Auditing Sales Transactions and Control Risk

1.What is a walk-through of sales transaction? How does internal questionnaire compliment the walk-through? Walk through of sales transaction is auditor's taking a single sample of a sales transaction and walk through it from its initiation to its recording in the accounting records. This involves following a sale from the initial customer order through credit approval, delivery of goods or services and billing, to the entry in the sales journal and accounts receivable records, and finally the collection of cash payment. The walk through 1)verify or update the auditor's understanding of the auditte's sales/ AR accounting system and control procedures and 2)show whether the controls in the auditee's internal control questionnaire actually in place. The walkthrough, combined with enquiry can contribute evidence about appropriate separation of duties, a basis for assessing control risk to be low. 2.What is control risk? How would an auditor perform a control test? Do you agree or disagree that only if control risk is set at high would you then perform a control test? Control risk is the risk that internal control will fail to prevent or detect a material misstatement. Auditor would perform a control test by vouching invoices with shipping documents (validity), review for credit approval (authorization), prices compared to price list (authorization and accuracy), recalculate (arithmetic accuracy) and trace to posting general ledge and A/R (accounting). I disagree because you would need to observe and enquire about the auditee's internal control to see if they have a high or low control risk. You would need to vouch invoices to source documents to make sure controls are strong an traces sales invoices to the sales account to make sure control risk is low. Also observe if there is segregation of duties which is also a factor in control risk being low. If control risk is high, other substantive testing will be performed. 3.Know why sample size should be set as high or low Four influences on sampling size: sampling risk, tolerable deviation rate, expected population deviation rate and population size. Sampling riskis defined as the probability that a conclusion based on the audit of a sample might be different from a conclusion based on an audit of the entire population. When using evidence from a sample for testing control, auditor might decide that 1)control risk is very low, in fact, it is not ( beta risk error) or 2) control risk is very high when in fact, it is not so bad (alpha risk error). The more you know about a population, the less likely you are to reach a wrong conclusion. Tolerable deviation rateis the rate of deviation that can exist without causing a minimum material misstatement in a test of control procedure. If tolerable deviation rate is 1%, it indicates a low control risk (say, 0.0) and justifies a great deal of reliance on internal control in the audit of sales and accounts receivable. Auditor who wants to assess control risk at .05 will need to audit a larger sample of sales transaction than another auditor who is willing to assess control risk at .4(tolerable rate =8%). Depending on auditor's choice. Expected population deviation rateis an estimate of the ratio of the number of expected deviation to population size Population size:sample should be larger for bigger population ( a direct relationship) 4.What would an auditor do if inventory count occurred before orafter year end date? Auditee sometimes count inventory on a date other than balance sheet date. The auditor observes this count, following the same procedure as for a period-end count. For the period between the count date and the balance sheet date, additional roll forward or rollback auditing procedures must be performed on inventory purchase (increasing) and issue (decreasing) transaction during that period. Inventory on count date is reconciled to the period-end inventory by addition or subtraction of the receiving and issue transaction that have occurred in the roll forward or rollback period.