ICC-1 Apollo Shoes, Inc. Internal Control Questionnaire Sales Transaction Processing December 31, 2007 Objectives and QuestionsYes, No, N/A Comments Environment: 1. Is the credit department independent of the sales department? Yes. Credit manager in Treasurer’s office 2. Are sales of the following types controlled by the same procedures described below? Sales to employees, COD sales, disposals of property, cash sales and scrap sales. No available information, apparently not applicable Existence Objective: 3. Is access to sales invoice blanks restricted? Yes. Kept in locked closet 4.
Are prenumbered bills of lading or other shipping documents prepared or completed in the shipping department? Yes. Shipping department Completeness Objective: 5. Are sales invoice blanks prenumbered? Yes 6. Is the sequence checked for missing invoices? No available information 7. Is the shipping document numerical sequence checked for missing bills of lading numbers? No available information Valuation Objective: 8. Are all credit sales approved by the credit department prior to shipment? Yes. Credit manager file 9. Are sales prices and terms based on approved standards? Yes. Approved price file 10.
Are returned sales credits and other credits supported by documentation as to receipt, condition, and quantity and approved by a responsible officer? No available information Occurrence Objective: 11. Are shipped quantities compared to invoice quantities? Yes. Shipping department clerk 12. Are sales invoices checked for error in quantities, prices, extensions and footing, and freight allowances and checked with customers’ orders? Yes. Accounts receivable clerk 13. Is there an overall check for errors in arithmetic accuracy of period sales data by a statistical or product-line analysis? Yes.
Marketing vice president 14. Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting? No. Information comes from accounts receivable accounting department Presentation and Disclosure Objective: 15. Does the accounting manual contain instruction for classifying sales? Yes. 16. Are summary journal entries approved before posting? Yes.. General ledger supervisor. (procedure manual) 17. Does the accounting manual contain instructions to date sales invoices on the shipment date? Yes.. General ledger supervisor. (procedure manual) ICC-1. 1 Apollo Shoes, Inc.
Apollo Revenue Cycle Flowchart December 31, 2007 ICC-1. 2 Apollo Shoes, Inc. Sales Transaction Processing Bridge Working Paper December 31, 2007 Strength/Weakness Audit Implication Audit Program S-1Credit approval on sales order. Credit authorization reduces risk of bad debt loss and helps check on validity of customer identification. Select a sample of recorded sales in-voices, and look for credit manager signature on attached sales order. Make note of missing sales orders, ones not approved and compare to customers’ accounts receivable for evidence of payment in advance.
Note correspondence of customer name on papers. S-2Unit prices are taken from an authorized list. (Later personnel recalculate and check the invoice arithmetic. ) Prices are in accordance with company policy, minimizing disputes. (Invoices are mathematically accurate. ) Using the S-1 sample of sales invoices, vouch prices used to the price list. Recalculate the math. S-3Sales are not recorded until goods are shipped. Invoices are checked for correct product descriptions (by accounts receivable personnel). Cutoff will be proper and sales will not be recorded too early.
Sales will describe products accurately for later inventory and sales classification accounting. Using the S-1 sample of sales invoices, compare the recording date to the shipment date on attached bill of lading and invoice Copy 4. Compare ship date to customer order date. Compare the product descriptions billed and shipped. (Also, scan the “pending shipment” file for old invoices that might represent unrecorded shipments. ) W-1Shipping personnel have transaction alteration (initiation) authority to change the quantities on invoices, as well as custody of the goods.
Dishonest shipping personnel can alone let accomplices receive large quantities and alter the invoice to charge them for small quantities. In this system, sales and accounts receivable would be understated, and inventory would be understated. The physical count of inventory will need to be observed carefully (extensive work) to detect material misstatement, if any. ICC-1. 3 Apollo Shoes Accounting and Control Procedure Manual Sales and Accounts Receivable Daily batches of sales invoices shall be analyzed by sales totals in the athletic shoes product lines.
Sales credits are coded to three product line sales revenue accounts. Charges to customer accounts should be dated the date of shipment. When sales invoices are recorded, the numerical sequence shall be checked by an accounts receivable clerk, and missing invoices must be located and explained. The items shipped shall be compared to the items billed for proper quantity, price, and other sales order terms. The general ledger supervisor shall compare the copy 2 daily batch total with the copy 4 individual accounts posting total sent from the accounts receivable department.
