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Chapter 14
Audit of the Sales and Collection Cycle: Tests of Control and Substantive Tests of Transactions Copyright © 2014 Pearson Education
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 and substantive tests of transactions for sales. 14-2
Copyright © 2014 Pearson Education
Apply the methodology for controls over sales transactions to controls over sales returns and allowances. Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts. Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable. 14-3
Copyright © 2014 Pearson Education
1 Identify the accounts and the classes of transactions in the sales and collection cycle.
14-4
Copyright © 2014 Pearson Education
14-5
Copyright © 2014 Pearson Education
2 Describe the business functions and the related documents and records in the sales and collection cycle.
14-6
Copyright © 2014 Pearson Education
Accounts
Sales Accounts receivable
14-7
Business Functions Documents and Records
Processing customer orders Granting credit Shipping goods Billing customers and recording sales
Customer order Sales order Customer order or sales order Shipping document Sales invoice Sales transaction file Sales journal or listing Accounts receivable master file Accounts receivable trial balance Monthly statements Copyright © 2014 Pearson Education
Accounts
Cash in bank (debits from cash receipts) Accounts receivable
14-8
Business Functions Documents and Records
Processing and recording cash receipts
Remittance advice Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing
Copyright © 2014 Pearson Education
Accounts
Sales returns and allowances Accounts receivable
14-9
Business Functions Documents and Records
Processing and recording sales returns and allowances
Credit memo Sales and returns and allowances journal
Copyright © 2014 Pearson Education
Accounts
Accounts receivable Allowance for uncollectible accounts
14-10
Business Functions Documents and Records
Writing off uncollectible accounts receivable
Uncollectible account authorization form General journal
Copyright © 2014 Pearson Education
Accounts
Bad debt expense Allowance for uncollectible accounts
Business Functions Documents and Records
Providing for bad debts
General journal
14-11 Copyright © 2014 Pearson Education
Customer Order: A request for merchandise by a customer Sales Order: A document describing the goods ordered by a customer
14-12
Copyright © 2014 Pearson Education
Before goods are shipped, a properly authorized person must approve credit to the customer for sales on account
14-13
Copyright © 2014 Pearson Education
This is the first point in the cycle at which the company gives up assets. One type of shipping document is a bill of lading.
Bills of lading are often transmitted once goods have been shipped
14-14
Copyright © 2014 Pearson Education
Sales transaction file
Accounts receivable file 14-15
Sales journal
Accounts receivable trial balance Copyright © 2014 Pearson Education
Prelisting of Cash receipts
Cash receipts transaction file 14-16
Copyright © 2014 Pearson Education
Credit memo Sales returns and allowances journal
14-17
Copyright © 2014 Pearson Education
Uncollectible account authorization form
This is a document used internally to indicate authority to write an account receivable off as uncollectible
14-18
Copyright © 2014 Pearson Education
This provision represents a residual, resulting from management’s end-of-period adjustment of the allowance for uncollectible accounts
14-19
Copyright © 2014 Pearson Education
3 Understand internal control, and design and perform tests of controls and substantive tests of transactions for sales.
14-20
Copyright © 2014 Pearson Education
Understand internal control – sales Assess planned control risk – sales Determine extent of testing controls Audit procedures Design tests of controls and Sample size substantive tests of transactions for sales to meet transactionItems to select related audit objectives Timing 14-21
Copyright © 2014 Pearson Education
Study the client’s flowcharts, prepare an internal control questionnaire, and perform walk-through tests of sales.
14-22
Copyright © 2014 Pearson Education
1. Framework for assessing control risk 2. Identify key internal controls and deficiencies 3. Associate controls and deficiencies with the objectives
4. Assess control risk for each objective 14-23
Copyright © 2014 Pearson Education
Adequate separation of duties Proper authorization Adequate documents and records Pre-numbered documents Monthly statements Internal verification procedures 14-24
Copyright © 2014 Pearson Education
Control effectiveness Control risk
14-25
Copyright © 2014 Pearson Education
14-26
Copyright © 2014 Pearson Education
Occurrence: Recorded sales are for shipments actually made.
