You Have Just Been Assigned to Manage the Audit of Cheap

question 120

Essay

You have just been assigned to manage the audit of Cheap Music Downloads Inc. (CMD), a new large client of your firm. CMD is a subsidiary of a client of your firm that manufactures audio and video equipment for international distribution. CMD has been in operation for two years.
CMD runs a website that allows customers to order songs using their credit card. There are tens of thousands of small transactions daily. Once the credit card has been authorized by the credit card processing intermediary, CMD's web sales system generates a 16-digit sequential code that the customer uses to access the song via the website. CMD then records both the sale and the royalty for the song.
Quarterly, CMD remits royalties to artists based on the number of copies of each song that has sold if the accumulated royalty exceeds $25 for that artist. Artist royalties that do not exceed $25.00 will be paid every two years if there has not been a payment during that time.
All contracted royalty rates, artist names, and song titles are recorded in CMD's database tables.
Required:
Describe three internal controls that should exist over sales or royalty transactions or over the database tables. For each control:
1. State the control.
2. Describe (not just state) the audit assertion associated with the control (or state the purpose of the control).
3. Provide an audit test that you could use to test the control.

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Definitions:

Laxatives

Substances used to stimulate or facilitate bowel movements, often used to treat constipation or prepare for certain medical procedures.

Diuretics

Medications designed to increase the amount of water and salt expelled from the body as urine, commonly used to treat high blood pressure, heart failure, and certain kidney or liver problems.

Lean

A systematic method for waste minimization within a manufacturing system without sacrificing productivity, often associated with the Toyota Production System.

American Cancer Society

A nationwide, community-based voluntary health organization dedicated to eliminating cancer through research, education, advocacy, and service.