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  1. 1. HENRICO RETAIL, INC. Understanding the IT Accounting System and Identifying Audit Evidence for Retail Sales Erika Iniguez - Cesar Romo - Mohamed Qadri - Bao Hoang
  2. 2. Auditing in the Retail Industry <ul><li>Largest Industry: 10% of our GNP </li></ul><ul><li>Optimized Infrastructure & Operating Efficiencies </li></ul><ul><li>Efficient Auditing Process </li></ul><ul><li>True Business Value </li></ul>
  3. 3. Challenges with Audit Systems in Retail <ul><li>Inefficient audit planning </li></ul><ul><li>Errors in manual data entry </li></ul><ul><li>Data loss </li></ul><ul><li>Non-standardized audit practices </li></ul>
  4. 4. Point of Sale Consolidated Sales Accounts
  5. 5. During this scan, the following are calculated by the computer: - Product code - Quantity - Total price - Tax
  6. 6. <ul><li>Receipts </li></ul><ul><ul><li>A Paper receipt is kept in the cash drawer. </li></ul></ul><ul><li>- An electronic receipt is kept in the </li></ul><ul><li>computer’s hard drive. </li></ul><ul><li>Credit sales contain an extra credit approval slip PAPER AND ELECTRONIC receipt with the approval code. </li></ul><ul><li>The hard drives are backed up on the store’s server every hour. </li></ul>
  7. 7. <ul><li>The clerk closes the register </li></ul><ul><li>At this point, the computer automatically </li></ul><ul><li>updates the store’s server. </li></ul><ul><li>A paper and electronic receipt of the cashier’s </li></ul><ul><li>total transactions for the day are printed. </li></ul><ul><li>The cashier records the total amounts on the </li></ul><ul><li>daily deposit sheet. </li></ul><ul><li>The cash drawer is counted and receipts for </li></ul><ul><li>credit sales are checked for any differences. </li></ul>
  8. 8. <ul><li>Cash and paper versions of credit receipts are taken to the store cashier and the store cashier verifies the Daily Deposit Sheet and initials the sheet. </li></ul><ul><li>Then, those cash and credit receipts are stored in the vault until Brinks security service picks it up for delivery to the bank’s overnight depository. </li></ul>
  9. 9. <ul><li>The bank immediately gives the cash credits and charge credits based on their arrangements with the credit companies. </li></ul><ul><li>An electronic email is sent to the store accountant and the cashier with confirmation of deposit. </li></ul>
  10. 10. <ul><li>An independent person verifies the information received from the bank and then reconciles to the totals on all the Daily Deposit Sheets from Henrico. </li></ul><ul><ul><li>After reconciliation, the bank’s confirmation is printed on paper and attached to the Daily Deposit Sheets and filed. </li></ul></ul>
  11. 11. <ul><li>The store’s server produces a Daily Sales Report each night from all processes and transactions downloaded from each register’s closing processes and sends it electronically to the corporate office main frame. </li></ul><ul><ul><li>A paper copy is also printed and filed at the store. </li></ul></ul>
  12. 12. <ul><ul><li>The store’s computer server also updates the perpetual inventory records. </li></ul></ul><ul><ul><li>This information is only updated electronically. </li></ul></ul>
  13. 13. <ul><ul><li>Inventory Reports and Sales Reports are electronically generated every month and transmitted to the corporate office. </li></ul></ul><ul><ul><li>Only the monthly sales report is printed in paper at the store. </li></ul></ul>
  14. 14. <ul><ul><li>The corporate office’s computer prepares the consolidated General Ledger, which summarizes the posting of the total monthly sales to the consolidated sales account on paper. </li></ul></ul>
  15. 15. Plan and Design an Audit Approach
  16. 16. Two things to consider… <ul><li>Collect sufficient evidence to meet auditor’s professional responsibility </li></ul><ul><li>Cost of accumulating evidence must be kept at a minimum to be profitable </li></ul>
  17. 17. Know the client’s strategies…
  18. 18. Understand and Assess Internal Control and Risks
  19. 19. Assess Risk of Material Misstatements
  20. 20. Three categories of Assertion <ul><li>Classes of transactions and events </li></ul><ul><li>Account balances at period end </li></ul><ul><li>Presentations and disclosures </li></ul>TRANSACTIONS
  21. 21. Common Assertions within the three categories <ul><li>Existence/Occurrence </li></ul><ul><li>Completeness </li></ul><ul><li>Accuracy </li></ul>
  22. 22. Existence/Occurrence Assertion <ul><li>An assertion made stating that a stated amount actually exists </li></ul>SALES ACCOUNT
  23. 23. Strategy for Auditing Existence Assertion for Henrico Sales <ul><li>Consolidated Sales Account </li></ul><ul><ul><li>Information from the General Ledger </li></ul></ul><ul><li>General Ledger (Paper/Electronic) </li></ul><ul><ul><li>Monthly Sales Report </li></ul></ul><ul><li>Monthly Sales Report (Paper/Electronic) </li></ul><ul><ul><li>Daily Sales Report </li></ul></ul><ul><li>Daily Sales Report (Paper/Electronic) </li></ul><ul><ul><li>Downloaded register closing processes </li></ul></ul><ul><li>Bank reconciliation Sheet </li></ul><ul><ul><li>Cash and credit slips sent to depository </li></ul></ul><ul><li>Register Closing Process </li></ul><ul><ul><li>*Daily Deposit Sheet (*Handwritten by sales clerk with differences reconciliation) </li></ul></ul><ul><ul><li>Register closing printout (Computerized Printout) </li></ul></ul><ul><li>Price Master List </li></ul>
