Answers to Case Study: Completeness of Sales Revenue in a Fast Food Chain
Step 1: Identify Inherent Risks
1. Why does the fact that SpeedyBites accepts a significant amount of cash increase the
inherent risk of incompleteness of sales revenue?
o Cash transactions are harder to track and more prone to employee
misappropriation, leading to a higher inherent risk of unrecorded sales.
2. What role do electronic payments play in potentially reducing inherent risk?
o Electronic payments are automatically recorded through the POS system,
reducing the risk of unrecorded transactions and limiting the opportunity for fraud
compared to cash.
3. Are there any other business-specific factors that increase the likelihood of
incomplete recording of sales revenue?
o The high volume of small, fast transactions in the fast-food industry increases the
chance of errors or omissions in recording, particularly with cash sales.
Step 2: Analyze Control Risk
1. How might the POS system reduce the control risk of incomplete sales recording?
o The POS system automatically records each transaction, minimizing the chance
that sales will go unrecorded. It provides a digital trail for both cash and
electronic payments.
2. What is the importance of segregating duties between cash handling and food
preparation?
o Segregating duties ensures no one employee controls both recording sales
(cashier) and delivering products (kitchen staff), reducing the risk of collusion and
fraud.
3. What other internal controls could be in place to mitigate control risk in this
scenario?
o Regular reconciliation of cash with recorded sales, surprise cash counts, and
managerial oversight of cashiers could further mitigate control risk.
Step 3: Assess Detection Risk
1. How does the effectiveness of internal controls influence the level of detection risk?
o If internal controls (e.g., POS system, segregation of duties) are strong and
effective, and the risk of material misstatement (RMM) is low, auditors can
consider setting a higher detection risk to maintain a set level of audit risk. This
allows for a reduction in the amount of audit testing.
2. Would you rely on more substantive testing or tests of control in this audit? Why?
o Given effective internal controls, the audit would likely first focus on tests of
control. If controls are found to be reliable, substantive testing could be reduced.
3. How would you design your audit procedures to reduce detection risk to an
acceptable level?
o A combined approach: Perform tests of controls (e.g., verifying the functioning of
the POS system, observing segregation of duties) and substantive testing (e.g.,
analytical procedures, sampling of cash sales transactions).
Step 4: Design Audit Procedures
1. If the control risk is low due to effective controls, how would that affect the extent of
your substantive testing?
o If control risk (CR) is low due to effective controls, and inherent risk (IR) is also
low, the risk of material misstatement (RMM)—which is the product of inherent
risk and control risk—will be relatively. As a result, the auditor can decrease the
extent of testing, relying more on the effectiveness of the controls. However, if
inherent risk remains high, despite low control risk, the auditor must still consider
the overall RMM and consider the impact on audit testing.
2. What specific audit procedures would you recommend to ensure completeness of
sales revenue?
o Perform tests of the POS system’s accuracy by matching daily cash receipts with
recorded sales. Reconcile total cash sales with the amount deposited. Review
electronic payment reconciliations. Conduct surprise cash counts and observe the
cash handling process to confirm proper segregation of duties.
