Bus 426 - Lecture 7.docx

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Business Administration
BUS 426
Michael Favere- Marchesi

Lecture 7 Test of Controls  Sales are initiated by customer order  Shipping document + invoice follow sale, recorded both in a text file (sale) + summary in customer master file (for A/R)  Sales Journal posts to the A/R Subsidiary Ledger o A/R Subsidiary Ledger is used to produce an aged A/R trial balance Online Systems 1. Transactions may be recorded without source documents because it is all electronical 2. Therefore, tracking becomes important for all transactions 3. Focus is on the prevention of errors 4. Input edit process check for valid customer data and reasonableness 5. Use of passwords to separate transaction entries from master file entries (For example, Updating of credit limits) Major Problem of Online Systems: Early recognition of Revenues  Controls over recognition of revenues need to be assessed  Consequently, there will be increased testing required of the assertions that affect revenue recognition General Controls  Prior to auditing individual transaction cycles, the auditor documents pervasive general controls that affect multiple transaction cycles  If the general controls are good, auditor may rely upon and test interdependent or fully automated controls  If the general controls are bad, auditor may rely on manual controls or conduct a substantive approach audit o Manual Controls: Controls performed only by people o Automated Controls: Controls performed only by computer system o Interdependent controls: Rely on computer processes (automated) by someone that must also be involved to fully perform the control Manual Control  Key Control: Credit is approved before shipment takes places. Sales manager initiates all sales order > $25 (Occurrence)  Possible TOC: Examine samples of sales orders to determine if sales manager’s initials appear Automated Controls  Key Control: Orders causing balances to exceed credit limits are held in a separated transaction file and not processed for shipment  Possible TOC: Print-out the day’s on hold sales and view the printout to ensure that all orders on printout caused customers credit limit to be exceeded Interdependent Controls  Key Control: Orders causing balances to exceed credit limits are printed on an exception report and must be approved by credit manager prior to shipment by means of entering a password  Possible TOC: Review an exception report and ensure that all sales orders caused customers’ limits to be exceeded + discuss with sales manager process followed + release the held orders What if Control Testing Yield many Errors? 1. Determine if errors are due to particular circumstances or restricted to specific time period 2. If errors are systemic, auditors looks for compensatory controls if alternative control achieves same purpose and is functioning correctly, auditor can still rely on control 3. If there are no compensating controls, determine if there is a potential for this weakness to result in a material error 4. If immaterial error could result, you may need to extend TOD, but you need to report to management 5. If material error could result, extend TOD, need to be sufficient to provide a reasonable estimate of the extent of error, report to management and to audit committee Computer Assisted Audit Test (CAAT)  Large number of tr
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