Within the revenue /receipt cycle, controls must be implemented not only for sales and shipments, but also for sales returns and allowances. Otherwise, sales could be overstated and the financial statements significantly misstated.

Required:

1. Draft and explain the journal entry an employee could make to commit a fraud with sales returns and allowances.

2. In tests of controls over credit memoranda, how can an auditor test whether goods related to sales returns and allowances were actually returned?