Ateneo de Davao University

School of Business and Governance

Bradmark Comprehensive Case

Revenue Cycle

In Partial fulfillment of the Requirements

In the Course
IT Audit – IT3

Presented to:

Mrs. Mylene S. Caballero

Professor

Presented by:

Course and Section:

Date:
 Bradmark Wholesale General Supply
An ACL™ Case Study

Bradmark is a wholesale general supply company that ships to business customers throughout
Northeast Pennsylvania, New York state, and Southern Connecticut. Bradmark has developed a
competitive edge by offering a wide variety of quality products at competitive prices. The
company’s products range from paint to watering cans.

Bradmark is a publicly owned company, whose board of directors has retained your firm to
conduct the annual audit. You are the in-charge auditor who is currently examining Bradmark’s
revenue and expenditures procedures and related accounts. Bradmark’s main offices are in its
Allentown, PA warehouse. The following describes your client’s system configuration and
business procedures.

System Overview and Background

Bradmark’s information system is a recently purchased application that runs on a client-server
network configuration. James Walker, a systems designer in Bradmark’s IT department, played a
central role in implementing and modifying the system to meet Bradmark’s specific needs.
Because of Walker’s familiarity with the system, he was asked by top management to
temporarily oversee the initial running of the new system to ensure a smooth transition from the
old legacy system. After several months, James Walker was offered a promotion to Warehouse
Manager and given permanent responsibility for product purchasing.

Sales and Cash Receipts Procedures

The flowchart in Figure 1 and the record layout in Figure 2 (see the related PowerPoint file for
figures) illustrate Bradmark’s sales and cash receipts procedures.

Sales Department
Customer orders are received by mail or fax in the sales department. One of the sales staff
accesses the customer record and reviews the available credit before creating a Sales Invoice
record. For customers with insufficient available credit, the clerk submits the order to the credit
manager for approval. If granted, the credit manager verbally authorizes the clerk to increase the
customer’s line of credit accordingly. For approved sales, a record is added to the Sales Invoice
file. The system automatically assigns an Invoice Number, which is the primary key for the
record. The clerk manually enters the remainder of the order data.

Warehouse
Based on input from the sales invoice, the warehouse terminal automatically prints a stock
release document, which the warehouse staff uses for picking the goods. The goods are sent to
the Shipping Department along with the stock release document. Once the goods have left the
warehouse, the clerk confirms to the system the quantity sold and it automatically updates the
Quantity on Hand field in the respective inventory record.

Shipping Department
The shipping department receives the goods, prepares them for shipment, selects a carrier and
prepares the packing slip and bill of lading (BOL). Once the goods are shipped, the clerk adds a
record of the shipment to the Shipping Log file.

Billing
At the end of the day the system automatically searches the Sales Invoice and Shipping Log files
for items shipped and prepares a hard copy customer invoice, which is mailed to the customer
the following morning. The current date is then placed in the Due Date field of the Sales Invoice
file.

Cash Receipts
Mary, the cash receipts clerk, receives the customer checks and remittance advises directly from
the customer. She records this transaction by entering the Invoice Number (taken from the
remittance advice) into the system. The system automatically creates a Cash Receipts record. It
assigns a Remittance Number as the primary key and adds this number to a field in the related
Sales Invoice record. The Invoice Number from the Sales Invoice is also added to the remittance
record as a reference. Mary then manually adds the customer number, amount, and payment date
to the Cash Receipts record. At the end of the day she prepares a deposit slip and sends the
checks to the bank. She files the remittance advice in her office.

Risk Assessment Procedure (Analytical Procedure)

Understand the entity, industry, and environment (Business Risk – Inherent Risk)
By reviewing the Company background, using the matrix format below identify an operational
(business) risk related to the revenue cycle. Briefly describe the audit objective and ACL
procedures to answer this concern.