Completeness: Existing sales transactions are recorded. Accuracy: Recorded sales are for the amount shipped. 14-27
Copyright © 2014 Pearson Education
Posting and summarization: Sales transactions are correctly included in the accounts receivable master file. Classification: Sales transactions are correctly classified. Timing: Sales are recorded on the correct dates. 14-28
Copyright © 2014 Pearson Education
Sham sales
Improper % of completion
Improper sales cutoff
Fraudulent Techniques
Premature revenue recognition Unauthorized shipments
Bill and hold Conditional sales Round-tripping loans as sales 14-29
Consignment sales
Copyright © 2014 Pearson Education
Identify key transaction-related audit objectives Determine key existing controls Design tests of controls to verify effectiveness
Evaluate any control deficiencies Determine extent of substantive tests of transactions
14-30
Copyright © 2014 Pearson Education
4 Apply the methodology for controls over sales transactions to controls over sales returns and allowances.
14-31
Copyright © 2014 Pearson Education
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.
14-32
Copyright © 2014 Pearson Education
There are, however, two important differences:
Materiality
14-33
Emphasis on objectives
Copyright © 2014 Pearson Education
5 Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts.
14-34
Copyright © 2014 Pearson Education
Determine whether cash received was recorded Prepare proof of cash receipts*
Test to discover lapping of accounts receivable*
14-35
Copyright © 2014 Pearson Education
6 Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable.
14-36
Copyright © 2014 Pearson Education
Occurrence transaction-related audit objective Proper authorization of the write-off of uncollectible accounts Verification of accounts written off
14-37
Copyright © 2014 Pearson Education
The parts of the audit most affected by the tests for the sales and collection cycle are:
Allowance for doubtful accounts
Accounts receivable
Bad debt expense Cash 14-38
Copyright © 2014 Pearson Education
Sales
Cash in Accounts Bank Receivable Sales Cash receipts transactions transactions Audited by TOC, STOT, and AP
Ending balance
Audited by TOC, STOT, and AP
Ending balance
Audited by AP and TDB
TOC + STOT + AP + TDB = Sufficient appropriate evidence 14-39
Copyright © 2014 Pearson Education
14-40
Copyright © 2014 Pearson Education
Copyright
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 14-41
Copyright © 2014 Pearson Education
Audit of the Sales and Collection Cycle: Tests of Control and Substantive Tests of Transactions Copyright © 2014 Pearson Education
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 and substantive tests of transactions for sales. 14-2
Copyright © 2014 Pearson Education
Apply the methodology for controls over sales transactions to controls over sales returns and allowances. Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts. Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable. 14-3
Copyright © 2014 Pearson Education
1 Identify the accounts and the classes of transactions in the sales and collection cycle.
14-4
Copyright © 2014 Pearson Education
14-5
Copyright © 2014 Pearson Education
2 Describe the business functions and the related documents and records in the sales and collection cycle.
14-6
Copyright © 2014 Pearson Education
Accounts
Sales Accounts receivable
14-7
Business Functions Documents and Records
Processing customer orders Granting credit Shipping goods Billing customers and recording sales
Customer order Sales order Customer order or sales order Shipping document Sales invoice Sales transaction file Sales journal or listing Accounts receivable master file Accounts receivable trial balance Monthly statements Copyright © 2014 Pearson Education
Accounts
Cash in bank (debits from cash receipts) Accounts receivable
14-8
Business Functions Documents and Records
Processing and recording cash receipts
Remittance advice Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing
Copyright © 2014 Pearson Education
Accounts
Sales returns and allowances Accounts receivable
14-9
Business Functions Documents and Records
Processing and recording sales returns and allowances
Credit memo Sales and returns and allowances journal
Copyright © 2014 Pearson Education
Accounts
Accounts receivable Allowance for uncollectible accounts
14-10
Business Functions Documents and Records
Writing off uncollectible accounts receivable
Uncollectible account authorization form General journal
Copyright © 2014 Pearson Education
Accounts
Bad debt expense Allowance for uncollectible accounts
Business Functions Documents and Records
Providing for bad debts
General journal
14-11 Copyright © 2014 Pearson Education
Customer Order: A request for merchandise by a customer Sales Order: A document describing the goods ordered by a customer
14-12
Copyright © 2014 Pearson Education
Before goods are shipped, a properly authorized person must approve credit to the customer for sales on account
14-13
Copyright © 2014 Pearson Education
This is the first point in the cycle at which the company gives up assets. One type of shipping document is a bill of lading.
