1. BA 427 – Assurance and Attestation Services Lecture 4 Internal Controls: Sales and Receivables

2. The Sales and Collection Cycle  Five classes of transactions for the sales and collection cycle: Sales (cash sales and credit sales) Cash receipts Sales returns and allowances Charge-off of uncollectible accounts Estimation of bad debt expense

3. The Sales and Collection Cycle  Eight Business functions for this cycle: Processing customer orders Authorizing credit and setting credit limits Shipping goods Invoicing customers and recording sales Processing and recording cash receipts Processing and recording returns and allowances Writing off uncollectible receivables Providing for bad debt expense

4. The Sales and Collection Cycle  Accounts involved in the sales and collection cycle: Sales (I/S account) Accounts Receivable (B/S account) Cash (B/S account) Allowance for uncollectible accounts (B/S) Cash discounts taken (I/S) Sales returns and allowances (I/S) Bad debt expense (I/S)

5. The Sales and Collection Cycle  Documents and records in this cycle: Customer order (completed by the customer) Sales order (an internally-generated document) Shipping document (packing slip) Bill of lading Sales invoice and monthly customer statements Sales journal and sales returns journal Accounts receivable subsidiary ledger Inventory records General ledger and general journal Credit memo

6. Control Objectives  Control Objectives, General: Existence Completeness Accuracy Classification Timing Posting and Summarization

7. Control Objectives  Control Objectives for Sales: Recorded sales are for shipments actually made to customers (existence). Existing sales transactions are recorded (completeness). Recorded sales are for the amount of goods actually shipped, and are correctly billed and recorded (accuracy). Sales transactions are properly classified. Sales are recorded on the correct dates.

8. Control Objectives  Control Objectives for Sales: Sales transactions are properly included in the A/R master file and are correctly summarized.

9. Control Objectives  Other control objectives for this cycle: Proper acceptance of customer orders. Credit approval in accordance with credit limits. Safeguarding of assets associated with the sale. Timely shipment of goods to customers. Recording, safeguarding, and depositing cash and checks received.

10. Segregation of Duties  Authorization of the transaction Credit approvals Write-off of bad debts  Recording of the transaction  Custody over assets Inventory Receivables Cash

11. Examples of controls for sales  Sales orders are routed through the credit manager, to ensure that goods are shipped only to customers who are likely to pay.  Sales order forms are prenumbered, to detect unrecorded or unauthorized transactions.  The accounts receivable subsidiary ledger is reconciled periodically with the general ledger, to ensure that all invoices are recorded in customers’ accounts.  A copy of the sales order held by Billing is matched to the copy routed through shipping, to ensure that all goods shipped are invoiced.

12. Examples of controls for cash receipts  Two clerks are present in the mail room when cash receipts are received.  Checks are immediately and restrictively endorsed.  All cash is deposited daily.  The accounts receivable subsidiary ledger is reconciled periodically to the general ledger.  Monthly statements are sent to customers.  Employees handling cash are bonded.

13. Examples of controls for cash sales  Cash sales often cannot segregate duties as well as credit sales. The same individual both authorizes and records the sale, and has custody of the assets (first the inventory and then the cash).  Compensating controls include the following: The use of a cash register or sales terminal. Limiting each register to a single sales clerk for a specified period of time, and reconciling the cash drawer at the end of this clerk’s shift. Increasing supervision of the sales clerk. Providing the customer a receipt.

14. Examples of controls for sales returns, allowances and bad debts  The sales department approves (authorizes) customer returns.  Credit memos for sales returns and allowances are approved by someone not in the sales department.  Write-off of bad debts is initiated by the credit manager and approved by a high-level officer.

15. CustomerMail room Cash Receipts BankGeneral Ledger ControllerAccounts Receivable Start Mail receipts checks & remittance advices Remittance advices Checks prepare daily remittance list Daily remit- tance list 2 = source document = action = summary list or document = ledger (G/L or subledger) = journal entry

16. CustomerMail room Cash Receipts BankGeneral Ledger ControllerAccounts Receivable Start Mail receipts checks & remittance advices B A AC deposit slip & cash receipts bank validates deposit slip Remittance advices Checks prepare G/L entry prepare deposit slip Daily Remit- tance list 1 2 checks & daily remit- tance list prepare daily remittance list Daily remit- tance list 2

17. CustomerMail room Cash Receipts BankGeneral Ledger ControllerAccounts Receivable Start Mail receipts checks & remittance advices B CA B AC General Ledger Post to G/L Dr cash Cr A/R deposit slip & cash receipts bank validates deposit slip Reconcile validated deposit slip Remittance advices Checks prepare G/L entry prepare deposit slip A/R sub ledger Post to A/R sub ledger Daily Remit- tance list 1 2 checks & daily remit- tance list prepare daily remittance list Daily remit- tance list 2