Operational/Audit Operational/Audit Audit Procedures to

Risk (indicate Objective be Performed Using
which) ACL
Examples: process
efficiency, fraud,
losses due to errors

Control Risk Assessment

1) System Documentation by using Flowcharts
a) Compare the diagram of the current system or existing system with the
diagram on how the system should work: Revenue cycle – sales processing;
cash receipts
(Insert here the two diagrams: a) the current system or existing system; and b) the
corrected system - how the system should work)
 b) Use questionnaire to recognize internal control weaknesses in the diagram
above:

Insert here Questionnaire

2) Identification of Control Activities

1) From the case description and the associated flowcharts, assess Bradmark’s internal controls
over its revenue cycle procedures.

Check whether the following files are used by the company:

Custome Sales Cash * Line Inventor Shipping
r File Invoice Receipts Item File y File Log File
File File
Implemented
Not
implemented

* Line Item File - The Line Item file contains a record of every product sold. Since a single
transaction can involve one or more products, each record in the Sales Invoice file is
associated with (linked to) one or more records in this file.

SALES PROCESSING SYSTEM

Control Activities Audit Findings: Potential Your
Internal Control Errors or Recommendations as
Weaknesses Frauds Auditor: Preventive or
Detective Control
PHYSICAL
CONTROLS:
Transaction
authorization
Segregation of duties
Supervision
Accounting records
Access
Independent verification
IT CONTROLS:

CASH RECEIPTS SYSTEM

Control Activities Audit Potential Errors Your Recommendations
Findings: or Frauds as Auditor: Preventive or
Internal Detective Control
Control
Weaknesses
PHYSICAL CONTROLS:
Transaction authorization
Segregation of duties
Supervision
Accounting records
Access
Independent verification
IT CONTROLS

3) Conclusions:
(inherent risk, control risk, and detection risk; substantive test)

Substantive tests for: Sales processing; Cash receipts

a) Using the case description, the flowchart, the file structures, and the selected financial
data below, specify an audit objective (that can be achieved using ACL™) for each
management assertion presented in the matrix below. For each audit objective, briefly
describe the ACL test procedure. As an example, the first row in the matrix has been
completed for you.

Selected Bradmark Financial Data

Sales 5,379,996.96

Accounts Receivable 4,752,257.70

Allowance for Doubtful Accounts (.02 x Sales) 107,600
Net Accounts Receivable 4,644,657.70

Management Audit Objective Audit Procedures to

Assertion be Performed Using
ACL
Existence or Verify that the AR Use ACL to prepare
Occurrence represents actually confirmation letters
owed to Bradmark for customers
Completeness

Valuation or
Allocation

Accuracy
Testing the Accuracy and Completeness Assertions: Review Sales
Invoices for Unusual Trends and Exceptions

Insert your answer here.

Testing the Accuracy and Completeness Assertions: Review Sales

Invoice and Shipping Log Files for Missing and Duplicate Items

Insert your answer here.

Testing the Accuracy and Completeness Assertions: Review Line Item

and Inventory Files for Sales Price Accuracy

Insert your answer here.

Testing the Accuracy and Completeness Assertions: Testing for

Unmatched Records

Insert your answer here.

Testing the Existence Assertion: Selecting Accounts to Confirm

Insert your answer here.

Testing the Valuation/Allocation Assertion: Aging Accounts Receivable

Insert your answer here.

b) Hand in a report describing the audit tests and your conclusions about the results of the
test.

Audit Tests Conclusions

Testing the Accuracy and
Completeness Assertions:
a) Review Sales Invoices for
Unusual Trends and Exceptions
b) Review Sales Invoice and
Shipping Log Files for Missing
and Duplicate Items
c) Review Line Item and Inventory
Files for Sales Price Accuracy
d) Testing for Unmatched Records
Testing the Existence Assertion:
a) Selecting Accounts to Confirm
Testing the Valuation/Allocation
Assertion:
a) Aging Accounts Receivable

b) Conclusions for Substantive Testing

(fairly presented or GAAP compliance)

Command log:

Insert your answer here.