Presentation on theme: "Chapter 14 Audit of the Sales and Collection Cycle"— Presentation transcript:
1Chapter 14 Audit of the Sales and Collection Cycle Statement
2Presentation OutlineAccounts and Documents in the Sales and Collection CycleSegregation of DutiesSales Transaction Audit ObjectivesSales Return and Allowance Audit ObjectivesCash Collection Transaction Audit ObjectivesOther Sales and Collection Cycle Considerations
3I. Accounts and Documents in the Sales and Collection Cycle Accounts in the Sales and Collection CycleDocuments in the Sales and Collection Cycle
4A. Accounts in the Sales and Collection Cycle CashsalesSales onaccountCash in BankAccounts ReceivableBeginning Cash receiptsbalanceSales returnsSales on and allowancesaccountCharge-off ofEnding uncollectiblebalance accountsCash DiscountsTakenSales Returnsand AllowancesBad DebtExpense
5A. Accounts in the Sales and Collection Cycle (continued) Accounts ReceivableBeginning Cash receiptsbalanceSales returnsSales on and allowancesaccountCharge-off ofEnding uncollectiblebalance accountsAllowance for Uncollectible AccountsCharge-off of Beginninguncollectible balanceaccountsEstimate of baddebt expenseEnding balanceBad DebtExpense
6B. Documents in the Sales and Collection Cycle Bill of lading – a written contract between a carrier and seller for the receipt and shipment of goods.Sales invoice – a document indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data.Credit memo – a document indicating a reduction in the amount due from a customer because of returned goods or an allowance grantedRemittance advice – a document that accompanies the sales invoice mailed to the customer that can be returned to the seller with the cash paymentCustomer statement – A document summarizing customer balance and account activity, that is sent to the customer for billing purposes.
7II. Segregation of Duties in the Revenue Cycle Authorizing sales transactionsApproving creditRecording salesMaintaining custody of goodsSuggested List of Duties to be Segregated
8A. Authorizing Sales Transactions Sales transactions are initiated by a customer order. The customer order provides the basis for preparing a sales order.
9B. Approving CreditA copy of the sales order is sent to the credit department for approval. A computer may simply compare preestablished credit limits to see if the customer has credit available
10General accounting maintains control accounts in the general ledger. C. Recording SalesAccounts receivable maintains the accounts receivable subsidiary ledger. May be a computerized accounts receivable master file.General accounting maintains control accounts in the general ledger.
11D. Maintaining Custody of Goods Custody of goods in warehouse or awaiting shipment.
12E. Suggested List of Duties to be Segregated Authorization Functions:Receiving orders for salesGranting credit and pursuing unpaid accountsRecordkeeping Functions:Billing customers and recording salesMaintaining inventory recordsMaintaining general ledger accounting recordsMaintaining detailed accounts receivable recordsCustody of Asset Functions:Shipping goodsProcessing cash receipts
13III. Sales Transaction Audit Objectives ExistenceCompletenessAccuracyClassificationTimingPosting and SummarizationNote: See Table 13-2 on pages for a full description ofTransaction-related objectives for sales
14Sales Transactions Existence Test of control – Examine sales invoice for supporting bill of lading and customer order.Substantive test – Auditor is concerned with three types of misstatements:Recorded sale with no shipment – Trace from sales journal entry to shipping documentSale recorded more than once – Check cancellation of shipping documentation.Shipments made to nonexistent customers – Person recording sales should not authorize shipments.
15B. Sales Transactions Completeness Test of control – Account for sequence of shipping documents.Substantive test – Many audits ignore completeness on the grounds that overstatement of income are of greater concern. However, errors may still misstate financial statements. One effective procedure is to trace from shipping documents to the sales invoice and entry in the sales journal.
16C. Sales Transactions Accuracy Test of control – Examine the approved price list for accuracy and proper authorization.Substantive test – Start with entries in the sales journal and compare the total of selected transactions with accounts receivable master file entries and duplicate sales invoices.
17D. Sales Transactions Classification Test of control – Examine document package for duplicate verification.Substantive test – When there are cash and credit sales, it is important not to debit accounts receivable for a cash sale or to credit sales for collection of a receivable. It is also important not to classify sales of operating assets as sales. A common procedure is to examine duplicate sales invoice for proper account classification.
