Homework Assignment 6 Due June 15 at 1155 pm Question 4 Mont

Homework Assignment 6 Due June 15 at 11:55 pm Question 4 Montgomery Glass (MG) a retailer of wood windows and stained glass panels, is planning its year-end audit. You, a CPA, are the audit manager on the file. You are currently working on the audit plan for MG\'s sales and cost of sales sections. You have compiled the following information on some of the transactions and events occurring at MG during the year: Your preliminary analysis of the gross profit margin determined that the gross profit percentage for the current year is 55%, whereas it was 50% in the prior year. . While the sales system is mostly automated, MG will sometimes make large-volume sales to hotel chains. These sales orders are calculated manually and invoices are produced using an Excel invoice template. . MG has made purchases from three vendors in U.S. dollars. The U.S. dollar has increased in value over the last 30 days. MG made a large online sale before year end. The shipping department has struggled with the volume of online sales, and the shipment of many of the orders was delayed. Required: Identify the risks for sales and cost of sales at MG and the related assertions. Suggest audit procedures to address the risks.

Solution

Identification of risks for sales and cost of sales at MG:

1. The gross profit percentage has gone up in current year as compared to last year, thus there is a possibility that cost of sales is not recorded properly. It is possible that the transaction is not recorded completely, the sales is recorded but corresponding cost of sales failed to be recorded. Thus we will check the completeness of all the sales transactions.

2. Another risk associated with sales is large volume sales to hotel chains, for which orders are processed manually, the risk is whether all the sales orders are properly recorded in the system or not. Another thing is segregation of duties related to these manually processed bills.

3. Purchases from three vendors in US dollars are recorded taking into account the change in value of US dollar or not.

4. Before year end online orders received are properly recorded in the books of accounts or not. As the shipments of many of the orders get delayed due to large volume, there is a risk that the sales invoices of these orders may get recorded after year end. So we need to check the existence, completeness, timing and posting of these transactions.

Audit Procedure to address the risks:

Firstly, we will understand the internal controls and transaction cycle related to sales and cost of sales.

Secondly, we will assess the control risks associated with the sales that the internal control may not detect. We found some risks associated with sales and cost of sales above, so we will do substantive testing of the transaction near year end and all the large voulume sales orders.