Audit of the Sales and Collection Cycle Chapter 14 Audit of the Sales and Collection Cycle

Last 4 chapters 14- Audit of Sales and Collection Cycle: Tests of Controls and Tests of Transactions 16 - Completing the Tests in the Sales and Collections Cycle: Accounts Receivable 23- Audit of Cash and Financial Instruments 24- Completing the Audit

Felix what are the primary transactions in the sales and collection cycle ?

Sales (cash sales and credit sales) Cash receipts Sales returns and allowances Write-off of uncollectible accounts Bad debt expense Page 448 (382)

Sales & Collection Transaction cycle credit sales accounts receivable x.xx sales x.xx cash receipts cash x.xx accounts rec x.xx sales returns sales returns x.xx accounts rec x.xx write-off accounts allow for DA x.xx accounts rec x.xx estimate bad debt exp bad debt expense x.xx allow for DA x.xx

auditing transaction cycles chapter 14 Credit sales --- transactions Cash receipts --transactions

auditing account balances CH 14 - Sales CH 23 - Cash CH 16 - Accounts Receivable

Cash Receipts = beginning Accounts Receivable + Sales - ending Accounts Receivable Sales = end Acc Rec + Cash Receipt – begin Acc Rec

Joe the SEC requires four criteria be satisfied in order to recognize revenue what are those four criteria ?

Revenue Recognition “SEC” Persuasive evidence of an arrangement exists Delivery has occurred or services have been provided Seller’s price is fixed Collectability is reasonably assured identify the contract Performance Obligation Satisfied Determine the Transaction Price REALIZABLE

COSO components of internal control Control environment Risk assessment Control activities adequate separation of duties proper authorization of transactions & activities adequate documents & records p. 345 (275) physical control over assets & records independent checks on performance Information and communication Monitoring p. 340 270

Documents & Records Customer order p. 449 (383) Sales order p. 449 Shipping document (BoL) p. 449 Sales invoice p. 450 Sales journal p. 450 Remittance advice p. 451 Prelisting of cash receipts p.451 Accounts receivable trial balance p. 451 Cash receipts journal p. 452

Jane what is the objective of AU-C section 315?

AU-C 315 Assessing RoMM & Understanding the Entity & Its Internal Control .03 The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.

Michelle What steps must we document to demonstrate a minimal understanding of the accounting system ?

AU 315.A84 the accounting system Procedures and records designed to Initiate, authorize, record, process, and report entity transactions Maintain accountability for the assets, liabilities & equity Transfer information to the general ledger Capture information other than transactions that is relevant to the financial statements. e.g. depreciation and amortization of assets, changes in the recoverability of receivables. Ensure information that is required to be disclosed is accumulated, recorded, processed, summarized, and appropriately reported in the financial statements. transactions adjusting journal entries disclosures

Page 338 (268) (Design of Internal Control) Risks related to all relevant assertions Evaluating Significant classes of transactions Identify how each significant class of transactions Initiated Authorized Recorded Processed through the accounting system Reported in the financial statements and disclosures In order to identify points in the transactions where material misstatements could occur

Assessing Control Risk significant classes of Transactions For each Significant Class of Transaction we must document our understanding of the Accounting Process from Initiation ---- into Financial Statements (probably with a flowchart) and assess Control Risk for each of the 5 management assertions

page 388

Table 6-3 Page 159 (167)

Kirissa What is the objective of AU-C section 500?

AU-C 500 Audit Evidence .04 The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

Assessing Control Risk significant classes of Transactions For each Significant Class of Transaction for mgmt assertions that we assess CR < MAX we must identify specific Control Procedures

preliminary Control Risk assessment significant classes of Transactions preliminary Control Risk assessment p. 373 (305) & 466 (400) occur complete accurate class cutoff Credit sales med Low Med Cash receipts Payroll Max Cash Disburse Purchasing

whenever we assess Control Risk less than Max Credit Sales Transactions p. 373 (305) Control activity Test of Control Proc Results Of ToC Occurrence med Completeness Low Accuracy Low Classification Low Cutoff med

Test of Controls Cyle. sales & collection Class of transactions Test of Controls Cyle sales & collection Class of transactions credit sales Table 2 on page 457 (391)