Discrepancies shall be investigated to help assure that the customer subsidiary accounts are posted for the same total amount posted to the control account. At the end of each month, the total of the trial balance of customer account balances (prepared by the accounts receivable department) shall be reconciled to the general ledger control account by the general ledger supervisor. Sales invoice batches shall be dated with the date of shipment, and totals of batches (including product line sales for athletic shoes) shall be accumulated each month and recorded in the accounts receivable control and sales revenue accounts.
The general ledger supervisor shall approve all monthly summary entries before they are posted to the general ledger. The treasurer shall approve all cash refunds and allowance credit memos for sales returns, after initiation by customer relations personnel. The marketing vice president shall periodically analyze sales activity by product lines in comparison to budgets and forecasts and prior years’ activity. Cash Management The monthly bank statements shall be mailed to the cash management department in the treasurer’s office.
Personnel use the duplicate deposit slips retained when bank deposits were made, the cash receipts journal listing, and the cash disbursements listing to reconcile the general bank accounts. The payroll bank account is also reconciled, utilizing the payroll register retained by the treasurer’s office. Cash management personnel shall compare cash receipts journal daily deposit records with the bank deposits and duplicate deposit slips when the general bank account reconciliation is performed.
At the discretion of the director of internal audit, internal auditors will occasionally make unannounced reviews of the bank account reconciliations. They may also prepare reconciliations without prior notice given to cash management personnel. Cash Receipts and Accounts Receivable Processing All cash receipts from customers related to sales shall be credited to accounts receivable individual and control accounts. The accounts receivable department shall post credits to individual customer accounts, dating the entries with the date of the remittance list.
Statements of accounts receivable balances shall be mailed to customers each month by the accounts receivable accounting department. Customers’ reports of disputes or differences shall be handled by customer relations personnel in the marketing department. ICC-1. 4 Cash Disbursements All disbursements shall be made by check, signed by the treasurer, including reimbursements of the petty cash funds. Checks shall be made payable to a named payee and not to “cash. ” Blank check stock shall be kept under lock and key in the accounts payable accounting department.
Under no circumstances may blank checks be signed by the treasurer. Voided and spoiled checks shall be transmitted to the treasurer for inspection and later filed in numerical order with paid checks. Cash disbursement journal entries shall be dated with the date of the check. The related monthly general ledger summary entries shall carry the date of the month summarized. Inventory Perpetual Records Inventory additions shall be dated with the date of the receiving report. Inventory issues shall be dated with the date of shipment. Fixed Asset Records and Transactions
When acquisition costs exceed the capital budget authorization by 10 percent or more, the additional expenditure shall be approved by the treasurer and board of directors, in advance if possible. Zero salvage values shall be used in all depreciation calculations. Useful life and depreciation method assignments for financial statement calculations shall follow these general guidelines: BuildingsDeclining Balance15 years EquipmentDeclining Balance3-6 years All repair, maintenance, and capital additions less than $5,000 shall be expensed. Amounts over $5,000 should always be capitalized unless unusual conditions point to proper expensing.
ICC-1. 5 Apollo Accounting and Control Systems: Revenue and Collection Cycle As evident in the company organization chart, Apollo has several departments and offices concerned with management, accounting, and control. The company also has an abbreviated accounting and control manual, although the manual has not been kept up to date. Officers and employees have described accounting and control procedures informally under the heading of several transaction cycles. Their descriptions of the company’s current revenue cycle activities appear below. Credit Approval and Sales Processing
Customer orders are received in the mail, over the telephone, and over the counter by salesclerks in the marketing department. The clerks prepare written sales orders for telephone and counter customers, signing each one and asking the counter customers to sign in person. The sales orders contain the customer name, a customer number (assigned immediately for new customers), customer address, identification of products, and the quantity ordered. The sales order forms are kept in the salesclerks’ working area through which many people pass during the day. The sales order documents used in the offices are not prenumbered.
The salesclerks prepare an estimate of the dollar amount of the order and write it on the form. The sales orders are then hand-carried to the credit manager, who is also in the marketing department. The credit manager checks the customers’ accounts receivable balances and other credit file information using a computer-based inquiry system. If credit is approved, the credit manager signs the sales order. If credit is not approved, the customer is asked to pay in advance, and the sales order is held until notification of payment is received from the cashier.