  24. 24. Is IT support necessary? <ul><li>Yes, accounting procedures and internal control processes depends heavily on electronic records. </li></ul><ul><li>Paper evidence needs to be matched with electronic form. </li></ul>
  25. 25. Examining sales transaction for ONE store <ul><li>Monthly Sales Report </li></ul><ul><li>Daily Sales Report </li></ul><ul><li>Bank Reconciliation Sheet </li></ul><ul><li>Daily Deposit Sheet </li></ul>
  26. 26. Why these sources? <ul><li>Generated by each store individually </li></ul><ul><ul><li>More specific </li></ul></ul><ul><ul><li>More detailed </li></ul></ul><ul><ul><li>Paper </li></ul></ul>
  27. 27. Evidence to examine for each transaction <ul><li>The type of transaction that occurred </li></ul><ul><ul><li>Cash or credit? </li></ul></ul><ul><li>Daily Deposit Sheet </li></ul><ul><ul><li>Credit Slip </li></ul></ul><ul><ul><li>Cash amount </li></ul></ul><ul><li>Bank Reconciliation Sheet </li></ul><ul><ul><li>Specific credit deposit </li></ul></ul><ul><ul><li>If cash, check ending balance </li></ul></ul><ul><li>Daily Sales Report </li></ul><ul><ul><li>Total Credit/Cash Receipts </li></ul></ul><ul><ul><li>Ending balance </li></ul></ul><ul><li>Monthly Sales Report </li></ul><ul><ul><li>Total Cash/Credit Sales </li></ul></ul><ul><ul><li>Ending balance </li></ul></ul><ul><li>*EXTRA STEP </li></ul><ul><ul><li>Check inventory for proper reduction due to sales transaction </li></ul></ul>
  28. 28. Management Assertions Assertions About Classes of Transactions and events Assertions on Account Balances Assertions on Presentations and Disclosures Occurrence Existence Occurrence and Rights and Obligations Completeness Completeness Completeness Accuracy Valuation and Allocation Accuracy and Valuation Classification Classification Cutoff Rights and Obligations
  29. 29. Assertions on Account Balances <ul><li>Valuation and Allocation </li></ul><ul><ul><li>Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded </li></ul></ul><ul><ul><li>SAS 31 </li></ul></ul>
  30. 30. Valuation and Allocation of Sales <ul><li>Inventory </li></ul><ul><ul><li>Perpetual Inventory System </li></ul></ul><ul><ul><li>IT audit specialist </li></ul></ul><ul><li>Cash in the bank </li></ul><ul><ul><li>Request bank statements </li></ul></ul><ul><li>Allowance for Uncollectible Accounts </li></ul><ul><ul><li>Sales on Credit Not Received </li></ul></ul>
  31. 31. Valuation and Allocation of Sales <ul><li>Liabilities </li></ul><ul><ul><li>Inventory purchased on credit </li></ul></ul><ul><ul><ul><li>Amount of inventory purchased </li></ul></ul></ul>
  32. 32. What is Accruracy and Valuation? <ul><li>Financial and other information is disclosed appropriately and at the appropriate amounts </li></ul><ul><ul><li>Dealing with both balance sheet and income statement </li></ul></ul>
  33. 33. Accuracy and Valuation <ul><li>Inventory </li></ul><ul><ul><li>Cost of Goods Sold </li></ul></ul><ul><li>Sales Returns and Allowances </li></ul><ul><ul><li>Amount credited to sales </li></ul></ul><ul><ul><li>returned merchandise </li></ul></ul><ul><li>Price and quantity </li></ul>
  34. 34. IT System Auditors For Henrico Retail ,Inc <ul><li>Information technology audit , or information systems audit </li></ul><ul><li>Collecting and evaluating evidence of an organization's information systems </li></ul><ul><li>Evidence determines if the information systems are safeguarding assets. </li></ul><ul><li>These reviews may be performed in conjunction with a financial statement audit , internal audit , or other form of attestation engagement. </li></ul>
  35. 35. IT Evaluation on Henrico, Inc <ul><li>Perpetual Inventory </li></ul><ul><ul><li>Records stored on computer server </li></ul></ul><ul><ul><li>No paper reports are generated </li></ul></ul><ul><ul><li>Perform IT audit in electronic form for assurance </li></ul></ul><ul><ul><li>RISK!!!! </li></ul></ul>
  36. 36. Control Deficiencies <ul><li>Management Control </li></ul><ul><ul><li>Approval and Price Change Control </li></ul></ul><ul><li>Voided Sales </li></ul><ul><ul><li>Receipts and Calculations </li></ul></ul><ul><li>Reconciliations </li></ul><ul><ul><li>Reviewed and Analyzed </li></ul></ul><ul><ul><li>Test for detail </li></ul></ul><ul><ul><li>Employee Fraud is more common than you think! </li></ul></ul><ul><ul><li>http://www.youtube.com/watch?v=VrARLen4hIk </li></ul></ul>
  37. 37. Management & Internal Control <ul><li>Sec 404 Sarbanes Oxley Act </li></ul><ul><li>Identify Procedures </li></ul><ul><li>Test Procedures </li></ul>
  38. 38. Audit Objective #3 <ul><li>Accuracy </li></ul><ul><ul><li>Transactions are stated in correct amounts </li></ul></ul><ul><ul><li>Accuracy in selling and billing prices </li></ul></ul><ul><ul><ul><li>Overstates or understates sales and revenue </li></ul></ul></ul><ul><ul><li>Accuracy in Transferring Info </li></ul></ul>
  39. 39. Phase IV :Complete the Audit and Issue an Audit Report <ul><li>Combine Information, reach an overall conclusion </li></ul><ul><li>Fairly Presented?? </li></ul><ul><li>Highly subjected </li></ul><ul><li>Audit Report with Financial Statements </li></ul>