Identify the accounts and the classes of transactions in the Financial Sttaments

Routin transaction Non routin transaction Transaction Accounting Estimate

Sales, receivable and collection Purchase, payable and payment Payroll and payment

Acquisition of assets Investment Loan

Valuation of assets Valuation of inventory Valuation of receivable Taxes and corporate income tax etc

The classes of transactions in the sales and collection cycle.

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

Customer order Shipping goods Sales transaction Cash receipts Sales returnAllowance Charge off uncollectible Bad Debt

Customer Order: A request for merchandise by a customer Sales Order: A document describing the goods ordered by a customer

This is the first point in the cycle where company assets are given up. Shipping document

Accounts Sales Accounts receivable Business Functions Processing customer orders, Granting credit, Shipping goods, Billing customers and recording sales Documents and Records Sales invoice, Sales journal or listing, Sales transaction file, Accounts receivable master file and trial balance, Monthly statements

Accounts Cash in bank (debits from cash receipts) Accounts receivable Business Functions Processing and recording cash receipts Documents and Records Remittance advise, Prelisting of cash receipts, Cash receipts transaction file, Cash receipts journal or listing

Accounts Sales returns and allowances Accounts receivable Business Functions Processing and recording sales returns and allowances Documents and Records Credit memo Sales returns and allowances journal

Accounts Accounts receivable Allowance for uncollectible accounts Business Functions Charging off uncollectible accounts receivable Documents and Records Uncollectible account authorization form General journal

Accounts Bad debt expense Allowance for uncollectible accounts Business Functions Providing for bad debts Documents and Records General journal

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

ACC Receivable Sales Cash/bank Allowance for Bad debt Sales return Bad debt expense

Sales Cash sales Sales on account Cash in Bank Cash Discounts Taken Sales Returns and Allowances Bad Debt Expense Accounts Receivable BeginningCash receipts balance Sales returns Sales onand allowances account Charge-off of Endinguncollectible balanceaccounts

Accounts Receivable BeginningCash receipts balance Sales returns Sales onand allowances account Charge-off of Endinguncollectible balanceaccounts Bad Debt Expense Allowance for Uncollectible Accounts Charge-off ofBeginning uncollectiblebalance accounts Estimate of bad debt expense Ending balance

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

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

Understand internal control – sales Audit procedures Sample size Items to select Timing Assess planned control risk – sales Evaluate cost-benefit of testing controls. Design tests of controls and substantive tests of transactions for sales to meet transaction- related audit objectives.

Adequate separation of duties Proper authorization Adequate documents and records Prenumbered documents Monthly statements Internal verification procedures

Evaluate cost-benefit of testing controls. Design tests of controls for sales.

Existence: Recorded sales are for shipments actually made. Accuracy: Recorded sales are for the amount shipped. Completeness: Existing sales transactions are recorded.

Classification: Sales transactions are properly classified. Timing: Sales are recorded on the correct dates. Posting and summarization: Sales transactions are properly included in the accounts receivable master file.

Sales journal General ledger Accounts receivable master file = Customer order Shipping document Duplicate sales invoice Completeness StartExistence Start

Column 1:Transaction-related audit objectives Column 2:Key internal controls Column 3:Test of controls Column 4:Weaknesses Column 5:Substantive tests of transactions

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

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.

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.

Existence of recorded write-offs is the most important transaction-related audit objective. What is a major concern in testing accounts charged off as uncollectible? – covering up a defalcation by charging off accounts receivable that have been collected

Realizable value Rights and obligations Presentation and disclosure

The parts of the audit most affected by the tests for the sales and collection cycle are: Accounts receivable Cash Bad debt expense Allowance for doubtful accounts

Sales transactions Cash receipts transactions Ending balance Ending balance TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS Audited by TOC, STOT, and AP Audited by AP and TDP Audited by TOC, STOT, and AP Sales Accounts Receivable Cash in Bank

Understand how e-commerce activities affect the sales and collection cycle.

The Internet The Internet and other developing technologies allow companies to develop new business models.

Business-to-business (B2B) Business-to-consumer (B2C) Management’s assertions for sales and collection activities remain the same.

Auditors should obtain an understanding of the design and operation of key internal controls over e-commerce revenues. Evidence for e-commerce activities is likely to be in electronic form.