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

2. Johanna
what are the primary transactions in the sales and collection cycle ?

3. Sales (cash sales and credit sales)
Cash receipts
Sales returns and allowances
Write-off of uncollectible accounts
Estimate bad debt expense
Page 243

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

5. auditing transaction cycles

6. auditing account balances

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

8. Mandeep
the SEC requires four criteria be satisfied in order to recognize revenue
what are those four criteria ?

9. 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

10. 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

11. 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 Remittance advice p Prelisting of cash receipts p. 246
Cash receipts journal p. 247

12. Rachel
what is the objective of AU-C section 315?

13. 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.

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

15. 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.

16. 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

18. Page 59

19. Clint
What is the objective of AU-C section 500?

20. 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.

21. 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

22. 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

23. 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

24. 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

25. 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

26. VOUCH
p. 252
see p. 176
Control Risk Matrix

27. 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

28. vouch

29. Denise
Describe Vouching
Describe Tracing

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

31. 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

32. Page 261
see
CR Matrix
p. 260

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

35. bank reconciliation
page 322

36. page proof of cash

37. page proof of cash

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

39. Iris
How do we reduce detection risk ?

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

41. Sumner
what is the audit risk model ?

42. Audit Risk Model

43. Page 59

45. cut-off as of 12/31/2014

46. 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

48. Laura
will you
Vouch or Trace ?

49. 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?

50. 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?

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

53. shipping documents
goods shipped in
2014
2015

55. 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

56. Stephanie
will you
Vouch or Trace ?

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

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

59. shipping documents
goods shipped in
2014
2015

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

63. 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

64. 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

65. Emmanuel
what does it imply about the effectiveness of their internal controls
while performing substantive tests you find material misstatements in the financial statements

66. Cash cut off

67. 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

68. Jake
cash receipts - will you
Vouch or Trace ?

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

71. 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

72. 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

73. 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

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

76. 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

77. 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

79. abc
what are two forms of
receivables confirmations ?

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

83. controlling the confirmation process

84. 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

85. aged trial balance
page 285

87. ???
with which financial statement assertion might the aged trial balance be helpful ?
page 288