Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions Chapter 14.
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1 Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions Chapter 14
2 Overview of Accounts in the Sales and Collection Cycle CashsalesSales onaccountAccounts ReceivableCash receiptsSales returnsand allowancesCharge-off ofuncollectibleaccountsBeginningbalanceEndingCash in BankCash DiscountsTakenBad DebtExpenseSales Returnsand Allowances
3 Accounts in the Sales and Collection Cycle Accounts ReceivableCash receiptsSales returnsand allowancesCharge-off ofuncollectibleaccountsBeginningbalanceSales onaccountEndingAllowance forUncollectible AccountsEstimate ofbad debtexpenseBad DebtExpense
4 Analysis of the Sales and Collection Cycle Excellent format for analysis:Business FunctionsAccounts involvedDocuments and RecordsThink Accounting Information Systems
5 Sales Transaction Accounts Sales receivable Business functions Processing customerordersGranting creditShipping goodsBilling customersand recording salesDocuments and recordsCustomer orderSales orderCustomer order or salesorderShipping documentSales invoiceSales transaction fileSales journal or listingAccounts receivablemaster filetrial balanceMonthly statements
6 Cash Receipts Transaction AccountsBusiness functionsProcessing andrecording cashreceiptsDocuments and recordsRemittance advicePrelisting of cashreceiptsCash receiptstransaction fileCash receipts journal orlistingCash in bank(debits fromcash receipts)Accountsreceivable
7 Sales Returns and Allowances Transaction AccountsBusiness functionsProcessing andrecording salesreturns andallowancesDocuments and recordsCredit memoSales and returns andallowances journalSales returnsandallowancesAccountsreceivable
8 Charge-off of Uncollectible Accounts Transaction Business functionsCharging offuncollectibleaccountsreceivableDocuments and recordsUncollectible accountauthorization formGeneral journalAccountsreceivableAllowance foruncollectibleaccounts
9 Bad Debt Expense Transaction AccountsBusiness functionsProviding for baddebtsDocuments and recordsGeneral journalBad debtexpenseAllowance foruncollectibleaccounts
10 Processing Customer Orders A request for merchandise by a customerSales Order:A document describing the goods orderedby a customer
11 Granting Credit Before goods are shipped, a properly authorized person must approve creditto the customer for sales on account.
12 Shipping Goods This is the first point in the cycle where company assets are given up.
13 Billing Customers and Recording Sales Sales invoiceSales transaction fileSales journal or listingAccounts receivable master fileAccounts receivable trial balanceMonthly statement
14 Processing and Recording Cash Receipts Remittance advicePrelisting of cash receiptsCash receipts transaction fileCash receipts journal or listing
15 Processing and Recording Sales Returns and Allowances Credit memoSales returns and allowances journal
16 Charging Off Uncollectible Accounts Receivable Uncollectible account authorization formThis is a document used internally toindicate authority to write an accountreceivable off as uncollectible.
17 Providing for Bad Debts This provision represents a residual,resulting from management’send-of-period adjustment of theallowance for uncollectible accounts.
18 Effect of E-Commerce on the Sales and Collection Cycle The Internet and other developingtechnologies allow companies todevelop new business models.
19 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.
20 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 activities islikely to be in electronic form.
21 Methodology for Designing Controls and Substantive Tests of Sales Transactions for Sales Understand internalcontrol – sales.Design tests of controls andsubstantive tests of transactionsfor sales to meet transaction-related audit objectives.Assess plannedcontrol risk – sales.Audit proceduresSample sizeItems to selectTimingDetermine extent oftesting controls.
22 Understand Internal Control – Sales Study the client’s flowcharts, preparean internal control questionnaire, andperform walk-through tests of sales.
23 Assess Planned Control Risk – Sales Four Steps:1. Framework for assessing control risk2. Identify key internal controls and deficiencies3. Associate controls and deficiencies with theobjectives4. Assess control risk for each objective
25 Determine Extent of Testing Controls Audits of publiccompaniesAudits of nonpubliccompanies
26 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.
27 Transaction-Related Audit Objectives 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.
28 Direction of Tests for Sales CustomerorderShippingdocumentDuplicatesalesinvoiceSalesjournalGeneralAccountsreceivablemaster file=CompletenessstartExistencestart
29 Summary of Methodology for Sales Transaction-related audit objectives (Column 1)Key existing controls (Column 2)Tests of control (Column 3)Deficiencies (Column 4)Substantive tests of transactions (Column 5)
30 Sales Returns and Allowances The transaction-related audit objectives andclient’s methods of controlling misstatementsare essentially the same for processing creditmemos as those described for sales.
31 Sales Returns and Allowances There are, however, two important differences.MaterialityEmphasis onobjectives
32 Tests of Controls and Substantive Tests of Transactions for Cash Receipts Determine whether cash received was recorded.Prepare proof of cash receipts.Test to discover lapping of accounts receivable.
33 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
34 Additional Internal Controls Over Account Balances Realizable valueCharging off uncollectiblesCredit approvalAged accounts receivable trial balance
35 Additional Internal Controls Over Account Balances Rights and obligationsPresentation and disclosure
36 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:Accounts receivableCashBad debt expenseAllowance fordoubtful accounts
37 Types of Audit Tests for the Sales and Collection Cycle AccountsReceivableCash inBanktransactionsCash receiptsEndingbalanceTOC + STOT + AP + TDB= Sufficient competent evidence per GAASAudited byTOC, STOT, and APAudited by AP and TDB