing Standards Assertions
International Auditing Standards and AICPA Auditing Standards Assertions
Assertions About Transactions, Balances, and Presentation and Disclosure
Assertions About Classes of Transactions and Events and RelatedDisclosures
Assertions About Account Balances and Related Disclosures
Existence or occurrence—Assets or liabilities exist at a given date, and recorded transactions have occurred during the period.
Occurrence—Transactions and events that have been recorded or disclosed have occurred and pertain to the entity.
Existence—Assets, liabilities, and equity interests exist.
Completeness—All transactions and accounts that should be presented in the financial statements are so included.
Completeness—All transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.
Completeness—All assets, liabilities, and equity interests that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included.
Valuation or allocation—Assets, liability, equity, revenue, and expense components have been included in the financial statements at appropriate amounts.
Accuracy—Amounts and other data relating to recorded transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described.
Accuracy, valuation, and allocation—Assets, liabilities, and equity interests have been included in the financial statements at appropriate amounts, any resulting valuation adjustments have been appropriately recorded, and related disclosures have been appropriately measured and described.
Classification—Transactions and events have been recorded in the proper accounts.
Classification—Assets, liabilities, and equity interests have been recorded in the proper accounts.
Cutoff—Transactions and events have been recorded in the correct accounting period.
Rights and obligations—The company holds or controls rights to the assets, and liabilities are obligations of the company ata given date.
Rights and obligations—The entity holds or controls the rights to assets, and liabilities are the obligation of the entity.
Presentation and disclosure—The components of the financial statements are properly classified, described, and disclosed.
Presentation—Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the
applicable financial reporting framework.
Presentation—Assets, liabilities, and equity interests are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework.
The SEC issues Accounting and Auditing Enforcement Releases (AAERs) summarizing SEC actions concerning civil lawsuits brought by the SEC in federal court and related settlements from administrative proceedings. Visit the SEC’s website (www.sec.gov) and locate the link to Accounting and Auditing Enforcement Releases (AAERs) under the “Enforcement” tab. Locate AAER-3932 involving Maxwell Technologies, Inc. issued on March 27, 2018.
a. Briefly describe how the Maxwell Technologies, Inc. 2011 and 2012 financial statements were misstated.
b. Describe examples of deficiencies in Maxwell Technologies’ control environment.
c. One of the inherent limitations of internal control is management override of internal control procedures. Give an example of management override from the Maxwell Technologies AAER.
d. Maintaining adequate documents and records is an important element of an entity’s control activities. How did the company’s vice president of sales and marketing violate this important element of internal control?
e. The risk assessment component of internal control involves a process for identifying and analyzing risks that may prevent the organization from achieving its objectives. How did the senior financial personnel exhibit deficiencies in risk assessment procedures related to red flags regarding sales and collections from the German distributor?