The sales order is stamped “paid” and sent to the billing department. Likewise, when customers pay cash over the counter, the money is taken by the cashier, and the sales order is stamped “paid” and sent to the billing department. For bookkeeping convenience, these “cash” sales are treated the same as credit sales, with the invoice amount being charged to an account receivable set up for the customer, and the customer’s payment being applied immediately to the same account. After credit has been approved, or a payment received, the sales orders are sent to the billing department in the controller’s office.
The billing clerks produce a four-copy sales invoice on a prenumbered invoice form. Using a screen facsimile on a personal computer, they insert the customer and product information from the customer order, the date, and the product unit prices from an approved price list. Sales taxes, delivery charges, and the invoice total are computed and put on the invoice. The sales invoice forms are kept in a locked closet in the billing department, and sheets in the numerical sequence are removed only for billing clerks’ immediate loading onto the computer printer. ICC-1. 6
Copy 1 and copy 2 of the sales invoice, the customer order, and the sales order are sent to the accounts receivable accounting department, which is also in the controller’s office. These documents are held in invoice numerical order in a “pending shipment” file, awaiting matching with copy 4 of the invoice, which was first sent to the inventory stores department as authority for the storeskeeper to put the order together and move it to the shipping department. Copy 3 of the invoice is sent to the shipping department, where it is initially held in a “pending release” file. Shipment and Delivery
Upon receipt of an invoice copy 4, which serves as the authorization to move goods to the shipping area, the inventory storeskeeper supervises removal of shoe products from shelves and bins. Copy 4 is sent to the shipping area with the products. In the shipping area, shipping employees remove copy 3 from the “pending release” file. They check both copy 3 and copy 4 for the correct quantity of each product, then pack the order in suitable boxes. Copy 3 is sent to the inventory records department in the controller’s office, where it serves as the source of entries to reduce the perpetual inventory records.
If any items shown on the invoice are not shipped, the handlers are supposed to alter the invoice copies to show the correct quantity. When customers are on the premises, they can pick up their own orders at the shipping area, where they are asked to sign copy 4 as acknowledgment of receipt. Otherwise, a prenumbered bill of lading is filled out in two copies for shipments by contract truckers. Copy 1 of the bill of lading is attached to the shipment. Copy 2 of the bill of lading is sent with invoice copy 4 to the accounts receivable accounting department. ICC-1. 7 Apollo Shoes, Inc.
Accounting and Control Systems: Purchasing and Expenditure Cycle Narrative December 31, 2007 The employee prepares a purchase requisition and has a supervisor approve it. The supervisor retains Copy 2 of the pre-numbered purchase requisition for the department, sends Copy 1 to the Purchasing Department and Copy 3 to Accounts Payable. When the Purchase Department receives the purchase requisition, they search the approved vendor list and consult the listed prices for the goods desired for each vendor. Once a vendor has been selected, five copies of a pre-numbered purchase order are prepared.
Copy 5 is retained in the purchasing department and filed with the accompanying purchase requisition. Copy 2 is sent back to the department who prepared the purchase requisition, where both source documents are filed by number together. Copy 3 is sent to the Receiving Department. However, their copy is modified so that the quantity of the items ordered is blacked-out. Copy 4 is sent to Accounts Payable. Copy 1 of the purchase order is sent to the selected vendor. When the goods are received, the invoice is sent to Accounts Payable and the acking slip is retained in Receiving. The Receiving department verifies the order by comparing the external packing slip with the internal purchase order. Then they count and inspect the items received. The blacked-out purchase order helps to ensure accurate counting of the items ordered. To further assure that the items received are counted, the receiving clerk is required to sign the receiving report. Once the manual process is complete, the inventory file is updated to reflect the goods received and three copies of a pre-numbered receiving report are prepared.
Copy 1 and the goods received are sent to the department that requested the items, where it is filed with the accompanying purchase requisition and purchase order. The Receiving Department files Copy 2 of the receiving report with the packing slip and their copy of the purchase order. Copy 3 of the receiving report is sent to A/P where it, the purchase order, and the purchase requisition are compared to the vendor’s invoice for accuracy. The voucher package is then filed according to payment date. This allows the potential for taking any vendor discounts offered.
