Question

• Imagine that you have been hired to audit the sales and collections of a medium-to-large merchandising company. Suggest at least two (2) ways that management could manipulate earnings, and make specific recommendations for the internal control procedure to prevent or detect the transaction. Justify your response.
• Discuss the advantages and disadvantages of at least two (2) sampling methods. Make a recommendation for the best method to sample accounts receivables. Support your position.

Answer 1

Two ways the Management may manipulate Earnings is:

1) Recording Revenue Prematurely: Management may book revenue that isn`t realized in the audit period by stating it as accrued.

2) Recording Fictitious Revenue: Management may book revenue that is never actually realizable to show improved financial condition.

Internal Control Procedure to prevent/detect the above transaction be:

1) Procedure to maintain a document proof(Physical or Electronical): Maintain a record of completion certificate(when the revenue relates to service) or to maintain a confirmation copy of receipt of goods at Customer end.

2) Procedure to question relevancy/ reliability of Extra- Ordinary Items: Whenever accounting for unusual revenue question the nature and relevance of the transaction.