1. Auditing the Sales and Collections Cycle Chapter 14

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

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

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

5. Records in Sales Sales journal Accounts receivable subsidiary ledger

6. 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

7. Documents in Cash Receipts Remittance advice Prelisting of receipts Deposit tickets

8. 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

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

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

11. 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

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

13. 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

14. 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

15. 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

16. 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

17. 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

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

19. 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

20. 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