CHAPTER 11 SALES AND COLLECTION CYCLE: TESTS OF CONTROL AND SUBSTANTIVE TESTS OF TRANSACTIONS

NATURE OF CYCLE ACCOUNTS AFFECTED BY CYCLE –SALES –TRADE RECEIVABLES –CASH BUSINESS FUNCTIONS IN CYCLE –PROCESSING CUSTOMER ORDERS –GRANTING CREDIT –SHIPPING GOODS –BILLING CUSTOMERS AND RECORDING –CASH RECEIPTS

DESIGNING TESTS OF CONTROL AND TRANSACTIONS - SALES UNDERSTAND INTERNAL CONTROLS –TRANSACTION-RELATED OBJECTIVES –IDENTIFY KEY INTERNAL CONTROLS –IDENTIFY POTENTIAL MISSTATEMENTS ASSESS PLANNED CONTROL RISK –KEY CONTROL ACTIVITIES ADEQUATE SEPARATION OF DUTIES PROPER AUTHORIZATION ADEQUATE DOCUMENTS AND RECORDS PRENUMBERED DOCUMENTS MAILING MONTHLY STATEMENTS INTERNAL VERIFICATIONS

EVALUATE COST-BENEFIT OF TESTING CONTROLS –WILL SAVINGS REDUCTIONS IN SUBSTANTIVE TESTS OF BALANCES BE GREATER THAN COSTS OF TESTS OF CONTROL DESIGN TESTS OF CONTROL –MUST DESIGN ONE OR MORE TESTS OF THE EFFECTIVENESS OF EACH KEY CONTROL AUDITOR PLANS TO RELY ON DESIGN TESTS OF TRANSACTIONS –RECORDED SALES EXIST RECORDED TRANSACTION DID NOT OCCUR RECORDED TRANSACTION MORE THAN ONCE SHIPMENT MADE TO NONEXISTENT CUSTOMERS

–EXISTING TRANSACTIONS ARE RECORDED TRACE FROM BEGINNING DOCUMENT TO JOURNALS –TRANSACTIONS ARE ACCURATELY RECORDED TEST PRICING OF TRANSACTION TEST QUANTITIES FROM OTHER DOCUMENTS RECOMPUTE AMOUNTS –TRANSACTIONS ARE PROPERLY CLASSIFIED CHART OF ACCOUNTS –TIMING OF RECORDING –TRANSACTIONS ARE CORRECTLY SUMMARIZED AND RECORDED IN MASTER FILES TRACE TO JOURNALS TRACE TO GENERAL LEDGER

TESTS OF CONTROL AND TRANSACTIONS - CASH COLLECTIONS UNDERSTAND INTERNAL CONTROLS –RECEIPTS OF CASH LOCK-BOX SEPARATION OF DUTIES IN MAIL ROOM PRELISTING OF RECEIPTS DEPOSIT DAILY ASSESS CONTROL RISK –POTENTIAL MISSTATEMENTS CASH RECEIVED WAS ACTUALLY RECORDED –PRELISTING TO DEPOSIT SLIP –PROOF OF RECEIPTS –LAPPING

EFFECT OF RESULTS ON DETAIL TESTS OF BALANCES ANALYZE EACH EXCEPTION TO CONTROL –CAUSE –EFFECT ON CONTROL RISK ASSESSMENT EFFECT ON CONFIRMATION OF A/R