Bills of lading are often transmitted once goods have been shipped
14-14
Copyright © 2014 Pearson Education
Sales transaction file
Accounts receivable file 14-15
Sales journal
Accounts receivable trial balance Copyright © 2014 Pearson Education
Prelisting of Cash receipts
Cash receipts transaction file 14-16
Copyright © 2014 Pearson Education
Credit memo Sales returns and allowances journal
14-17
Copyright © 2014 Pearson Education
Uncollectible account authorization form
This is a document used internally to indicate authority to write an account receivable off as uncollectible
14-18
Copyright © 2014 Pearson Education
This provision represents a residual, resulting from management’s end-of-period adjustment of the allowance for uncollectible accounts
14-19
Copyright © 2014 Pearson Education
3 Understand internal control, and design and perform tests of controls and substantive tests of transactions for sales.
14-20
Copyright © 2014 Pearson Education
Understand internal control – sales Assess planned control risk – sales Determine extent of testing controls Audit procedures Design tests of controls and Sample size substantive tests of transactions for sales to meet transactionItems to select related audit objectives Timing 14-21
Copyright © 2014 Pearson Education
Study the client’s flowcharts, prepare an internal control questionnaire, and perform walk-through tests of sales.
14-22
Copyright © 2014 Pearson Education
1. Framework for assessing control risk 2. Identify key internal controls and deficiencies 3. Associate controls and deficiencies with the objectives
4. Assess control risk for each objective 14-23
Copyright © 2014 Pearson Education
Adequate separation of duties Proper authorization Adequate documents and records Pre-numbered documents Monthly statements Internal verification procedures 14-24
Copyright © 2014 Pearson Education
Control effectiveness Control risk
14-25
Copyright © 2014 Pearson Education
14-26
Copyright © 2014 Pearson Education
Occurrence: Recorded sales are for shipments actually made.
Completeness: Existing sales transactions are recorded. Accuracy: Recorded sales are for the amount shipped. 14-27
Copyright © 2014 Pearson Education
Posting and summarization: Sales transactions are correctly included in the accounts receivable master file. Classification: Sales transactions are correctly classified. Timing: Sales are recorded on the correct dates. 14-28
Copyright © 2014 Pearson Education
Sham sales
Improper % of completion
Improper sales cutoff
Fraudulent Techniques
Premature revenue recognition Unauthorized shipments
Bill and hold Conditional sales Round-tripping loans as sales 14-29
Consignment sales
Copyright © 2014 Pearson Education
Identify key transaction-related audit objectives Determine key existing controls Design tests of controls to verify effectiveness
Evaluate any control deficiencies Determine extent of substantive tests of transactions
14-30
Copyright © 2014 Pearson Education
4 Apply the methodology for controls over sales transactions to controls over sales returns and allowances.
14-31
Copyright © 2014 Pearson Education
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.
14-32
Copyright © 2014 Pearson Education
There are, however, two important differences:
Materiality
14-33
Emphasis on objectives
Copyright © 2014 Pearson Education
5 Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts.
14-34
Copyright © 2014 Pearson Education
Determine whether cash received was recorded Prepare proof of cash receipts*
Test to discover lapping of accounts receivable*
14-35
Copyright © 2014 Pearson Education
6 Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable.
14-36
Copyright © 2014 Pearson Education
Occurrence transaction-related audit objective Proper authorization of the write-off of uncollectible accounts Verification of accounts written off
14-37
Copyright © 2014 Pearson Education
The parts of the audit most affected by the tests for the sales and collection cycle are:
Allowance for doubtful accounts
Accounts receivable
Bad debt expense Cash 14-38
Copyright © 2014 Pearson Education
Sales
Cash in Accounts Bank Receivable Sales Cash receipts transactions transactions Audited by TOC, STOT, and AP
Ending balance
Audited by TOC, STOT, and AP
Ending balance
Audited by AP and TDB
TOC + STOT + AP + TDB = Sufficient appropriate evidence 14-39
Copyright © 2014 Pearson Education
14-40
Copyright © 2014 Pearson Education
Copyright
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. 14-41
Copyright © 2014 Pearson Education
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