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Sales & Cash Receipts Transactions By David N. Ricchiute
AUDITING CHAPTER 10 Sales & Cash Receipts Transactions By David N. Ricchiute
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TOPICS Nature of revenue/receipt cycle
Flow of information Auditor’s assessment of control risk Audit of internal2 control for sales, cash receipts Computer auditing, sampling, tests of controls Assurance, consulting services GBW 8th ed. Ch. 10
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NATURE OF REVENUE/RECEIPT CYCLE
Goods, services sold to customers in exchange for future promises to pay Cash collected from customers GBW 8th ed. Ch. 10
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REVENUE/RECEIPT CYCLE Flow of Information
Customer order received Sales order prepared Price, quantity, goods, terms Shipping document Identifies goods shipped Contract between seller, carrier Sales invoice (bill) Customer remittance advice Returned with payment from customer GBW 8th ed. Ch. 10
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SELLER’S DOCUMENTS Sales order Shipping document (bill of lading)
Identifies goods ordered, price, quantity, terms, etc. Shipping document (bill of lading) Identifies good shipped Contract between seller & carrier Sales invoice Formal notice to customer of amount & payment terms Customer remittance advice Returned with payment GBW 8th ed. Ch. 10
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CONTROLS FOR CREDIT SALES
Multicopy, prenumbered sales order prepared Customer credit reviewed, approved Authorized copy sales order accompanies goods from Inventory Control to Shipping Goods received in Shipping compared with sales order; shipping document prepared Common carrier provides receipt for goods shipped Shipping document, approved sales order sent to billing for preparation of invoice, daily sales summaries Invoice copy sent to General Accounting for recording GBW 8th ed. Ch. 10
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CASH COLLECTION Process Sales returns separate from cash collection
Checks by mail listed, endorsed List copy to Accounts Receivable with remittance for posting List copy with checks to Cash Receipts Dept. for daily deposit Sales returns separate from cash collection Uncollected accounts Reviewed for credit limits, aged, written off as necessary GBW 8th ed. Ch. 10
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INTERNAL CONTROL & RISK
Controls Risks Authorization Prenumbered shipping documents Recording controls Restricted access Credit risk, uncollectible accounts Shipment, billing not timely Items recorded in improper amounts, accounts Theft GBW 8th ed. Ch. 10
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ASSESSING CONTROL RISK Obtain Understanding
Review Sarbanes-Oxley Section 404 documentation for sales process Document the client’s system Flowchart, questionnaire, narrative Perform transaction walk-through Identify control activities Test controls to reduce control risk below maximum Assess control risk GBW 8th ed. Ch. 10
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TESTS OF CONTROLS Sales, Collection
Provide a reasonable degree assurance that employees comply with management’s procedures Sales Properly authorized, executed, recorded Cash collections Cash receipts recorded, deposited promptly Returns, uncollectible accounts Proper authorization, recording GBW 8th ed. Ch. 10
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CONTROL RISK Shipping Major risks Unauthorized shipment
Fictitious or related parties Goods properly shipped, not billed, recorded GBW 8th ed. Ch. 10
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TESTING CONTROLS: Shipping
Select random sample shipping documents Examine sample for authorized sales order & agreement Trace sample shipping documents to invoices (completeness) Trace invoices to sales journal, A/R ledgers Trace invoices to inventory records GBW 8th ed. Ch. 10
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CONTROL RISK Billing Major risks Bills sent but goods not shipped
Bills not properly prepared, recorded GBW 8th ed. Ch. 10
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TESTING CONTROLS: Billing
Select sample invoices from Billing dept. Verify unit prices & mathematical accuracy Trace invoices to shipping documents (existence/occurrence) Trace invoices to sales journal, A/R ledgers Trace invoices to inventory records GBW 8th ed. Ch. 10
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CONTROL RISK Recording
Periodic summaries not prepared or not prepared correctly GBW 8th ed. Ch. 10
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TESTING CONTROLS: Recording
Review evidence of procedures for Reconciliation daily sales summaries with sales journal totals Periodic reconciliation A/R trial balance with general ledger control Scan sales journal for unusual transactions, large amounts Verify mathematical accuracy sales journal for selected periods; trace postings to general ledger GBW 8th ed. Ch. 10
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CONTROL RISK Cash Collection, Deposit
Risk of embezzlement, deposit into improper accounts GBW 8th ed. Ch. 10
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TESTING CONTROLS: Cash Collection & Deposit
Surprise basis: take control bank deposits Compare total checks to total deposit slip Compare check details to cash receipt records & A/R ledger Determine timeliness Deposits Interim: compare deposits CRJ with bank statements Trace CRJ to general ledger GBW 8th ed. Ch. 10
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CONTROL RISK Sales Returns, Allowances
Risk that credit memoranda Not approved Not properly recorded GBW 8th ed. Ch. 10
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TESTING CONTROLS: Sales Returns & Allowances
Test details random sample credit memoranda Receiving reports Perpetual inventory records Entries A/R ledger & general ledger Review credit register for unusual items GBW 8th ed. Ch. 10
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CONTROL RISK Uncollectible Accounts
Risk that account write-offs Properly authorized Properly recorded GBW 8th ed. Ch. 10
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TESTING CONTROLS: Uncollectible Accounts
For written-off entries: Select sample Trace to authorization Trace to posting Review write-offs for unusual entries GBW 8th ed. Ch. 10
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ASSESSING CONTROL RISK
2 Questions Are controls effective? Can controls be relied upon? If answer is yes to both Assess control risk below maximum Assess detection risk above minimum Restrict substantive tests of sales, receivables, cash GBW 8th ed. Ch. 10
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PRELIMINARY OPINION ON INTERNAL CONTROL
Required by Sarbanes-Oxley Auditor must form opinion on management’s assessment of internal control over financial reporting based on Reports of internal auditors Auditor’s tests of controls Substantive audit tests GBW 8th ed. Ch. 10
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TESTS OF CONTROLS Deduction Management
3 Critical questions Does Accounts Receivable monitor deductions? Does Account Operations approve deduction inquiries Does senior management review decisions made by Accounts Receivable, Account Operations? GBW 8th ed. Ch. 10
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COMPUTER AUDITING & SAMPLING
Understand the system Tests of controls Input controls Code verification Data entry controls Processing controls Control totals Limit tests Assess control risk GBW 8th ed. Ch. 10
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TESTS OF BILLING CONTROLS An Example
Randomly select sample sales invoices Verify unit prices, clerical accuracy Trace details of invoices to shipping documents Trace sales invoices to inventory records GBW 8th ed. Ch. 10
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ASSURANCE, CONSULTING SERVICES
Sarbanes-Oxley restricts Information systems consulting to non-audit public clients, and any non-public clients GBW 8th ed. Ch. 10
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