Chapter 16, Problem 28DQP

Niosoki Auto Parts sells new parts for foreign automobiles to auto dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk writes the date on the shipping document. The last shipment made in the fiscal year ended August 31, 2016, was recorded on document 2167. Shipments are billed in the order that the billing clerk receives the shipping documents.

For late August and early September, shipping documents are billed on sales invoices as follows:

The August and September sales journals have the following information included:

Required

1. a. What are the accounting requirements for a correct sales cutoff?
2. b. Which sales invoices, if any, are recorded in the wrong accounting period? Prepare an adjusting entry to correct the financial statement for the year ended August 31, 2016. Assume that the company uses a periodic inventory system (inventory and cost of sales do not need to be adjusted).
3. c. Assume that the shipping clerk accidentally wrote “August 31” on shipping documents 2168 through 2172. Explain how that will affect the correctness of the financial statements. How will you, as an auditor, discover that error?
4. d. Describe, in general terms, the audit procedures you would follow in making sure that cutoff for sales is accurate at the balance sheet date.
5. e. Identify internal controls that will reduce the likelihood of cutoff misstatements. How would you test each control?