1. Audit of the Sales and Collection Cycle

2. Identify the accounts and the classes of transactions in the sales and collection cycle. Describe the business functions and the related documents and records in the sales and collection cycle. Understand internal control and design and perform tests of controls for sales. Understand internal control and design and perform tests of controls for cash receipts.

3. Learning Objective 1 Identify the accounts and the classes of transactions in the sales and collection cycle.

4. Accounts in the Sales and Collection Cycle Sales Cash sales Sales on account Accounts Receivable Cash receipts Sales returns and allowances Charge-off of uncollectible accounts Beginning balance Sales on account Ending balance Cash in Bank Cash Discounts Taken Bad Debt Expense Sales Returns and Allowances

5. Accounts in the Sales and Collection Cycle Accounts Receivable Cash receipts Sales returns and allowances Charge-off of uncollectible accounts Beginning balance Sales on account Ending balance Allowance for Uncollectible Accounts Charge-off of uncollectible accountsBeginningbalance Estimate of bad debt expense Endingbalance Bad Debt Expense

6. Learning Objective 2 Describe the business functions and the related documents and records in the sales and collection cycle.

7. Classes of Transactions AccountsBusiness FunctionsDocuments and Records Sales Accounts receivable Processing customer orders Customer order Sales order Granting credit Customer order or sales order Shipping goodsShipping document Billing customers and recording sales Sales invoice Sales journal Summary sales report Accounts receivable master file Accounts receivable trial balance Monthly statements

8. Classes of Transactions Accounts Business Functions Documents and Records Cash receipts Cash in bank (debits from cash receipts) Accounts receivable Processing and recording cash receipts Remittance advice Prelisting of cash receipts Cash receipts journal Sales returns and allowances Accounts receivable Processing and recording sales returns and allowances Credit memo Sales returns and allowances journal Charge-off of uncollectible accounts Accounts receivable Allowance for uncollectible accounts Charging off uncollectible accounts receivable Uncollectible account authorization form General journal Bad debt expense Allowance for uncollectible accounts Providing for bad debts General journal

9. customer order a request for merchandise by a customer sales order a document used to indicate credit approval to prevent excessive bad debts proposed sales order total plus existing customer balance is less than credit limit in the AR master file copies to credit approval, sales, accounting, warehouse and customer

10. shipping document a document used to authorize shipment of the goods, indicating the description of the goods, the quantity shipped, and other relevant data Warehouse personnel agrees to transfer goods to shipping dept only when he confirms the authorised sales order exists. Then he prepares multiple copies of shipping documents copies to customer, accounting, shipping dept, warehouse –to generate sales invoice and entry in the sales journal –update perpetual inventory records in the inventory master file when the inventory is removed from the warehouse and bar codes are scanned –a copy retained in warehouse should be signed by shipping dept –a copy retained in shipping dept should be signed by customer

11. sales invoice a document used to indicate the description and quantity of goods sold, the price, freight charges, insurance, credit terms copies to customer and accounting dept sales journal a journal used to record sales transactions on credit summary sales report a computer-generated document that summarizes sales for a period and includes information analyzed by key components such as sales-person, product, and territory

12. Accounts receivable master file (subsidiary ledger / subledger) A file used to record individual sales, cash receipts, and sales returns and allowances for each customer and to maintain customer account balances The total of the individual account balances in the master file equals the total balance of AR in the general ledger (control account) AR trial balance a list of the amount owed by each customer at a point by time AR aged trial balance (aged receivables’ listing / aged schedule of AR / reconciliation of AR by age) AR trial balance, showing how old the AR components of each customers balance are as of the report date

13. monthly statement a document sent to each customer to indicate the beginning balance of AR, the amount and date of each sale, cash payments received, credit memos issued, and the ending balance due remittance advice (EFT and Lockbox) a document that accompanies the sales invoice mailed to the customer and expected to be returned to the seller with the cash payment to indicate the customer name, the sales invoice number, the amount of the invoice and the account number or the lockbox address.

14. Prelisting of cash receipts a list prepared when cash is received by sb who has no responsibility for recording sales, AR, or cash, and who has no access to accounting records to verify cash received was recorded and deposited at the correct amounts and or a timely basis cash receipts journal a journal used to record cash receipts collection, cash sales, and all other cash receipts supported by remittance advices and prelistings

15. Lockbox banking is a service offered to organizations by commercial banks that simplifies collection and processing of account receivables by having those organizations' customers' payments mailed directly to a location accessible by the bank. In general, a lockbox is a Post Office box (PO box) that is accessible by a bank. A company may set up a lockbox service with their bank for receiving customers' payments. The company's customers send their payments to the PO box. Then the bank collects and processes these payments directly and deposits them to the company's account. Typical costs are several cents per transaction to as high as one dollar or more.

16. credit memo/note a document indicating a reduction in the amount due from a customer because of returned goods or an allowance granted sales returns and allowances journal a journal used to record sales returns and allowances many companies record sales returns and allowances transactions in the sales journal rather than in a separate journal uncollectible account authorization form a document used internally to indicate authorization to write an AR off as uncollectible

17. Learning Objective 3 Understand internal control and design and perform tests of controls for sales.

18. Control objective Key internal controlCommon Test of Control Recorded sales are for shipments actually made to existing and correct customers. (occurrence) Recording of sales is supported by sales invoice, shipping documents and sales order. Examine copies of sales invoices for supporting shipping documents and sales order. Credit is authorized before shipment takes place. Examine customer order/sales order for credit approval. Sales invoices are prenumbered and properly accounted for. Account for integrity of numerical sequence of sales invoices. Shipping documents are prenumbered and accounted for. Account for integrity of numerical sequence of shipping documents. Shipping documents are matched with related sales invoices and sales order. Examine copies of shipping documents to determine that each has a related sales invoice and sales order. Relate to completeness as well

