Auditing the Sales and Collections Cycle Chapter 14

Accounts in the Cycle Sales Cash receipts Sales returns and allowances Estimate of bad debts Write-offs of uncollectibles

Business Functions in Sales Processing customer orders Generating sales orders Granting / checking credit Shipping goods Billing customers and recording sales

Documents in Sales Customer purchase orders Sales orders Credit applications Picking sheets Shipping documents / bills of lading Invoices & remittance advices Monthly statements

Records in Sales Sales journal Accounts receivable subsidiary ledger

Cash Receipts Generally treated as a separate journal rather than commingled with disbursements Good controls require separation of cash handling from accounting Typical is to have one person open the mail and list receipts, then separate

Documents in Cash Receipts Remittance advice Prelisting of receipts Deposit tickets

Sales R & A Process: item is returned, credit memo is issued to A/R Documents: credit memos and sales r&a journal Important to track returns rather than just reduce sales

Bad Debt Expense Estimate is made by management Must have reasonable basis

Write-Offs Treated separately from credit memos Must have proper authorization on a write-off form No special journal though

Credit Card Sales Not treated the same way as A/R Creditor is the bank, not the cardholder Payment is electronic and quick Payment is reduced by bank fee, so expense is recorded as well

Methodology for Testing Should sound familiar! 1. Understand controls 2. Test controls 3. Perform substantive tests 4. Suggest adjustments if necessary

Audit Objectives for Controls Most controls relate to transactions, not balances PERCV is recast (see chapter 6) P & R not pertinent E & C the same Valuation has four components Accuracy Classification Timing Posting and summarization

Tests of Controls Existence: examine sales invoices for supporting bill of lading Completeness: account for numerical sequence of shipping documents Accuracy: compare sales orders to approved price list Classification: examine whether expense account numbers are verified Timing: see completeness Posting: examine reconciliations of deposits to check listings

Substantive Tests of Existence: Sales Vouch sales entries to shipping documents: finds non-existent sales Extract data about possible duplicate sales Shipments to non-existent customers harder to determine

Completeness of Sales Less of a concern in substantive testing Can be tested by tracing pre-numbered shipping documents to journal Remember direction of testing

Accuracy of Sales Select a sample of sales invoices Compare to price list Recompute extensions and footings Trace to journal entries to sales and A/R Can be greatly reduced if controls are effective

Timing of Sales Trace shipping documents to sales journal for timing Test sample of sales transactions on year-end date ± two weeks for timing

Controls for Cash Receipts Prelisting of checks Reconciliation of deposits to batches Checks restrictively endorsed Statements sent each month Returned statements and customer correspondence retained

Tests of Balances Confirmations Tracing just as for sales Aging analysis Review sample to 100% of written-off debts Proof of Cash Lapping Cut-off