Final answer:
An auditor's review of a client's sales cutoff could detect excessive goods returned for credit, unrecorded sales discounts, lapping of year-end accounts receivable, or overstated sales for the year. The firm's accounting profit is calculated by subtracting total expenses from sales revenue, which for the example given equals $50,000.
Step-by-step explanation:
The question you've asked pertains to an auditor's role in reviewing a company's sales cutoff procedures. When an auditor reviews the sales cutoff, they are looking to ensure that sales are recorded in the correct accounting period. This is to prevent overstatement or understatement of revenue which can lead to inaccurate financial reporting. Situations that might be detected include:
- Excessive goods returned for credit, which could indicate returns being processed in a subsequent period instead of the current period, affecting the sales and accounts receivable balances.
- Unrecorded sales discounts, which could lead to the overstatement of revenue if not properly accounted for at the time of sale.
- Lapping of year-end accounts receivable, which involves covering up theft or discrepancies in cash flows by using subsequent receipts to hide unrecorded sales or missing funds.
- Overstated sales for the year, resulting from recording future sales in the current period either intentionally or by error.
To answer the self-check question, the firm's accounting profit would be calculated by subtracting the total expenses from the sales revenue:
Accounting Profit = Sales Revenue - Total Expenses
Accounting Profit = $1,000,000 - ($600,000 + $150,000 + $200,000)
Accounting Profit = $1,000,000 - $950,000
Accounting Profit = $50,000
Therefore, the firm's accounting profit was $50,000 last year.