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Audit of the Sales and Collection Cycle
Chapter 13
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Identify the accounts and the classes of transactions in the
Learning Objective 1 Identify the accounts and the classes of transactions in the sales and collection cycle.
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Accounts in the Sales and Collection Cycle
Cash sales Sales on account Cash in Bank Accounts Receivable Beginning Cash receipts balance Sales returns Sales on and allowances account Charge-off of Ending uncollectible balance accounts Cash Discounts Taken Sales Returns and Allowances Bad Debt Expense
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Accounts in the Sales and Collection Cycle
Accounts Receivable Beginning Cash receipts balance Sales returns Sales on and allowances account Charge-off of Ending uncollectible balance accounts Allowance for Uncollectible Accounts Charge-off of Beginning uncollectible balance accounts Estimate of bad debt expense Ending balance Bad Debt Expense
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Describe the business functions and the related documents and
Learning Objective 2 Describe the business functions and the related documents and records in the sales and collection cycle.
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Processing Customer Orders
A request for merchandise by a customer Sales Order: A document describing the goods ordered by a customer
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Granting Credit Before goods are shipped, a properly
authorized person must approve credit to the customer for sales on account.
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Sales Transaction Sales Accounts Accounts receivable
Business Functions Processing customer orders, Granting credit, Shipping goods, Billing customers and recording sales Documents and Records Sales invoice, Sales journal or listing, Sales transaction file, Accounts receivable master file and trial balance, Monthly statements
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Cash Receipts Transaction
Accounts Cash in bank (debits from cash receipts) Accounts receivable Business Functions Processing and recording cash receipts Documents and Records Remittance advise, Prelisting of cash receipts, Cash receipts transaction file, Cash receipts journal or listing
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Sales Returns and Allowances Transaction
Accounts Sales returns and allowances Accounts receivable Business Functions Processing and recording sales returns and allowances Documents and Records Credit memo Sales returns and allowances journal
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Charge-off of Uncollectible Accounts Transaction
Accounts receivable Allowance for uncollectible accounts Business Functions Charging off uncollectible accounts receivable Documents and Records Uncollectible account authorization form General journal
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Bad Debt Expense Transaction
Accounts Bad debt expense Allowance for uncollectible accounts Business Functions Providing for bad debts Documents and Records General journal
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Shipping Goods This is the first point in the cycle
where company assets are given up. Shipping document
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Billing Customers and Recording Sales
Sales invoice Sales transaction file Sales journal or listing Accounts receivable master file Accounts receivable trial balance Monthly statement
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Processing and Recording Cash Receipts
Remittance advise Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing
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Lockbox Systems and Electronic Funds Transfer
Bank Order/Payment Information Information Customer Company
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Processing and Recording Sales Returns and Allowances
Credit memo Sales returns and allowances journal
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Charging Off Uncollectible Accounts Receivable
Authorization Form This is a document used internally to indicate authority to write an account receivable off as uncollectible.
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Providing for Bad Debts
This provision represents a residual, resulting from management’s end-of-period adjustment of the allowance for uncollectible accounts.
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Understand how e-commerce sales and collection cycle.
Learning Objective 3 Understand how e-commerce activities affect the sales and collection cycle.
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Effect of E-Commerce on the Sales and Collection Cycle
The Internet The Internet and other developing technologies allow companies to develop new business models.
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Effect of E-Commerce on the Sales and Collection Cycle
Business-to-business (B2B) Business-to-consumer (B2C) Management’s assertions for sales and collection activities remain the same.
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Effect of E-Commerce on the Sales and Collection Cycle
Auditors should obtain an understanding of the design and operation of key internal controls over e-commerce revenues. Evidence for e-commerce activities is likely to be in electronic form.
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Understand internal control and design and perform tests
Learning Objective 4 Understand internal control and design and perform tests of controls and substantive tests of transactions for sales.
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Methodology for Designing Controls and Substantive Tests: Sales
Design tests of controls and substantive tests of transactions for sales to meet transaction- related audit objectives. Understand internal control – sales Assess planned control risk – sales Audit procedures Sample size Evaluate cost-benefit of testing controls. Items to select Timing
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Understanding Internal Control – Sales
Study the client’s flowcharts, prepare an internal control questionnaire, and perform walk-through tests of sales.
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Assess Planned Control Risk – Sales
Adequate separation of duties Proper authorization Adequate documents and records Prenumbered documents Monthly statements Internal verification procedures
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Internal Verification Procedures
Evaluate cost-benefit of testing controls. Design tests of controls for sales.
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Transaction-Related Audit Objectives for Sales
Existence: Recorded sales are for shipments actually made. Completeness: Existing sales transactions are recorded. Accuracy: Recorded sales are for the amount shipped.
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Design Substantive Tests of Transactions for Sales
Classification: Sales transactions are properly classified. Timing: Sales are recorded on the correct dates. Posting and summarization: Sales transactions are properly included in the accounts receivable master file.
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Direction of Tests for Sales
Customer order Shipping document Duplicate sales invoice Completeness Start Sales journal General ledger Accounts receivable master file = Existence Start
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Summary of Methodology for Sales
Column 1: Transaction-related audit objectives Column 2: Key internal controls Column 3: Test of controls Column 4: Weaknesses Column 5: Substantive tests of transactions
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Apply the methodology for controls over sales transactions
Learning Objective 5 Apply the methodology for controls over sales transactions to controls over sales returns and allowances.
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Sales Returns and Allowances
The transaction-related audit objectives and client’s methods of controlling misstatements are essentially the same for processing credit memos as those described for sales.
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Sales Returns and Allowances
There are, however, two important differences. Materiality Emphasis on objectives
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Understand internal control and design and perform tests of
Learning Objective 6 Understand internal control and design and perform tests of controls and substantive tests of transactions for cash receipts.
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Tests of Controls and Substantive Tests of Transactions for Cash Receipts
Determine whether cash received was recorded Prepare proof of cash receipts Test to discover lapping of accounts receivable
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Apply the methodology for controls over the sales and collection cycle
Learning Objective 7 Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable.
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Audit Tests for Uncollectible Accounts
Existence of recorded write-offs is the most important transaction-related audit objective. What is a major concern in testing accounts charged off as uncollectible? – covering up a defalcation by charging off accounts receivable that have been collected
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Additional Internal Controls Over Account Balances
Realizable value Rights and obligations Presentation and disclosure
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Effect of Results of Controls and Substantive Tests of Transactions
The parts of the audit most affected by the tests for the sales and collection cycle are: Accounts receivable Bad debt expense Cash Allowance for doubtful accounts
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Role of all Audit Tests in the Sales and Collection Cycle
Accounts Receivable Cash in Bank Sales transactions Cash receipts transactions Audited by TOC, STOT, and AP Audited by TOC, STOT, and AP Ending balance Ending balance Audited by AP and TDP TOC + STOT + AP + TDP = Sufficient competent evidence per GAAS
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End of Chapter 13
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