Presentation on theme: "Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions Chapter 14."— Presentation transcript:
1 Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions Chapter 14
2 Learning Objective 1 Identify the accounts and the classes of transactions in thesales and collection cycle.
3 Accounts in the Sales and Collection Cycle Cash in BankCashsalesAccounts ReceivableCash DiscountsTakenSales onaccountBeginningbalanceCash receiptsSales onaccountSales returnsand allowancesSales Returnsand AllowancesEndingbalanceWrite-off ofuncollectibleaccountsBad DebtExpense
4 Accounts in the Sales and Collection Cycle Allowance forUncollectible AccountsAccounts ReceivableBeginningbalanceCash receiptsWrite-off ofuncollectibleaccountsBeginningbalanceSales onaccountSales returnsand allowancesEstimate ofbad debtexpenseEndingbalanceWrite-off ofuncollectibleaccountsEndingbalanceBad DebtExpense
5 Learning Objective 2 Describe the business functions and the related documents andrecords in the sales andcollection cycle.
6 Sales Transaction Sales Accounts receivable Processing customer orders Business FunctionsDocuments and RecordsSalesAccountsreceivableProcessingcustomer ordersGranting creditShipping goodsBilling customersand recordingsalesCustomer orderSales orderCustomer order orsales orderShipping documentSales invoiceSales transaction fileSales journal or listingAccounts receivablemaster filetrial balanceMonthly statements
7 Cash Receipts Transaction AccountsBusiness FunctionsDocuments and RecordsCash in bank(debits fromcash receipts)AccountsreceivableProcessing andrecording cashreceiptsRemittance advicePrelisting of cashreceiptsCash receiptstransaction fileCash receipts journalor listing
8 Sales Returns and Allowances Transaction AccountsBusiness FunctionsDocuments and RecordsSales returnsandallowancesAccountsreceivableProcessing andrecording salesreturns andallowancesCredit memoSales and returns andallowances journal
9 Write-off of Uncollectible Accounts Transaction Business FunctionsDocuments and RecordsAccountsreceivableAllowance foruncollectibleaccountsWriting offuncollectibleaccountsreceivableUncollectible accountauthorization formGeneral journal
10 Bad Debt Expense Transaction AccountsBusiness FunctionsDocuments and RecordsBad debtexpenseAllowance foruncollectibleaccountsProviding for baddebtsGeneral journal
11 Processing Customer Orders A request for merchandise by a customerSales Order:A document describing the goods orderedby a customer
12 Granting Credit Before goods are shipped, a properly authorized person must approve creditto the customer for sales on account
13 Shipping Goods This is the first point in the cycle where company assets are given up
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 advicePrelisting of cash receiptsCash receipts transaction fileCash receipts journal or listing
16 Processing and Recording Sales Returns and Allowances Credit memoSales returns and allowances journal
17 Writing Off Uncollectible Accounts Receivable Uncollectible account authorization formThis is a document used internally toindicate authority to write an accountreceivable off as uncollectible
18 Providing for Bad Debts This provision represents a residual,resulting from management’send-of-period adjustment of theallowance for uncollectible accounts
19 Learning Objective 3 Understand internal control, and design and perform tests ofcontrols and substantive testsof transactions for sales.
20 Methodology for Designing Controls and Substantive Tests Understand internal control – salesAssess planned control risk – salesDetermine extent of testing controlsDesign tests of controls andsubstantive tests of transactionsfor sales to meet transaction-related audit objectivesAudit proceduresSample sizeItems to selectTiming
21 Understand Internal Control – Sales Study the client’s flowcharts, preparean internal control questionnaire, andperform walk-through tests of sales.
22 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
23 Assess Planned Control Risk – Sales Adequate separation of dutiesProper authorizationAdequate documents and recordsPrenumbered documentsMonthly statementsInternal verification procedures
24 Determine Extent of Testing Controls Audits of public companiesAudits of nonpublic companies
25 Transaction-related Audit Objectives for Sales Occurrence:Recorded sales are for shipments actually made.Completeness:Existing sales transactions are recorded.Accuracy:Recorded sales are for the amount shipped.
26 Transaction-related Audit Objectives for Sales Posting and summarization:Sales transactions are correctly includedin the accounts receivable master file.Classification:Sales transactions are correctly classified.Timing:Sales are recorded on the correct dates.
27 Direction of Tests for Sales CustomerorderShippingdocumentDuplicatesalesinvoiceSalesjournalGeneraljournal=Accountsreceivablemaster fileCompletenessstartOccurrencestart
28 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)
29 Learning Objective 4 Apply the methodology for controls over sales transactions to controlsover sales returns and allowances.
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 on objectives
32 Learning Objective 5 Understand internal control, and design and perform tests ofcontrols and substantive testsof transactions for cash receipts.
33 Tests of Controls and Substantive Tests of Transactions for Cash Receipts Determine whether cash received was recordedPrepare proof of cash receipts*Test to discover lapping of accounts receivable** Only performed when fraud is suspected
34 Learning Objective 6 Apply the methodology for controls over the sales andcollection cycle to write-offsof uncollectible accountsreceivable.
35 Audit Tests for the Write-Off of Uncollectible Accounts Occurrence transaction-related audit objectiveProper authorization of the write-off ofuncollectible accountsVerification of accounts written off
36 Additional Internal Controls Over Account Balances Realizable valueCredit approvalAged accounts receivable trial balanceWriting off uncollectiblesRights and obligationsPresentation and disclosure
37 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 for doubtful accounts
38 Types of Audit Tests for the Sales and Collection Cycle AccountsReceivableCash inBankSalestransactionsCash receiptstransactionsAudited byTOC, STOT, and APAudited byTOC, STOT, and APEndingbalanceEndingbalanceAudited by AP and TDBTOC + STOT + AP + TDB= Sufficient appropriate evidence