Chapter 14 Audit of the Sales and Collection Cycle:

(1)

Chapter 14 Audit of the Sales

and Collection

Cycle:

Tests of Control and Substantive Tests of

(2)

14-2

Identify the accounts and the classes of

transactions in the sales and collection

cycle.

Describe the business functions and the

and collection cycle.

Understand internal control, and design

and perform tests of controls and

(3)

14-3

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.

(4)

Identify the accounts and the classes of

transactions in the sales and collection cycle.

14-4

(5)

(6)

Describe the business functions and the related

documents and records in the sales and

collection cycle.

14-6

(7)

14-7

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

(8)

14-8

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

(9)

14-9

Sales returns and allowances Accounts receivable Processing and recording sales returns and allowances Credit memo

Sales and returns and allowances journal

(10)

14-10

Accounts receivable Allowance for uncollectible accounts Writing off uncollectible accounts receivable Uncollectible account authorization form General journal

(11)

14-11

Bad debt expense

Allowance for uncollectible accounts

Providing for bad debts

(12)

14-12

Customer Order:

 A request for merchandise by a customer

Sales Order:

 A document describing the goods ordered

(13)

14-13

Before goods are shipped, a properly authorized person must approve credit to the customer for sales on account

(14)

14-14

 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

(15)

(16)

(17)

14-17

 Credit memo

(18)

14-18

Uncollectible account authorization form

This is a document used internally to indicate authority to write an account receivable off as uncollectible

(19)

14-19

This provision represents a residual, resulting from management’s

end-of-period adjustment of the

(20)

Understand internal control, and design and

perform tests of controls and substantive tests of

transactions for sales.

14-20

(21)

14-21

Understand internal control – sales Assess planned control risk – sales Determine extent of testing controls

Design tests of controls and substantive tests of transactions

for sales to meet transaction- related audit objectives

Audit procedures Sample size Items to select

(22)

14-22

Study the client’s flowcharts, prepare an internal control questionnaire, and perform walk-through tests of sales.

(23)

14-23

1. Framework for assessing control risk

2. Identify key internal controls and deficiencies 3. Associate controls and deficiencies with the objectives

(24)

14-24

Adequate separation of duties

Proper authorization

Adequate documents and records

Pre-numbered documents

Monthly statements

(25)

(26)

(27)

14-27

Occurrence:

Recorded sales are for shipments actually made. Completeness:

Existing sales transactions are recorded. Accuracy:

Recorded sales are for the amount shipped.

(28)

14-28

Posting and summarization:

Sales transactions are correctly included in the accounts receivable master file.

Classification:

Sales transactions are correctly classified. Timing:

Sales are recorded on the correct dates.

(29)

Copyright © 2014 Pearson Education 14-29 Improper sales cutoff Sham sales Improper % of completion Conditional sales Round-tripping loans as sales Fraudulent Techniques Premature revenue recognition Unauthorized shipments

Bill and hold

Consignment sales

(30)

14-30

 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

(31)

Apply the methodology for controls over sales

transactions to controls over sales returns and

allowances.

14-31

(32)

14-32

The transaction-related audit objectives and client’s methods of controlling misstatements are essentially the same for processing credit memos as those described for sales.

(33)

14-33

There are, however, two important differences:

Materiality Emphasis

on

(34)

Understand internal control, and design and

perform tests of controls and substantive tests

of transactions for cash receipts.

14-34

(35)

14-35

 Determine whether cash received was recorded

 Prepare proof of cash receipts*

(36)

Apply the methodology for controls over the

sales and collection cycle to write-offs of

uncollectible accounts receivable.

14-36

(37)

14-37

 Occurrence transaction-related audit objective

 Proper authorization of the write-off of

uncollectible accounts

(38)

14-38

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

Accounts receivable

Cash

Allowance for doubtful accounts

(39)

14-39

Audited by

TOC, STOT, and AP

Audited by AP and TDB

Audited by

TOC, STOT, and AP

Sales Receivable Accounts Cash in Bank

Sales

transactions Cash receipts transactions

Ending

balance balance Ending

TOC + STOT + AP + TDB

(40)

(41)

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