Date: the customers. * For customer overcharges, what

Date: the customers. * For customer overcharges, what

Date: Mon, 21 JAN 2008 11:04:37 +0000 From: “Darlene Wardlaw” <DW@aow. cpa> Subject: FW: Revenue Cycle Problems Bradley sent me a copy of his test of controls work that he did on sales transactions. (Please tell him to send his work to you, rather than me. ) Based on what Bradley found, there looks to be some serious problems in Sales and A/R. You need to write a memo identifying and explaining the significance of the qualitative features indicated by these deviations. Some things you may want to think about: If the control performance were uniform for the year, the deviations would be evenly distributed by month. * Apollo Shoes faced financial problems in the fourth quarter of the year.

* Sales transactions with missing bills of lading suggest improperly recorded sales. * December is the month when deviations overstating sales can have the most effect on the financial statements. * The company reports financial results each calendar quarter ending in March, June, September, and December.

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* Lack of credit approval for sales generally suggests the company might experience collection problems. Errors in billing customers generally might be expected to be a mixture of overcharges and undercharges to the customers. * For customer overcharges, what was the average delay between the invoice date and the date a credit memo was entered giving the customer credit to correct the mistake? * Can you find any qualitative characteristics not signaled by these indicators? Because of the problems noted, I don’t think we can rely on Apollo’s controls over revenue and accounts receivable. We will need to confirm most, if not all, of the accounts receivable balances.I suggest that you mail positive confirmations to those customers with accounts greater than $1,000,000 and negative confirmations to those with balances less than $1,000,000. Also, I suggest that you ask Apollo’s customers to verify total sales during the year.

Normally, you wouldn’t do this because it is difficult for the customers to confirm a year’s worth of transactions. However, since there is a relatively small amount of sales transactions during the year, they should be able to confirm without a problem.I’ll talk to you about it more later. I don’t think you need to worry about customers with current zero balances.

For now, just write the memo to be placed in the accounts receivable workpapers (C-series) about the problems that Bradley found and their affect on our audit procedures (more extensive testing, positive confirmations, etc. ). DW Date: Mon, 21 JAN 2008 10:32:16 +0000 From: “Bradley Crumpler” <TheCrumpler@Aow. cpa> Subject: Test of Controls Attachment: <<Revenue Cycle Test of Controls.

ls>> 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: * I randomly chose the sample of 120 transactions across the year with 10 from each calendar month. * I found all the invoices in the sample. None were missing. * 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.

The invoices not listed had no deviations related to other documents, recalculations, or comparisons. * “No credit approval” means that the expected credit approval notation could not be found in the documents. * When “Wrong quantity billed” appears, a description of the effect follows. * “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. * “Paid in full on time” means the customer paid the invoice when it was due.

“Missing BL”means the bill of lading (shipping document) could not be found. * “Wrong price” means the clerks put the wrong unit price on the invoice and billed the customer incorrectly. * “Arithmetic error” means I found the invoice multiplied and added to show an incorrect total.

* . 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.


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