HENRICO RETAIL, INC.Understanding the IT Accounting System and Identifying

Audit Evidence for Retail Sales

Erika Iniguez - Cesar Romo - Mohamed Qadri - Bao Hoang

Auditing in the Retail Industry

Largest Industry: 10% of our GNP

Optimized Infrastructure & Operating Efficiencies

Efficient Auditing Process

True Business Value

Challenges with Audit Systems in Retail

Inefficient audit planning

Errors in manual data entry

Data loss Non-standardized audit

practices

Point of Sale

Consolidated Sales

Accounts

During this scan, the following are calculated by the computer:

- Product code- Quantity- Total price- Tax

Receipts - A Paper receipt is kept in the cash drawer.

- An electronic receipt is kept in the computer’s hard drive.

- Credit sales contain an extra credit approval slip PAPER AND ELECTRONIC receipt with the approval code.

- The hard drives are backed up on the store’s server every hour.

- The clerk closes the register

- At this point, the computer automatically updates the store’s server.

- A paper and electronic receipt of the

cashier’s total transactions for the day are printed.

- The cashier records the total amounts on

the daily deposit sheet.

- The cash drawer is counted and receipts

for credit sales are checked for any differences.

- 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.

-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.

- The bank immediately gives the cash credits and charge credits based on their arrangements with the credit companies.

- An electronic email is sent to the store accountant and the cashier with confirmation of deposit.

- An independent person verifies the information received from the bank and then reconciles to the totals on all the Daily Deposit Sheets from Henrico.

- After reconciliation, the bank’s confirmation is printed on paper and attached to the Daily Deposit Sheets and filed.

- 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.

- A paper copy is also printed and filed at the store.

- The store’s computer server also updates the perpetual inventory records.

- This information is only updated electronically.

- Inventory Reports and Sales Reports are electronically generated every month and transmitted to the corporate office.

- Only the monthly sales report is printed in paper at the store.

- 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.

Plan and Design an Audit Approach

Two things to consider…

Collect sufficient evidence to meet auditor’s professional responsibility

Cost of accumulating evidence must be kept at a minimum to be profitable

Know the client’s strategies…

Understand and Assess Internal Control and Risks

Assess Risk of Material Misstatements

Three categories of Assertion Classes of transactions and events Account balances at period end Presentations and disclosures

TRANSACTIONS

Common Assertions within the three categories

Existence/Occurrence Completeness Accuracy

Existence/Occurrence Assertion An assertion made stating that a stated

amount actually exists

SALES ACCOUNT

Strategy for Auditing Existence Assertion for Henrico Sales Consolidated Sales Account

Information from the General Ledger General Ledger (Paper/Electronic)

Monthly Sales Report Monthly Sales Report (Paper/Electronic)

Daily Sales Report Daily Sales Report (Paper/Electronic)

Downloaded register closing processes Bank reconciliation Sheet

Cash and credit slips sent to depository Register Closing Process

*Daily Deposit Sheet (*Handwritten by sales clerk with differences reconciliation)

Register closing printout (Computerized Printout) Price Master List

Is IT support necessary? Yes, accounting procedures and internal

control processes depends heavily on electronic records.

Paper evidence needs to be matched with electronic form.

Examining sales transaction for ONE store

Monthly Sales Report Daily Sales Report Bank Reconciliation Sheet Daily Deposit Sheet

Why these sources?

Generated by each store individuallyMore specificMore detailedPaper

Evidence to examine for each transaction The type of transaction that occurred

Cash or credit? Daily Deposit Sheet

Credit Slip Cash amount

Bank Reconciliation Sheet Specific credit deposit If cash, check ending balance

Daily Sales Report Total Credit/Cash Receipts Ending balance

Monthly Sales Report Total Cash/Credit Sales Ending balance

*EXTRA STEP Check inventory for proper reduction due to sales transaction

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

Assertions on Account Balances Valuation and Allocation

o Assets, liabilities and equity interests are included in the financial statements at appropriate amounts and any resulting valuation adjustments are appropriately recorded

o SAS 31

Valuation and Allocation of Sales Inventory

o Perpetual Inventory System

o IT audit specialist

Cash in the bank o Request bank

statements

Allowance for Uncollectible Accountso Sales on Credit Not

Received

Valuation and Allocation of Sales Liabilities

o Inventory purchased on credito Amount of inventory purchased

What is Accruracy and Valuation? Financial and other

information is disclosed appropriately and at the appropriate amounts o Dealing with both

balance sheet and income statement

Accuracy and Valuation

Inventory o Cost of Goods Sold

Sales Returns and Allowanceso Amount credited to saleso returned merchandise

Price and quantity

IT System Auditors For Henrico Retail ,Inc Information technology audit, or information

systems audit Collecting and evaluating evidence of an

organization's information systems Evidence determines if the information systems

are safeguarding assets. These reviews may be performed in conjunction

with a financial statement audit, internal audit, or other form of attestation engagement.

IT Evaluation on Henrico, Inc Perpetual Inventory

Records stored on computer serverNo paper reports are generatedPerform IT audit in electronic form for

assuranceRISK!!!!

Control Deficiencies Management Control

Approval and Price Change Control

Voided Sales Receipts and Calculations

Reconciliations Reviewed and Analyzed Test for detail Employee Fraud is more common than you think!http://www.youtube.com/watch?v=VrARLen4hIk

Management & Internal Control Sec 404 Sarbanes

Oxley Act

Identify Procedures

Test Procedures

Audit Objective #3

AccuracyTransactions are stated in correct amountsAccuracy in selling and billing prices

○ Overstates or understates sales and revenueAccuracy in Transferring Info

Phase IV :Complete the Audit and Issue an Audit Report

Combine Information, reach an overall conclusion

Fairly Presented??

Highly subjected

Audit Report with Financial Statements