When payment is due, a disbursement voucher is prepared and is sent to the cashier and the voucher package is sent to the Finance Department. Upon receipt of the disbursement voucher, the cashier will review, sign and cancel the disbursement voucher and prepare a check. The VP of Finance will sign the check after reviewing it with the voucher package for consistency and accuracy. The VP of Finance cancels the voucher package and sends it to A/P. The canceled disbursement voucher is sent to A/P from the cashier, where it is matched and filed with the accompanying canceled voucher package.
The VP of Finance sends a copy of each signed check to A/P. The copy is then attached to the canceled voucher package and canceled disbursement voucher and filed as paid. A journal entry is recorded to show the payment of the payable. ICC-2 Apollo Shoes, Inc. Test of Controls Results December 31, 2007 Of the 120 sales transactions you asked me to look at, I found 51 “deviations. ” I have attached a list. These were the procedures that I used: 1. I randomly chose the sample of 120 transactions across the year with 10 from each calendar month. 2. I found all the invoices in the sample.
None were missing. 3. All the invoices were properly posted to the general ledger sales and accounts receivable control accounts, and each was posted to the right customer’s individual account. 4. The invoices not listed had no deviations related to other documents, recalculations, or comparisons. 5. “No credit approval” means that the expected credit approval notation could not be found in the documents. 6. When “Wrong quantity billed” appears, a description of the effect follows. 7. “CM (date)” means the customer notified Apollo of an error and a credit memo was issued on the subsequent date.
All credit memos generate debits to a sales returns account and credits to accounts receivable. 8. “Paid in full on time” means the customer paid the invoice when it was due. 9. “Missing BL”means the bill of lading (shipping document) could not be found. 10. “Wrong price” means the clerks put the wrong unit price on the invoice and billed the customer incorrectly. 11. “Arithmetic error” means I found the invoice multiplied and added to show an incorrect total. 12.. I found purchase orders from each customer except for the December shipment to Mall-Warts. Because there was no purchase order, I looked at the sales and shipping documents.
The cost of the inventory shipped was $3,169,145. 10. Apollo Shoes, Inc. ICC-2. 1 Revenue Cycle Test of ControlsPrepared by BC For Year Ended 12/31/2007Reviewed by DeviationSample #InvoiceMonth DayAmountCustomerDeviation 12139918Sep. 23$35,029 Nuke MeWrong quantity. Overcharge $250. CM Nov. 5. 23739357Aug. 28$11,326,574 Mall-WartsNo credit approval. Unpaid as of Dec. 31. 35035669Apr. 18$2,447,119 Mall-WartsNo credit approval. Paid in full on time. 45141612Dec. 10$2,165,501 Run For Your LifeNo credit approval. Unpaid as of Dec. 31 55242056Dec. 28$730,588 Shoe ShackWrong quantity.
Overcharge $200. No CM. Unpaid. 66140812Nov. 3$3,051,755 NeutralizerNo credit approval. Unpaid as of Dec. 31. 76639684Sep. 13$139,246 Imelda’s ClosetNo credit approval. Paid in full on time. 86733762Feb. 21$1,478,296 Mall-WartsNo credit approval. Paid in full on time. 97240004Sep. 27$35,029 Nuke MeWrong quantity. Overcharge $180. CM Nov. 4. 108640256Oct. 8$9,582 Wall of ShoesNo credit approval. Unpaid as of Dec. 31. 118934233Mar. 5$35,029 Nuke MeNo credit approval. Paid in full on time. 129139640Sep. 11$92,900 Pump It Up ShoesArithmetic error. Overcharge $8,100. CM Nov. 1. 1310439036Aug. 4$35,079 Nuke MeWrong price. Overcharge $50. CM Sept. 12 1410941326Nov. 27$45,258 Eight EastNo credit approval. Unpaid as of Dec. 31. 1511239113Aug. 17$524,239 WalkaboutWrong price. Overcharge $50. CM Sept. 1. 1611641754Dec. 16$10,458,848 Paul BunionNo credit approval. Unpaid as of Dec. 31. 