1. Audit of the Sales and Collection Cycle
Chapter 13

2. Identify the accounts and the classes of transactions in the
Learning Objective 1
Identify the accounts and the
classes of transactions in the
sales and collection cycle.

3. Accounts in the Sales and Collection Cycle
Cash
sales
Sales on
account
Cash in Bank
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on and allowances
account
Charge-off of
Ending uncollectible
balance accounts
Cash Discounts
Taken
Sales Returns
and Allowances
Bad Debt
Expense

4. Accounts in the Sales and Collection Cycle
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on and allowances
account
Charge-off of
Ending uncollectible
balance accounts
Allowance for Uncollectible Accounts
Charge-off of Beginning
uncollectible balance
accounts
Estimate of bad
debt expense
Ending balance
Bad Debt
Expense

5. Describe the business functions and the related documents and
Learning Objective 2
Describe the business functions
and the related documents and
records in the sales and
collection cycle.

6. Processing Customer Orders
A request for merchandise
by a customer
Sales Order:
A document describing the
goods ordered by a customer

7. Granting Credit Before goods are shipped, a properly
authorized person must approve credit
to the customer for sales on account.

8. Sales Transaction Sales Accounts Accounts receivable
Business
Functions
Processing customer orders,
Granting credit, Shipping goods,
Billing customers and recording sales
Documents
and Records
Sales invoice, Sales journal or listing, Sales
transaction file, Accounts receivable master
file and trial balance, Monthly statements

9. Cash Receipts Transaction
Accounts
Cash in bank (debits from cash receipts)
Accounts receivable
Business
Functions
Processing and recording cash receipts
Documents
and Records
Remittance advise, Prelisting of cash receipts,
Cash receipts transaction file,
Cash receipts journal or listing

10. Sales Returns and Allowances Transaction
Accounts
Sales returns and allowances
Accounts receivable
Business
Functions
Processing and recording
sales returns and allowances
Documents
and Records
Credit memo
Sales returns and allowances journal

11. Charge-off of Uncollectible Accounts Transaction
Accounts receivable
Allowance for uncollectible accounts
Business
Functions
Charging off uncollectible
accounts receivable
Documents
and Records
Uncollectible account authorization form
General journal

12. Bad Debt Expense Transaction
Accounts
Bad debt expense
Allowance for uncollectible accounts
Business
Functions
Providing for bad debts
Documents
and Records
General journal

13. Shipping Goods This is the first point in the cycle
where company assets are given up.
Shipping
document

14. Billing Customers and Recording Sales
Sales invoice
Sales transaction file
Sales journal or listing
Accounts receivable master file
Accounts receivable trial balance
Monthly statement

15. Processing and Recording Cash Receipts
Remittance advise
Prelisting of cash receipts
Cash receipts transaction file
Cash receipts journal or listing

16. Lockbox Systems and Electronic Funds Transfer
Bank
Order/Payment
Information
Information
Customer
Company

17. Processing and Recording Sales Returns and Allowances
Credit memo
Sales returns and
allowances journal

18. Charging Off Uncollectible Accounts Receivable
Authorization Form
This is a document used internally to
indicate authority to write an account
receivable off as uncollectible.

19. Providing for Bad Debts
This provision represents a residual,
resulting from management’s
end-of-period adjustment of the
allowance for uncollectible accounts.

20. Understand how e-commerce sales and collection cycle.
Learning Objective 3
Understand how e-commerce
activities affect the
sales and collection cycle.

21. Effect of E-Commerce on the Sales and Collection Cycle
The Internet
The Internet and
other developing
technologies allow
companies to develop
new 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 and
collection activities remain the same.

23. Effect of E-Commerce on the Sales and Collection Cycle
Auditors should obtain an understanding
of the design and operation of key internal
controls over e-commerce revenues.
Evidence for e-commerce activities
is likely to be in electronic form.

24. Understand internal control and design and perform tests
Learning Objective 4
Understand internal control
and design and perform tests
of controls and substantive
tests of transactions for sales.

25. Methodology for Designing Controls and Substantive Tests: Sales
Design tests of controls
and substantive tests
of transactions for sales
to meet transaction-
related audit objectives.
Understand internal
control – sales
Assess planned
control risk – sales
Audit procedures
Sample size
Evaluate cost-benefit
of testing controls.
Items to select
Timing

26. Understanding Internal Control – Sales
Study the client’s flowcharts,
prepare an internal control
questionnaire, and perform
walk-through tests of sales.

27. Assess Planned Control Risk – Sales
Adequate separation
of duties
Proper authorization
Adequate documents
and records
Prenumbered
documents
Monthly statements
Internal verification
procedures

28. Internal Verification Procedures
Evaluate cost-benefit
of testing controls.
Design tests of
controls for 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 included
in the accounts receivable master file.

31. Direction of Tests for Sales
Customer
order
Shipping
document
Duplicate
sales invoice
Completeness Start
Sales
journal
General
ledger
Accounts
receivable
master file =
Existence Start

32. Summary of Methodology for Sales
Column 1: Transaction-related audit objectives
Column 2: Key internal controls
Column 3: Test of controls
Column 4: Weaknesses
Column 5: Substantive tests of transactions

33. Apply the methodology for controls over sales transactions
Learning Objective 5
Apply the methodology for
controls over sales transactions
to controls over sales
returns and allowances.

34. Sales Returns and Allowances
The transaction-related audit objectives
and client’s methods of controlling
misstatements are essentially the same
for processing credit memos as those
described for sales.

35. Sales Returns and Allowances
There are, however, two important differences.
Materiality
Emphasis on
objectives

36. Understand internal control and design and perform tests of
Learning Objective 6
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for cash receipts.

37. 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

38. Apply the methodology for controls over the sales and collection cycle
Learning Objective 7
Apply the methodology for controls
over the sales and collection cycle
to write-offs of uncollectible
accounts receivable.

39. Audit Tests for Uncollectible Accounts
Existence of recorded write-offs is the most
important transaction-related audit objective.
What is a major concern in testing accounts
charged off as uncollectible?
– covering up a defalcation by charging off
accounts receivable that have been collected

40. Additional Internal Controls Over Account Balances
Realizable value
Rights and obligations
Presentation and disclosure

41. Effect of Results of Controls and Substantive Tests of Transactions
The parts of the audit most affected by the
tests for the sales and collection cycle are:
Accounts
receivable
Bad debt
expense
Cash
Allowance for
doubtful accounts

42. Role of all Audit Tests in the Sales and Collection Cycle
Accounts
Receivable
Cash in
Bank
Sales
transactions
Cash receipts
transactions
Audited by
TOC, STOT, and AP
Audited by
TOC, STOT, and AP
Ending
balance
Ending
balance
Audited by AP and TDP
TOC + STOT + AP + TDP
= Sufficient competent evidence per GAAS

43. End of Chapter 13