Accouting Auditing Question

A.1. Control Over Credit Sales: All new 2021credit sales are (a) first approved by the credit manager as noted by an initial, (b) agreed to the purchase order and current price list, and (c) verified and initialed by the accounts receivable manager before the goods are shipped and invoice is sent to the customer.

Audit Result: Inspected 157 random entries in the sales journal and noted one entry (#85) was missing a customer purchase order.

Audit Conclusion: “I’m 95% confident that all 2021 entries in the sales journal are proper, with an error rate of 3% or less. ”

Response to the Staff Accountant:

A.2. Control Over CRJ: All daily cash receipts are (a) recorded in the CRJ and (b) taken to the bank the next business day.

Audit Result: Randomly selected 149 daily entries in the CRJ and agreed to the amount shown as a deposit on the bank statement on the next business day. No errors were noted.

Audit Conclusion: “I’m 95% confident that cash receipts are deposited on a timely basis, with an error rate of 2% or less. “

Response to the Staff Accountant:

A.3. Control Over CDJ: All cash disbarments are (a) agreed to supporting documents (e.g., Purchase Order, Bill of Lading, Invoice), and (b) approved by the cash disbursement’s supervisor prior to payment.

Audit Result: Randomly selected one day, June 19th, 2021 and inspected the first 149 entries in the CDJ, and noted the appropriate supporting documentation and supervisor’s initials noting approval for payment.

Audit Conclusion: “I’m confident that cash disbursements are properly recorded in the CDJ.

Response to the Staff Accountant:

A.4. Control Over PPE: All new long-lived assets purchased are supported by a purchase order, invoice, are tagged with an ID sticker and assigned to a specific department within the client. ($130m in 2021)

Audit Result: Randomly selected 149 new PPE acquisitions in 2021 and observed they exit, agreed cost to a purchase order, invoice, and CDJ, and all had property ID stickers.

Audit Conclusion: “I’m 95% confident that the new 2021 PPE additions are fairly stated in accordance with GAAP at $130m + $2.6m”

Response to the Staff Accountant:

A.5. Control Over Cash: Bank reconciliations are performed no later than one week after receipt of the monthly bank statements for the six checking accounts. Initials by the assistant controller note the cash accounts have been reconciled.

Audit Result: Randomly selected 149 monthly bank reconciliations in 2021 and recomputed the reconciliation and noted initials by the assistant controller. No exceptions noted, except one was 21 days late given COVID.

Audit Conclusion: “I’m 95% confident that the control regarding bank reconciliations is functioning problems, with an error rate of 2% or less.”

Response to the Staff Accountant:

Deviation?

Item

Yes No

A sales invoice was computed incorrectly. When the (price * quantity) was computed, two numbers were transposed, creating a difference evenly divisible by 9. The mistake was detected by the credit sales manager before being sent to the customer.

Yes No

The purchase order for a shipment could not be located. However, a bill of lading and invoice were discovered in the client’s files. The $242,325 invoice is still outstanding after six months.

Yes No

A customer has returned some damaged goods and now has a credit balance for $25,021 issued 18 days ago. The customer’s credit balance shows up in the client’s aging schedule.

Yes No

The client implements an early payment incentive program of 2% off if paid within 10 days, if not, the normal terms are applied of net/30 with the goal to expedite cash flow (aka 2/10; net.30).

Yes No

Given recent severe employee understaffing in the accounting department, all incoming mail is opened by one person, not two, as mentioned in the client’s internal control manual.

Yes No

The client changed where they back up their accounting files on the cloud, from Google (GCS) to Amazon (AWS).

Yes No

The credit manager is required to approve, initial and date all Purchase Orders requesting goods before shipment. One Purchase Order was received 7/12/21, the goods were sent 7/21/21, and the credit manager initialed and dated the request 6/13/21.

Sample Size

Internal Control Events

↑ ↓ ↔ ?

Omeros has shown signs of improved financial health in 2021, and the auditor has reassessed the client’s audit risk from medium/high in 2020 to medium in 2021.

↑ ↓ ↔ ?

For the FYE 2021 audit fee, Xerox ’s auditor reduced their confidence level from 93% to 92% and the tolerable deviation rate from 2% to 3%. The result was a 27% reduction in audit fees from $14m to $11m.

↑ ↓ ↔ ?

In 2021, Sally Beauty changed inventory methods from FIFO to the weighted average method.

↑ ↓ ↔ ?

For the FYE 2021 audit, the audit partner has determined that materiality should be increased from 1% to 1.25% for all assets.

↑ ↓ ↔ ?

In October 2021, Zoom stock tumbled 26%. The stock price had tripled in 2020.

↑ ↓ ↔ ?

Starting in 2021, Google required all accounting personnel to be subjected to random saliva drug testing.

↑ ↓ ↔ ?

Last week, Hertz signed a $4.4b contract with Tesla to purchase 100,000 electric vehicles to be delivered in 2022. Tesla’s stock price increase 14% upon the news and now has a market value of $1 trillion.

↑ ↓ ↔ ?

Facebook has recently come under government scrutiny as providing misleading or harmful images, especially to young subscribers. Facebook changes their name to Meta to help rebrand their image.

Receivables

Inventory

Pre-Sample (selected randomly)

81 items

64 items

Population (all customers)

710 customers

1,865 SKUs

Client’s book value of pre-sample

$11,014k

$4,392k

Audited value of pre-sample

$11,310k

$4,437k

Standard deviation of pre-sample errors

$1.1k

$0.9k

Receivables

Inventory

Desired Upper Range

$ k

$ k

Desired Lower Range

$ k

$ k

Receivables

Inventory

Auditor’s best guess of the Actual Value

$ k

$ k

Receivables

Inventory

Achieved Upper Range

$ k

$ k

Achieved Lower Range

$ k

$ k

June 30,

December 31,

June 30,

2021

2020

2020

ASSETS:

CURRENT ASSETS:

Cash and cash equivalents

$

8,358

$

28,353

$

25,832

Trade receivables – net

79,963

48,010

35,362

Inventories – net

143,516

77,576

74,546

Income tax receivable

2,290

-

-

Prepaid expenses

4,772

3,713

3,358

Total current assets

241,151

163,186

140,754

LEASED ASSETS

2,626

1,572

1,554

PPE – net

55,956

33,750

28,450

GOODWILL

48,375

-

-

IDENTIFIED INTANGIBLES

127,904

30,209

30,224

OTHER ASSETS

879

374

348

TOTAL ASSETS

$

476,891

$

229,091

$

201,330

6/30/21

6/30/20

Retail trade receivables allowances

4.8

%

4.1

%