Reference no: EM133633856

You are an internal auditor for a retail company with a widespread network of stores. During a routine audit of one of the flagship stores, you discover a series of irregularities. Cash register reconciliations consistently show shortages, and there is evidence of unauthorized discounts given by some employees. Additionally, you find discrepancies in the inventory records, with some high-value items missing. Explain the steps you would take to investigate these irregularities, assess the risks involved, and recommend corrective actions.

Question: In your audit of XYZ Electronics Inc. for the year ending December 31, 2018, you have encountered the following internal controls related to the sales and accounts receivable cycle (each control should be assessed independently):

(1) Each week, the sales manager reviews and approves all sales orders before they are processed. However, this approval only involves verifying the customer's credit limit and does not include checking the accuracy of the order details.

(2) The accounts receivable clerk, responsible for invoicing customers, is not allowed to access or handle cash. Cash handling and reconciliation of the bank account are performed by another employee with adequate expertise and independence.

(3) The CFO is responsible for signing all outgoing invoices, and before signing, she reviews the supporting documentation for each sale. Additionally, she initials a 'validation stamp' on each invoice to indicate her approval.

(4) Following the CFO's signature on invoices, the administrative assistant applies a 'Paid' stamp to the supporting documents and records the invoice number and payment date to prevent any potential reuse of these documents.

REQUIRED

Using the table on the following table:

For each of the internal controls, identify the transaction-related objectives(s) the control is meant to fulfil.

For each control, state one (1) test of control the auditor could perform to test the effectiveness of the control.

For each control, list one (1) substantive test the auditor could perform to determine whether monetary (financial) misstatements are actually taking place.