Kroger Case Analysis

When reviewing the income statement for Kroger CO., sales have increased over the past three years. Sales were for the past three years were 2012 ($96,619 million), 2013 ($ 98,375 million) and 2014 ($ 108,465 million). The sales transactions need to be tested and validated. According to smallbusiness.chron.com, the following steps should be: “Test of Controls

An auditor tests the controls the company has set up for the sales cycle to determine how strong and reliable they are. If they are strong, the auditor can reduce the amount of transaction testing he must do. Common internal controls over the sales cycle include numbered sales invoices, purchase order authorization over a certain limit and authorization over receivables write-offs.

Accounts receivable balances are tested by sending confirmation letters to customers to obtain objective assurance that the balance is correct. The auditor also chooses sales transactions from the sales ledger and verifies that there are legitimate sales receipts to back up the transaction. To test the accuracy of the sales figure, the auditor reviews sales transactions in the ledger close to the financial statement date to ensure that the company only included sales prior to that date.” What Are the Audit Procedures for the Sales & Collection Cycle? (n.d.).

When reviewing the balance sheet of Kroger Co., the balance sheet is only listing two years for comparison. Assets are up from 2014 to 2015 and the liabilities have also increased over the two previous years. Sample testing should be conducted on the assets of the company to validate why cash is decreased and sales are

The term segregation of duties is an important internal control that must be tested and followed. “The rationale for segregation of duties is that the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee. There are two common applications of this principle:

1. The responsibility for related activities should be assigned to different individuals.

2. The responsibility for record keeping for an asset should be separate from the physical custody of the asset.” Chapter 7 Financial Accounting. (n.d.).

The audit universe is defined by sampling a list of transactions that test the controls of the financial statements. The higher suspicion of risk will cause the sampling size to increase to ensure the materiality of the transaction. The most preferable testing procedure is sending out confirmations for bank balances, legal issues, and accounts receivable. Also looking at a trial balance of accounts and talking to Kroger’s management team can identify what and how many testing samples are