1. AUDITING SALES AND CASH RECEIPTS

2. 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

3. NATURE OF REVENUE/RECEIPT CYCLE
Goods, services sold to customers in exchange for future promises to pay
Cash collected from customers

5. DFD of Sales Order Process

6. 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

7. 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

8. 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

9. 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

10. 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

11. ASSESSING CONTROL RISK Obtain Understanding
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

12. 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

13. CONTROL RISK Shipping Major risks Unauthorized shipment
Fictitious or related parties
Goods properly shipped, not billed, recorded

14. 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

15. CONTROL RISK Billing Major risks Bills sent but goods not shipped
Bills not properly prepared, recorded

16. 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

17. CONTROL RISK Recording
Periodic summaries not prepared or not prepared correctly

18. 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

19. CONTROL RISK Cash Collection, Deposit
Risk of embezzlement, deposit into improper accounts

20. 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

21. CONTROL RISK Sales Returns, Allowances
Risk that credit memoranda
Not approved
Not properly recorded

22. 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

23. CONTROL RISK Uncollectible Accounts
Risk that account write-offs
Properly authorized
Properly recorded

24. TESTING CONTROLS: Uncollectible Accounts
For written-off entries:
Select sample
Trace to authorization
Trace to posting
Review write-offs for unusual entries

25. 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

26. PRELIMINARY OPINION ON INTERNAL CONTROL
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

27. 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?

28. 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