Presentation on theme: "Audit of the Sales and Collection Cycle"— Presentation transcript:
1 Audit of the Sales and Collection Cycle Chapter 13
2 Identify the accounts and the classes of transactions in the Learning Objective 1Identify the accounts and theclasses of transactions in thesales and collection cycle.
3 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
4 Accounts in the Sales and Collection Cycle Accounts ReceivableBeginning Cash receiptsbalanceSales returnsSales on and allowancesaccountCharge-off ofEnding uncollectiblebalance accountsAllowance for Uncollectible AccountsCharge-off of Beginninguncollectible balanceaccountsEstimate of baddebt expenseEnding balanceBad DebtExpense
5 Describe the business functions and the related documents and Learning Objective 2Describe the business functionsand the related documents andrecords in the sales andcollection cycle.
6 Processing Customer Orders A request for merchandiseby a customerSales Order:A document describing thegoods ordered by a customer
7 Granting Credit Before goods are shipped, a properly authorized person must approve creditto the customer for sales on account.
9 Cash Receipts Transaction AccountsCash in bank (debits from cash receipts)Accounts receivableBusinessFunctionsProcessing and recording cash receiptsDocumentsand RecordsRemittance advise, Prelisting of cash receipts,Cash receipts transaction file,Cash receipts journal or listing
10 Sales Returns and Allowances Transaction AccountsSales returns and allowancesAccounts receivableBusinessFunctionsProcessing and recordingsales returns and allowancesDocumentsand RecordsCredit memoSales returns and allowances journal
11 Charge-off of Uncollectible Accounts Transaction Accounts receivableAllowance for uncollectible accountsBusinessFunctionsCharging off uncollectibleaccounts receivableDocumentsand RecordsUncollectible account authorization formGeneral journal
12 Bad Debt Expense Transaction AccountsBad debt expenseAllowance for uncollectible accountsBusinessFunctionsProviding for bad debtsDocumentsand RecordsGeneral journal
13 Shipping Goods This is the first point in the cycle where company assets are given up.Shippingdocument
14 Billing Customers and Recording Sales Sales invoiceSales transaction fileSales journal or listingAccounts receivable master fileAccounts receivable trial balanceMonthly statement
15 Processing and Recording Cash Receipts Remittance advisePrelisting of cash receiptsCash receipts transaction fileCash receipts journal or listing
16 Lockbox Systems and Electronic Funds Transfer BankOrder/PaymentInformationInformationCustomerCompany
17 Processing and Recording Sales Returns and Allowances Credit memoSales returns andallowances journal
18 Charging Off Uncollectible Accounts Receivable Authorization FormThis is a document used internally toindicate authority to write an accountreceivable off as uncollectible.
19 Providing for Bad Debts This provision represents a residual,resulting from management’send-of-period adjustment of theallowance for uncollectible accounts.
20 Understand how e-commerce sales and collection cycle. Learning Objective 3Understand how e-commerceactivities affect thesales and collection cycle.
21 Effect of E-Commerce on the Sales and Collection Cycle The InternetThe Internet andother developingtechnologies allowcompanies to developnew business models.
22 Effect of E-Commerce on the Sales and Collection Cycle Business-to-business (B2B)Business-to-consumer (B2C)Management’s assertions for sales andcollection activities remain the same.
23 Effect of E-Commerce on the Sales and Collection Cycle Auditors should obtain an understandingof the design and operation of key internalcontrols over e-commerce revenues.Evidence for e-commerce activitiesis likely to be in electronic form.
24 Understand internal control and design and perform tests Learning Objective 4Understand internal controland design and perform testsof controls and substantivetests of transactions for sales.
25 Methodology for Designing Controls and Substantive Tests: Sales Design tests of controlsand substantive testsof transactions for salesto meet transaction-related audit objectives.Understand internalcontrol – salesAssess plannedcontrol risk – salesAudit proceduresSample sizeEvaluate cost-benefitof testing controls.Items to selectTiming
26 Understanding Internal Control – Sales Study the client’s flowcharts,prepare an internal controlquestionnaire, and performwalk-through tests of sales.
29 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.
30 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 includedin the accounts receivable master file.
31 Direction of Tests for Sales CustomerorderShippingdocumentDuplicatesales invoiceCompleteness StartSalesjournalGeneralledgerAccountsreceivablemaster file=Existence Start
32 Summary of Methodology for Sales Column 1: Transaction-related audit objectivesColumn 2: Key internal controlsColumn 3: Test of controlsColumn 4: WeaknessesColumn 5: Substantive tests of transactions
33 Apply the methodology for controls over sales transactions Learning Objective 5Apply the methodology forcontrols over sales transactionsto controls over salesreturns and allowances.
34 Sales Returns and Allowances The transaction-related audit objectivesand client’s methods of controllingmisstatements are essentially the samefor processing credit memos as thosedescribed for sales.
35 Sales Returns and Allowances There are, however, two important differences.MaterialityEmphasis onobjectives
36 Understand internal control and design and perform tests of Learning Objective 6Understand internal control anddesign and perform tests ofcontrols and substantive testsof transactions for cash receipts.
37 Tests of Controls and Substantive Tests of Transactions for Cash Receipts Determine whether cash received was recordedPrepare proof of cash receiptsTest to discover lapping of accounts receivable
38 Apply the methodology for controls over the sales and collection cycle Learning Objective 7Apply the methodology for controlsover the sales and collection cycleto write-offs of uncollectibleaccounts receivable.
39 Audit Tests for Uncollectible Accounts Existence of recorded write-offs is the mostimportant transaction-related audit objective.What is a major concern in testing accountscharged off as uncollectible?– covering up a defalcation by charging offaccounts receivable that have been collected
40 Additional Internal Controls Over Account Balances Realizable valueRights and obligationsPresentation and disclosure
41 Effect of Results of Controls and Substantive Tests of Transactions The parts of the audit most affected by thetests for the sales and collection cycle are:AccountsreceivableBad debtexpenseCashAllowance fordoubtful accounts
42 Role of all Audit Tests in the Sales and Collection Cycle AccountsReceivableCash inBankSalestransactionsCash receiptstransactionsAudited byTOC, STOT, and APAudited byTOC, STOT, and APEndingbalanceEndingbalanceAudited by AP and TDPTOC + STOT + AP + TDP= Sufficient competent evidence per GAAS