19. Control objective Key internal controlCommon Test of Control Recorded sales are for shipments actually made to existing and correct customers. (occurrence) Monthly statements are sent to customers; complaints receive independent follow- up. Observe whether statements are mailed and examine customer correspondence files. Only customer numbers existing in the computer data files are accepted when they are entered. Examine printouts of tractions rejected by the computer as having nonexistent customer numbers. Trace sales journal entries to copies of sales invoices, shipping documents and sales orders. (vouching) Trace entries of shipments in perpetual inventory records to shipping documents. Trace debit entries in AR master file to existing source Not relate to completeness

20. Control objective Key internal controlCommon Test of Control sales transactio ns that occurred are recorded (complete ness) Sales invoices are prenumbered and properly accounted for. Account for integrity of numerical sequence of sales invoices. Shipping documents are prenumbered and accounted for. Account for integrity of numerical sequence of shipping documents. Shipping documents are matched with related sales invoices and sales order. Examine copies of shipping documents to determine that each has a related sales invoice and sales order. Trace shipping documents to resultant sales invoices and entry into sales journal and accounts receivable master file. Trace shipping documents to entries of shipments in perpetual inventory records. Relate to occurrence as well

21. Control objective Key internal controlCommon Test of Control Recorded sales are for the amount of goods shipped and are correctly billed and recorded. (accuracy) Approved unit selling prices are entered into the computer and used for all sales. Examine approved computer printout of unit selling prices and compare it with copies of sales invoices. Determination of prices, terms, freight, and discounts is properly authorized. Examine copies of sales invoices for proper authorization. Invoice preparation is internally verified. Examine indication of internal verification on sales invoices. Batch totals are compared with computer summary reports. Examine file of batch totals for initials of data control clerk; compare totals with summary. Journaling is internal verified. Examine indication on sales journal indicating comparison with supporting documents. Posting is internal verified. Examine indication on general ledger account indicating comparison with sales journal. Examine indication on sales ledger indicating comparison with sales journal. AR master file or trial balance totals are compared with general ledger balance. Examine AR trail balance prepared by the client. Prepare AR trail balance independently by the auditor. Recompute information on sales invoices Foot the sales journal for a 1-month period and compare all totals with the general ledgers. –Substantive test

22. Control objective Key internal controlCommon Test of Control Sales transactions are properly classified. (classification) An adequate chart of accounts is used. Review chart of accounts for adequacy. Monthly statements are sent to customers; complaints receive independent follow-up. Observe whether statements are mailed and examine customer correspondence files. Sales transactions are internally reviewed and verified. Examine indication of internal verification on affected documents. Examine documents supporting sales transactions for proper classification. Relate to occurrence, completeness, accuracy and cut-off

23. Control objective Key internal controlCommon Test of Control Sales are recorded in the correct period. (cut-off) Shipping documents are forwarded to the invoicing section on a daily basis. Compare dates of recorded transactions with dates on corresponding sales invoices and shipping documents. Daily invoicing of goods shipped. Daily recording of goods shipped and invoiced.

24. Learning Objective 4 Understand internal control and design and perform tests of controls for cash receipts.

25. Control objective Key internal controlCommon Test of Control Cash received is recorded in the cash receipts journal. (complete ness) Remittance advices or prelistings of cash receipts are used. Account for numerical sequence of remittance advice or prelistings. Incoming checks are immediately endorsed. Observe immediate endorsement of incoming checks. Cash receipts journal are daily reconciled with posting to AR ledger. Examine indication of internal verification. Monthly statements are sent to customers; complaints receive independent follow-up. Observe whether statements are mailed and examine customer correspondence files. Trace from remittances or prelisting to cash receipts journal. Trace from credit entries in bank statements to cash receipts journal. Not relate to occurrence relate to classification as well

26. Control objective Key internal controlCommon Test of Control Recorded cash receipts are for funds actually received by the company. (occurrence) There is adequate separation of duties between handling cash and record keeping. Inquire from personnel of separation of duties and observe. Bank accounts are independently reconciled. Observe independent reconciliation of bank accounts and examine initials of internal verification on bank reconciliation. Prepare bank reconciliation independently and compare it with that prepared by the client. Trace from cash receipts journal to remittances or prelisting. Trace from cash receipts journal to credit entries in bank statements. Relate to completeness as well

27. Control objective Key internal controlCommon Test of Control Cash receipts are deposited and recorded at the amounts received. (accuracy) Cash discounts are approved. Examine remittance advices for proper approval. Batch totals are compared with computer summary reports. Examine file of batch totals for initials of data control clerk; compare totals with reports. Cash receipts transactions are properly classified. (classification) An adequate chart of accounts is used. Review chart of accounts for adequacy. Internal verification of journalizing and posting. Examine the indications of internal verification on the affected records. Monthly statements are sent to customers; complaints receive independent follow-up. Observe whether statements are mailed and examine customer correspondence files. relate to completeness as well

28. Control objective Key internal controlCommon Test of Control Cash receipts are recorded in the correct period. (cut-off) Bank reconciliation is prepared at period-end as internal verification. Examine the initials on bank reconciliation for internal verification. Procedures require recording of cash receipts on a daily basis. Observe unrecorded cash at any point of time. Compare the dates of cash receipts on cash receipts journal and prelistings of cash receipts.

29. June 2006 Q1b June 2007 Q3a June 2008 Q1b June 2009 Q1b June 2011 Q1a