copyright © 2014 pearson education chapter 14 audit of the sales and collection cycle: tests of...

Chapter 14

Audit of the Sales and Collection

Cycle:

Tests of Control and Substantive Tests of

Transactions

Chapter 14

Audit of the Sales and Collection

Cycle:

Tests of Control and Substantive Tests of

Transactions

Identify the accounts and the classes of transactions in the sales and collection cycle.

Describe the business functions and the related documents and records in the sales and collection cycle.

Understand internal control, and design and perform tests of controls and substantive tests of transactions for sales.

Apply the methodology for controls over sales transactions to controls over sales returns and allowances.

Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts.

Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable.

Identify the accounts and the classes of transactions in the sales and collection cycle.

Describe the business functions and the related documents and records in the sales and

collection cycle.

Accounts Business Functions Documents and Records

Sales Accounts receivable

Processing customer orders Granting credit Shipping goods Billing customers and recording sales

Customer order Sales order Customer order or sales order Shipping document Sales invoice Sales transaction file Sales journal or listing Accounts receivable master file Accounts receivable trial balance Monthly statements

Cash in bank (debits from cash receipts) Accounts receivable

Processing and recording cash receipts

Remittance advice Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing

Sales returns and allowances Accounts receivable

Processing and recording sales returns and allowances

Credit memo Sales and returns and allowances journal

Accounts receivable Allowance for uncollectible accounts

Writing off uncollectible accounts receivable

Uncollectible account authorization form General journal

Bad debt expense Allowance for uncollectible accounts

Providing for bad debts

General journal

Customer Order: A request for merchandise by a customer

Sales Order: A document describing the goods ordered

by a customer

Before goods are shipped, a properlyauthorized person must approve creditto the customer for sales on account

This is the first point in the cycle at which the company gives up assets.

One type of shipping document is a bill of lading.

Bills of lading are often transmitted once goods have been shipped

Sales transaction

Sales journal

Accounts receivable

trial balance

Prelisting of

Cash receipts

Cash receiptstransaction

Credit memo

Sales returns and allowances journal

Uncollectible account authorization form

This is a document used internally toindicate authority to write an accountreceivable off as uncollectible

This provision represents a residual,resulting from management’send-of-period adjustment of theallowance for uncollectible accounts

Understand internal control, and design and perform tests of controls and substantive tests of

transactions for sales.

Understand internal control – sales

Assess planned control risk – sales

Determine extent of testing controls

Design tests of controls andsubstantive tests of transactions

for sales to meet transaction-related audit objectives

Study the client’s flowcharts, preparean internal control questionnaire, andperform walk-through tests of sales.

1. Framework for assessing control risk

2. Identify key internal controls and deficiencies

3. Associate controls and deficiencies with the objectives

4. Assess control risk for each objective

Adequate separation of duties

Proper authorization

Adequate documents and records

Pre-numbered documents

Monthly statements

Internal verification procedures

Control risk

Control effectiveness

Occurrence:Recorded sales are for shipments actually made.

Completeness:Existing sales transactions are recorded.

Accuracy:Recorded sales are for the amount shipped.

Posting and summarization:Sales transactions are correctly includedin the accounts receivable master file.

Classification:Sales transactions are correctly classified.

Timing:Sales are recorded on the correct dates.

Improper sales cutoffSham sales

Improper % of completion

Conditional sales

Round-tripping loans as sales

Fraudulent

Techniques

Premature revenue

recognition

Unauthorized shipments

Bill and hold

Consignment sales

Identify key transaction-related audit objectives Determine key existing controls Design tests of controls to verify effectiveness Evaluate any control deficiencies Determine extent of substantive tests

of transactions

Apply the methodology for controls over sales transactions to controls over sales returns and

allowances.

The transaction-related audit objectives andclient’s methods of controlling misstatementsare essentially the same for processing creditmemos as those described for sales.

There are, however, two important differences:

Materiality Emphasis on

objectives

Understand internal control, and design and perform tests of controls and substantive tests

of transactions for cash receipts.

Determine whether cash received was recorded

Prepare proof of cash receipts*

Test to discover lapping of accounts receivable*

Apply the methodology for controls over the sales and collection cycle to write-offs of

uncollectible accounts receivable.

Occurrence transaction-related audit objective

Proper authorization of the write-off ofuncollectible accounts

Verification of accounts written off

The parts of the audit most affected by thetests for the sales and collection cycle are:

Accounts receivable

Allowance for doubtful accounts

Bad debt expense

Audited byTOC, STOT, and AP

Audited by AP and TDB

Audited byTOC, STOT, and AP

SalesAccounts

ReceivableCash inBank

Salestransactions

Cash receiptstransactions

Endingbalance

TOC + STOT + AP + TDB= Sufficient appropriate evidence

Copyright

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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