18E. Sales Transactions Timing Test of control –Account for sequence of shipping documents.Substantive test – Sales should be billed when ownership is transferred to the customer. A common procedure is to compare the date of recording a sale in the sales journal with the date on the duplicate sales invoice and bill of lading.
19F. Sales Transactions Posting and Summarization Test of control – Examine evidence that accounts receivable master file is reconciled to the general ledger.Substantive test – Use audit software to foot and cross-foot the sales journal and trace totals to the general ledger.
20IV. Sales Return and Allowance Audit Objectives An Internal Control for ExistenceAn Internal Control for CompletenessCommon Types of TransactionsThe objectives and methodology for auditing sales returnsand allowances is the same as for sales. The same procedurecan be used to develop suitable controls, tests of controls, andsubstantive tests of transactions to verify the amounts.
21Sales Adjustment Existence Ensure that all sales returnsand allowances and charge-offs are approved byappropriate personnel.Ensuring that recorded sales adjustments actually occurred is important because a diversion of cash from an account receivable collection could be covered up by a fictitious sales return or allowance.
22B. Sales Adjustment Completeness Sales Adjustment FormDiscount forDamagedmerchandiseForm #36Unrecorded sales returns and allowances can be material and can be used by a company’s management to overstate net income.$5ApprovalRSGeneral JournalEnsure that prenumbered salesadjustment forms are used,and that all forms areaccounted for.Sales Allowance 5Acc. RecRecord Adjustment #36
23C. Major Types of Sales Adjustment Transactions Customers may receive discounts for paying early.Customers may return goods or request selling price reductions.Incorrect billing.Bad debt write-offs.
24V. Cash Collection Transaction Audit Objectives ExistenceCompletenessAccuracyClassificationTimingPosting and Summarization
25A. Cash Collections Existence Test of control – Observe whether accountant reconciles bank account.Substantive test – Trace cash receipts entries from the cash receipts journal entries to the bank statement.
26B. Cash Collections Completeness Test of control – Observe prelisting of cash receipts.Substantive test – Compare the prelisting with the duplicate deposit slip.
27C. Cash Collections Accuracy Test of control – Observe whether accountant reconciles bank account.Substantive test – Prepare a proof of cash receipts to reconcile cash receipts per books with cash receipts per bank.
28D. Cash Collections Classification Test of control – Examine evidence of internal verification.Substantive test – Examine prelisting for proper account classification.
29E. Cash Collections Timing Test of control – Observe unrecorded cash at a point in time to see when it is recorded.Substantive test – Compare date of deposit in bank statement to the dates in the cash receipts journal and prelisting of cash receipts.
30E. Cash Collections Posting and Summarization Test of control – Examine evidence that accounts receivable master file is reconciled to general ledger.Substantive test – Use audit software to foot and cross-foot the cash receipts journal and trace to the general ledger.
31VI. Other Sales and Collection Cycle Considerations Lapping of Accounts ReceivableAudit Tests for Uncollectible Accounts
32A. Lapping of Accounts Receivable Lapping is when, to cover a cash theft, an employee defers recording cash receipts from one customer and covers the shortage with receipts from another customer. It can be detected by comparing the name, amount, and dates shown on remittance advices with cash receipts journal entries and related duplicate deposit slips.Dishonest EmployeeCustomerB’sAccountCustomerA’sAccountCustomer ACustomer B
33B. Audit Tests for Uncollectible Accounts Major concern is that client covers up a theft by charging off accounts receivable that have actually been collected.Audit tests for proper authorization of write-off. This often involves an aged analysis of receivables. It is also usually necessary to examine correspondence in client files to establish uncollectibility.After the auditor has concluded that the accounts should be charged off, the auditor should verify the corresponding journal entries and postings into the general and subsidiary ledgers.
34Summary Accounts and Documents in the Sales and Collection Cycle Segregation of DutiesSales Transaction Audit ObjectivesSales Return and Allowance Transaction Audit ObjectivesCash Collection Transaction Audit ObjectivesLapping of Accounts ReceivableUncollectible Accounts