Potential Misstatements and test controls

timer Asked: Jan 12th, 2016

Question description

1.(Potential misstatements and tests of controls) Your firm has been engaged to audit the financial statements of the Haven Company. In obtaining an understanding of internal control pertaining to credit sales, the following questionnaire is used:

  1. Does the company evaluate the customer's credit history, and is amount of available credit checked before a sale is authorized?
  2. Is there adequate segregation of duties between authorizing sales, shipping goods, and recording sales?
  3. Does management compare all shipments with recorded sales to ensure that all sales are recorded?
  4. Is every recorded sale checked against shipping records for appropriateness of revenue recognition?
  5. Are there adequate controls over the accuracy of the sales invoice?
  6. Are there adequate controls to ensure that the sales invoices are recorded in the correct time period?
  7. Are there adequate controls to ensure that the proper customer is billed for shipments?
  8. Does management review all sales that are recorded on a weekly basis?
  9. Do adequate controls exist to review company accounting policies regarding revenue recognition?
  10. Do adequate controls exist to review the consistency of the estimation of the provision for doubtful accounts?


  1. Identify a potential misstatement that could occur, assuming a No answer to each question.
  2. For each question, would you expect the control procedure to be a computer control or a manual control?
  3. Identify a possible test of controls for the control procedure, assuming a Yes answer to each question.

Present your answer in tabular form with separate columns for parts a, b, and c.

2. (Necessary application controls/tests of controls) In auditing the financial statements of the The Lively Trout Company, you discover the following internal controls associated with the company's EDP system:

  1. Computer generates prenumbered control over requisitions and purchase orders and checks numerical sequence.
  2. Computer compares account distribution on the voucher with account distribution on purchase requisition or purchase order.
  3. Computer checks batch totals and run-to-run totals to ensure that all transactions are processed.
  4. Computer matches of voucher information regarding vendor, type of good, quantity of goods, and dollar amount against authorized purchase order and receiving report.
  5. Computer checks for a valid purchase order in order to initiate receiving report.
  6. Computer verification of employee authorization code to enter requisition or purchase order.
  7. Computer performs limit test on requisitions and purchase orders. Necessary approvals tied to limit test.
  8. Computer checks the mathematical accuracy of the voucher and supporting documents.
  9. Computer compares vendor on purchase order to master vendor file.
  10. Computer checks for goods ordered and not received within a reasonable period of time.
  11. Computer checks for goods received but not recorded as a liability within a reasonable period of time. In the case of services, the computer checks for services ordered but not recorded as a liability within a reasonable period of time.
  12. Computer compares accounting period in which the voucher is recorded with the accounting period received.
  13. Computer checks the mathematical accuracy of the voucher and supporting documents.
  14. Computer compares sum of subsidiary ledger accounts with general ledger control account.


Identify the assertion that is controlled by each of the control procedures identified above.

3. (Auditing around versus through the computer) CPAs may audit “around” or “through” computers in examining financial statements of clients who use computers to process accounting data.


  1. Describe the auditing approach referred to as auditing around the computer.
  2. Under what conditions does the CPA decide to audit through the computer instead of around the computer?
  3. In auditing through the computer, the CPA may use test data.
    1. What are test data?
    2. Why does the CPA use test data?
  4. How can the CPA become satisfied that the computer program tapes presented by the client are actually being used to process its accounting data?



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