Apollo Shoes, Inc. Attention: Mr. Larry Lancaster, Chairman, President and CEO And Mr. Joe Bootwell, Executive Senior VP and CFO 100 Shoe Plaza Shoetown, ME 00001
Mr. Lancaster and Mr. Bootwell,
The services planned for this audit involves designing test of controls, substantive test of transactions and analytical procedures for Apollo Shoes. The business cycles developed to design test of controls, substantive tests of transactions and analytical procedures are sales and collection, payroll and personnel, and acquisition and payment. The services will help Apollo Shoes establish strong internal controls, in compliance with generally accepted accounting principles (GAAP). 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. 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. AUDIT PROGRAM DESIGN PART II 2
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 in the treasurers department. The credit manager checks the customers accounts receivable balances and other credit file information using a computer-based inquiry system. 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. Payroll and Personnel AUDIT PROGRAM DESIGN PART II 3
The payroll and personnel cycle at Apollo Shoes, Inc. should be designed to achieve two objectives: detect ghost employees and deter payroll fraud. Apollo Shoes has a large employee base and could be subject to ghost employees if the proper controls are not implemented. Common tests of controls and substantive test of transactions that should be designed for Apollo Shoes, Inc. include but not limited to: Examination of time cards for indication of manager/supervisor approvals Examination of time cards and Human Resource employee files Review organizational chart, discuss with employees, and observe duties being performed Examine printouts of transactions, if applicable, rejected by the computer for having non- existent employee numbers Examine payroll records for proper approvals Account for a sequence of payroll checks Discuss with employees and observe a payroll account reconciliation Examine checks that in place to verify no two employees have the same address and investigate thoroughly if they do Examine procedures manuals and observe when recording takes place Common substantive tests of transactions for Apollo Shoes: Review the payroll journal, general ledger, and payroll earnings records for large or unusual amounts AUDIT PROGRAM DESIGN PART II 4
Compared cancelled checks with direct deposit information with HR Examine cancelled checks for proper endorsement Reconcile the disbursements in the payroll journal compared to the disbursements on the payroll bank account Recompute hours worked from time cards, recomputed gross pay and payroll deductions Compare pay rates with HR Test clerical accuracy by footing the payroll journal and tracing postings to the general ledger and PR master file Compare dates of recorded payments in the PR journal with date on cancelled checks or direct deposit records Analytical Procedures for the Payroll and Personnel Cycle: Compare PR expense account balance with previous years Compare direct labor as a percentage of sales with previous years Compare commission expense as of percentage of sales with previous years Compare PR tax expense as a percentage of salaries and wages with previous years Compare accrued payroll tax accounts with previous years. In the payroll and personnel cycles there needs to be a clear separation of duties for payroll processing functions. These functions need to be maintained to separate the employee entering payroll and processing payroll, from the person delivering checks and pay stubs. If AUDIT PROGRAM DESIGN PART II 5
payroll checks cannot be delivered to an employee, for whatever reason, the payroll checks should be delivered to Controllers office and locked in a secure cabinet. Acquisition and Payment Cycle Acquisition and payment cycle evaluates whether accounts affected by the goods acquired are presented in accordance with accounting rules and regulations. It is imperative that Apollo Shoes. Inc has thorough internal controls over this aspect of the company, because it effects the operation of the company. The auditing staff is to familiarize themselves with the companys internal controls through various risk assessments such as reviewing questionnaires and flowcharts. Management is responsible for ensuring goods and services recorded in the financial statements are actually received. Employees use dual control when accepting a package, where they both sign a log stating the item was received. They make sure the receiving reports, such as purchase requisitions, purchase orders, and vendors invoices, are attached to the voucher. This control is tested by checking all packages for appropriate documentation. A substantive test of transaction for this control is done by reviewing the companys general ledger and accounts payable master file for large purchases and matching them with the vouchers. Prior to the audit, management is to make sure all existing acquisition transactions are present, recorded properly with the correct date and time, classified correctly, and completed. All items and its receiving reports should be numbered and in sequential order. The files for these orders should be traceable on all receiving reports and journals. Auditors should be able to compare the recorded transactions in the acquisition journal with the receiving reports, and recompute with accuracy. According to Arens, Elder, & Beasley (2012), The correctness of AUDIT PROGRAM DESIGN PART II 6
many assets, liabilities, and expense accounts depends on the correct recording of transactions in the acquisition journal (p. 610). The sales and collections testing will ensure that Apollo Shoes controls are strong and reliable, provide assurance on the numbers, or discover fraud in the sales cycle audit procedures. The payroll and personnel testing will uncover fraud in the payroll and personnel cycle, or determine that internal controls are strong and reliable. The acquisition and payment testing will detect any deficiencies identified in the audit, or ensure the reliability of internal controls.
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Reference Arens, A. A., Elder, R. J., & Beasley, M. S. (2012). Auditing and assurance services: An integrated approach (14th ed.). New York, NY: Pearson/Prentice Hall.