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Running head: AUDIT PROGRAM DESIGN PART II 1

Anderson, Olds, and Watershed, LLP


32
nd
Financial Avenue
Shoetown, ME 00002

April 14, 2007

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.
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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
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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
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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
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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
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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.