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

Johanna 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 Estimate bad debt expense Page 243

Sales & Collection Transaction cycle “credit sales” accounts receivable x.xx sales x.xx “cash receipts” cash x.xx accounts rec x.xx

auditing transaction cycles

auditing account balances

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

Mandeep 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 EARNED REALIZABLE

COSO components of internal control Control environment Risk assessment Control activities adequate separation of duties proper authorization of transactions & activities p. 166 adequate documents & records page 243-7 physical control over assets & records independent checks on performance Information and communication Monitoring

Documents & Records Customer order p. 244 Sales order p. 244 Shipping document p. 244 Sales invoice p. 245 Sales journal p. 245 Accounts receivable trial balance p. 246 Remittance advice p. 246 Prelisting of cash receipts p. 246 Cash receipts journal p. 247

Rachel 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.

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

The classes of transactions that are significant page 160/169 The classes of transactions that are significant Procedures by which those transactions are: Initiated & authorized, Documented & recorded what accounting records exist, Processed through the accounting system into the GL, and reported in the financial statements. How the info system captures other events that are significant to the financial statements Reporting process used to prepare the financial statements, including significant estimates and disclosures.

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

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Clint 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 pages 176 & 260 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. 176 Control activity Test of Control Proc Results Of ToC Occurrence med Completeness Low Accuracy Low Classification Low Cutoff med

whenever we assess Control Risk less than Max Cash Receipts Transactions p. 260 Control activity Test of Control Proc Results Of ToC Occurrence Low Completeness med Accuracy Low Classification Low Cutoff Low

Test of Controls Cyle. sales & collection Class of transactions Test of Controls Cyle sales & collection Class of transactions credit sales Table 2 on page 252

VOUCH p. 252 see p. 176 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 252

vouch

Denise Describe Vouching Describe Tracing

Test of Controls Cycle sales & collection Class of transactions cash receipts Table 3 on page 261

whenever we assess Control Risk less than Max Cash Receipts Transactions p. 260 Control activity Test of Control Proc Results Of ToC Occurrence Low Completeness med Accuracy Low Classification Low Cutoff Low

Page 261 see CR Matrix p. 260

Substantive Tests of Transactions Cycle Substantive Tests of Transactions Cycle sales & collection Class of transactions cash receipts Table 3 on page 261

bank reconciliation page 322

page 329 proof of cash

page 329 proof of cash

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

Iris How do we reduce detection risk ?

Lauren What is the achieved detection risk (not planned detection risk) at the start of every audit ?

Sumner what is the audit risk model ?

Audit Risk Model

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cut-off as of 12/31/2014

David credit sales In the Sales Journal ---- Are you going to audit the last 25 entries prior to 12/31/14 or the first 25 entries after 1/1/15

Laura will you Vouch or Trace ?

Makinzie what does the evidence indicate if you Vouch the last 25 entries in the Sales Journal, prior to 12/31/14 to Shipping Documents dated on or prior to 12/31/14?

Mitch what does the evidence indicate if you Vouch the last 25 entries in the Sales Journal, prior to 12/31/14, to Shipping Documents which are dated on or after 1/1/15?

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

shipping documents goods shipped in 2014 2015

Saul do you want to audit the last 25 orders that were actually shipped prior to 12/31/14 or the first 25 orders that were shipped in January of 2015

Stephanie will you Vouch or Trace ?

Abhinav what would the evidence indicate if you trace the last 25 shipments on Dec. 31, 2014 into the 2014 Sales Journal?

Adrian what would the evidence indicate if you traced the first 25 shipments on Jan. 1, 2015 into the 2015 Sales Jnl ?

shipping documents goods shipped in 2014 2015

Albert what would the evidence indicate if you traced the first 25 shipments on Jan. 1, 2015 into the 2014 Sales Journal?

the client refuses to adjust their Alyxandria 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

Emily 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

Emmanuel 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 12-31-14

Erin Cash Receipts Journal Are you going to audit the last 25 entries in CR Jnl the prior to 12/31/14 or the first 25 entries in the CR Jnl after 1/1/15

Jake cash receipts - will you Vouch or Trace ?

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

Joyce cash receipts you are Vouching the last 25 entries in the cash receipts journal prior to 12/31/14? describe an example of evidence that supports the recorded balance

Kyle cash receipts you are Vouching the last 25 entries in the cash receipts journal prior to 12/31/14 ? describe an example of evidence that indicates Cash Receipts are overstated

Maria 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 2015

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

Phil You are auditing the first 25 entries in the CD Jnl dated 1/1/2015 ? describe an example of evidence that would indicate cash disbursements are correct

Ariana You are auditing the first 25 entries in the CD Jnl dated 1/1/2015 ? describe an example of evidence that would indicate cash disbursements are understated

abc what are two forms of receivables confirmations ?

forms of receivables confirmations ? positive (also blank form) p 291 negative p 291

controlling the confirmation process

alternative procedures --- p. 294 subsequent cash receipts Or Vouch from Acc Rec subsidiary ledger To Invoice Invoice To Bill of Lading Shipping Doc To Purchase Order Sales Order

aged trial balance page 285

??? with which financial statement assertion might the aged trial balance be helpful ? page 288