VOUCH p. 457 391 see p. 373 305 Control Risk Matrix

Cycle sales & collection Class of transactions credit sales Substantive Tests of Transactions Cycle sales & collection Class of transactions credit sales Table 2 on page 457 (391)

vouch

Cole Describe Vouching Describe Tracing p. 393 Direction of Tests

Test of Controls Cycle sales & collection Class of transactions cash receipts Figure 5 on page 466 (400)

preliminary Control Risk assessment significant classes of Transactions preliminary Control Risk assessment p. 373 (305) & 466 (400) occur complete accurate class cutoff Credit sales med Low Med Cash receipts Payroll Max Cash Disburse Purchasing

whenever we assess Control Risk less than Max Cash Receipts Transactions p. 466 (400) Control activity Test of Control Proc Results Of ToC Occurrence Low Completeness med Accuracy Low Classification Low Cutoff Low

Page 465 (399) see CR Matrix p. 466 (400)

Substantive Tests of Transactions Cycle Substantive Tests of Transactions Cycle sales & collection Class of transactions cash receipts Table 3 on page 465 (399)

bank reconciliation p. 743 (467)

page 750 (474) proof of cash

page 750 (474) proof of cash

Cash Receipts = beginning Accounts Receivable + Sales - ending Accounts Receivable Sales = end Acc Rec + Cash Receipt – begin Acc Rec

John How do we reduce detection risk ?

Dorian what is the audit risk model ?

Audit Risk Model

Danny What is the level of detection risk have we achieved (not planned detection risk) at the start of every audit ?

Table 6-3 Page 159 (167)

cut-off as of 12/31/2017

Haley credit sales In the Sales Journal ---- Are you going to audit the last 25 entries prior to 12/31/17 or the first 25 entries after 1/1/18

Hailee will you Vouch or Trace ?

Max what does the evidence indicate if you Vouch the last 25 entries in the Sales Journal, prior to 12/31/17 to Shipping Documents dated on or prior to 12/31/17?

Genna what does the evidence indicate if you Vouch the last 25 entries in the Sales Journal, prior to 12/31/17, to Shipping Documents which are dated on or after 1/1/18?

shipping documents sales (and receivables) cut-off at the loading dock

shipping documents goods shipped in 2017 2018

Navid do you want to audit the last 25 orders that were actually shipped prior to 12/31/17 or the first 25 orders that were shipped in January of 2018

Stephanie will you Vouch or Trace ?

Mikey what would the evidence indicate if you trace the last 25 shipments on Dec. 31, 2017 into the 2017 Sales Journal?

Julia L what would the evidence indicate if you traced the first 25 shipments on Jan. 1, 2018 into the 2018 Sales Jnl ?

shipping documents goods shipped in 2017 2018

Jenna what would the evidence indicate if you traced the first 25 shipments on Jan. 1, 2018 into the 2017 Sales Journal?

the client refuses to adjust their Sammie what opinion do we issue while performing substantive tests you find material misstatements in the financial statements the client refuses to adjust their financial statements

Sofia what opinion do we issue while performing substantive tests we find material misstatements in the financial statements the client agrees to make the necessary adjustments prior to issuing the financial statements

Malcolm what does it imply about the effectiveness of their internal controls while performing substantive tests you find material misstatements in the financial statements

Cash cut off 12-31-17

Mitchell Cash Receipts Journal Are you going to audit the last 25 entries in CR Jnl the prior to 12/31/17 or the first 25 entries in the CR Jnl after 1/1/18

Kyle cash receipts - will you Vouch or Trace ?

Nik cash receipts with which financial statement assertion are you most concerned if we are auditing cash receipts?

Mark cash receipts you are Vouching the last 25 entries in the cash receipts journal prior to 12/31/17? describe an example of evidence or a situation that supports the recorded balance

Austin cash receipts you are Vouching the last 25 entries in the cash receipts journal prior to 12/31/17 ? describe an example of evidence or situation that indicates Cash Receipts are overstated

Laura Cash Disbursements Journal will you audit the last 25 entries in the CD Jnl prior to Dec. 31st or the first 25 entries in the CD Jnl after Jan 1st 2018

Hannah cash disbursements with which financial statement assertion are you most concerned if you are auditing cash disbursements ?

Courtney You are auditing the first 25 entries in the CD Jnl dated 1/1/2018 ? describe an example of evidence or situation that would indicate cash disbursements are correct

Julia B You are auditing the first 25 entries in the CD Jnl dated 1/1/2018 ? describe an example of evidence that would indicate cash disbursements are understated

jj what are two forms of receivables confirmations ?

forms of receivables confirmations ? positive (also blank form) p 539 432 negative p 540 433