Exam 12: Audit of the Revenue Cycle

Office Design Inc. (ODI) has been your audit client for five years. ODI designs and sells office furniture such as desks, cabinets, and couches used in office reception areas. ODI has sales in Canada and the U.S., with five distribution locations where furniture is available to prospective purchasers to try out before purchasing. These locations are in Toronto, Montreal, Halifax, New York, and Chicago. The company uses custom-designed software for its order processing and sales, which is kept current by one of the five information systems personnel. The Vice President of Finance is new. Executive management is paid a salary and a bonus based on the annual net income of ODI. Unfortunately, the accounting staff at the head office (in Montreal) has been downsized from ten people to six due to a recent slowdown in sales. Your review of the aged accounts receivable trial balance revealed that one third of the accounts have been outstanding for more than one year. ODI's profits have declined substantially from last year. Its line of credit and bank loans are at their maximum and the company is considering selling its U.S. operations to provide cash flow. Prior year working papers revealed few errors and indicate that you considered management integrity to be good. However, due to segregation issues, you did not rely on the internal controls in the prior year. Required: A) What issues in corporate governance and in the control environment affect your assessment of internal controls for revenue? How does this affect the decision to conduct substantive testing (i.e. exclusion of tests of controls)? B) What is the likely assessment of computer general controls? How does this affect the type of audit testing conducted at ODI?

IFRS, ASPE, and ASNPO require that related party transactions be disclosed. Gregorio Limited has a materiality threshold of $50 000. Which of the following standards apply to the disclosure of related party transactions for Gregorio Limited?

Gonzo is an online dating agency. Gonzo has been in business for 5 years and was able to reach revenues of $1 million last year. Given its recent expansion, Gonzo's shareholders have required that the company's financial statements be audited for the first time this year. You have been assigned to the audit team for this mandate. The senior manager has asked you to review the process description for the sales of Gonzo. You need to identify the controls in place that could be tested and used for the audit and also identify any controls that might be missing and briefly explain the impact on the audit. Gonzo's CEO has provided you with the following description of the company's processes and activities for the past year. Sales Gonzo's website is operational 24 hours per day. All of the sales for Gonzo are completed online when a customer opens a profile. Each customer pays $50 to open a profile and then pays $10 per month to keep his or her profile active. Most customers pay online with their credit cards and the sale is automatically recorded in Gonzo's sales ledger at the time of payment. Gonzo also had a promotion for the last 3 months of the year: If a new customer subscribed for one year, they could pay $100 up front to keep their profile active for the full year instead of paying $10 each month for 12 months. This proved to be a popular sales tactic as customers enjoyed the $20 savings. Website Security In the past year, one hacker managed to compromise the website and stole the credit card information of 25 Gonzo customers. To ensure quality of customer service, Gonzo reimbursed a total of $10 000 to the customers to compensate them for the amounts that were stolen as a result of the intrusion on their website. Since then, Gonzo hired a third party, Mindster Box, to improve the security of their website. Mindster Box performs monthly updates to the security features and monitors any intrusion attempts. Gonzo has not had any website security problems since hiring Mindster. Collection and Reconciliation As most of the sales are done by credit card, Gonzo receives money from large credit card companies on a by-weekly basis. When money is received, Jo-Ann, the accounting manager at Gonzo, reconciles the details of the payments received from the credit card company to the sales ledger of Gonzo. Jo-Ann has often complained that this is nearly impossible to do since Gonzo's accounting system keeps track of the payment by the website user name, which is often very different from the actual name of the person as stated on the detailed report provided by the credit card company. Jo-Ann therefore mostly relies on the statement of the credit card company to record and adjust revenues reported by Gonzo.

The two primary classes of transactions in the sales and collection cycle are

The auditor has elected to conduct the following audit tests: reperform addition of the aged accounts receivable trial balance for the total column and for the columns depicting the aging. Which audit objective is associated with these audit tests?

To determine that sales are accurately charged, the unit prices on the duplicate sales invoices are normally compared with

Which of the following data elements would be included in the customer master file as semi-permanent information?

A risk of material misstatement in accounts receivable associated with the accuracy balance-related audit objective is that "sales recorded at the incorrect price result in revenue and accounts receivable that are over- or understated." Which of the following tests of detail of balances would respond to this risk?

The defalcation process that postpones entries for the collection of accounts receivable to conceal an existing cash shortage is referred to as

The information systems audit specialist on your audit team has indicated that the general controls over program changes are excellent for all application cycles. What impact does this have on your audit of sales invoice processing?

Which of the following is an example of a data entry input edit that could be used to improve the accuracy of online data entry of sales orders?

The appropriate test of controls for separation of duties is

When a company uses purchased software packages for its accounting software, such packages normally do not permit the company to change the software package's functionality. This means that the auditor will consider

Which of the following is an example of a key internal control for an online system that would help ensure that recorded sales are for the amount of goods shipped and are accurately billed and recorded?