1712133430Feb. 11$2,492,336 Paul BunionMissing BL. Paid in full on time. 1812341774Dec. 17$3,376 Pump It Up ShoesNo credit approval. Paid in full in Jan. 1912537526June14$35,029 Nuke MeNo credit approval. Paid in full on time. 2013242065Dec. 29$2,649 Doug’sArithmetic error. Overcharge $15. CM Jan. 15. 2113333217Feb. $35,029 Nuke MeNo credit approval. Paid in full on time. 2213740725Oct. 30$146,446 Lockup Shoe StoreNo credit approval. Paid in full on time. 2314339160Aug. 19$110,002 Evil SpirtWrong price. Overcharge $220. CM Sept. 30. 2414839130Aug. 18$112,239 Wild Hair ShoesWrong price. Overcharge $50. CM Sept. 20. 2516138488July19$4,333,275 Mall-WartsNo credit approval. Paid in full 60 days. 2616138488Wrong price. Overcharge $700. CM Aug. 5. 2716638816Aug. 4$3,000 Blue Bird ShoesWrong price. Overcharge $2,000. CM Sept. 10. 2818041898Dec. 22$35,029 Nuke MeNo credit approval. Paid in full in Jan. 2918639163Oct. 9$1,030,239 TreadWrong price. Overcharge $1389. CM Dec. 4. (Neutralizer) 3019041341Nov. 27$13,332 Blue Bird ShoesNo credit approval. Paid in full on time. 3119138669July27$62,300 Intnl Soccer FederationWrong price. Overcharge $100. CM Aug. 15. 3219335969 Apr. 24$22,450 Pump It Up ShoesMissing BL. Paid in full on time. 3322539439Aug. 31$65,392 Custom ShoesNo credit approval. Paid in full on time. 3422838191July6$357,246 Pump It Up ShoesNo credit approval. Paid in full on time. 3522838191Wrong price. Overcharge $100. CM Aug. 6. 3623236111May1$1,257,923 Mall-WartsNo credit approval. Paid in full on time. 723439485Sep. 4$35,069 Evil SpirtNo credit approval. Paid in full on time. 3823840425Oct. 16$6,242 Blue Bird ShoesNo credit approval. Paid in full on time. 3924032270Jan. 6$2,447,829 Mall-WartsNo credit approval. Paid in full on time. 4024237498June13$250,326 Sassy ShoesNo credit approval. Paid in full on time. 4124541306Nov. 26$63,259 PayMore ShoesNo credit approval. Unpaid as of Dec. 31. 4225238582July23$5,249 Blue Bird ShoesNo credit approval. Paid in full on time. 4325939057Aug. 14$4,792 Blue Bird ShoesMissing BL. Paid in full on time. 4426539578Sep. 8$63,259 Company BNo credit approval.
Unpaid as of Dec. 31. 4526835100Apr. 1$35,029 Nuke MeNo credit approval. Paid in full on time. 4626938773Aug. 1$329,374 TrenchfootWrong price. Overcharge $35. CM Aug. 22. 4728038744Aug. 1$750,000 Intl Soccer FederationWrong price. Overcharge $25. CM. Aug. 10. 4828939436Aug. 31$35,029 Nuke MeNo credit approval. Paid in full on time. 4929138740Aug. 1$139,666 Sassy ShoesWrong price. Overcharge $500. CM. Aug. 22 5029241976Dec. 28$5,765,082 Mall-WartsNo credit approval. No purchase order. Unpaid as of Dec. 31. 5129640686Oct. 28$5,765,082 Sassy ShoesNo credit approval. Unpaid as of Dec. 31. ICC-3
Apollo Shoes, Inc. Bridge Working Paper, Purchasing System December 31, 2007 IndexControl ActivityImplicationsTest controlTest procedures W-1Receiving should not get a copy of the P. O. even though quantities are blacked-out. Since black ink is not permanent, it may be possible to determine the quantities ordered and skip counting the received merchandiseUpdate controlConsider using a separate report with item descriptions. Quantities should not be printed. W-2Department preparing requisition should not get copy of P. O. A P. O. is an authorization to purchase. It should be sent to the vendor only.
If the department gets it, possibility to fraudulently reorder merchandise presentUpdate controlDo not give copy of P. O. the originating department. S-1Filing vendor invoices by dateProvides incentive to pay invoices on time and save money. SamplingSample test of filing cabinets to see if invoices are filed by date. S-2A/P does not produce check, only a voucher for payment. Appropriate separation of authorization and asset custody. SamplingCheck preparers of company checks S-3Finance sends copy of check to A/PConfirms that the check has been paid. SamplingCheck invoice files for copies of checks to vendors