Copyright © 2014 Pearson Education Chapter 14 Audit of the Sales and Collection Cycle: Tests of Control and Substantive Tests of
Copyright © 2014 Pearson Education
Chapter 14
Audit of the Sales and Collection
Cycle:
Tests of Control and Substantive Tests of
Transactions
Chapter 14
Audit of the Sales and Collection
Cycle:
Tests of Control and Substantive Tests of
Transactions
Copyright © 2014 Pearson Education14-2
Identify the accounts and the classes of transactions in the sales and collection cycle.
Describe the business functions and the related documents and records in the sales and collection cycle.
Understand internal control, and design and perform tests of controls and substantive tests of transactions for sales.
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Apply the methodology for controls over sales transactions to controls over sales returns and allowances.
Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts.
Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable.
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Identify the accounts and the classes of transactions in the sales and collection cycle.
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Describe the business functions and the related documents and records in the sales and
collection cycle.
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Accounts Business Functions Documents and Records
Sales Accounts receivable
Processing customer orders Granting credit Shipping goods Billing customers and recording sales
Customer order Sales order Customer order or sales order Shipping document Sales invoice Sales transaction file Sales journal or listing Accounts receivable master file Accounts receivable trial balance Monthly statements
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Accounts Business Functions Documents and Records
Cash in bank (debits from cash receipts) Accounts receivable
Processing and recording cash receipts
Remittance advice Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing
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Accounts Business Functions Documents and Records
Sales returns and allowances Accounts receivable
Processing and recording sales returns and allowances
Credit memo Sales and returns and allowances journal
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Accounts Business Functions Documents and Records
Accounts receivable Allowance for uncollectible accounts
Writing off uncollectible accounts receivable
Uncollectible account authorization form General journal
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Accounts Business Functions Documents and Records
Bad debt expense Allowance for uncollectible accounts
Providing for bad debts
General journal
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Customer Order: A request for merchandise by a customer
Sales Order: A document describing the goods ordered
by a customer
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Before goods are shipped, a properlyauthorized person must approve creditto the customer for sales on account
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This is the first point in the cycle at which the company gives up assets.
One type of shipping document is a bill of lading.
Bills of lading are often transmitted once goods have been shipped
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Sales transaction
file
Sales journal
Accounts receivable
file
Accounts receivable
trial balance
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Prelisting of
Cash receipts
Cash receiptstransaction
file
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Credit memo
Sales returns and allowances journal
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Uncollectible account authorization form
This is a document used internally toindicate authority to write an accountreceivable off as uncollectible
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This provision represents a residual,resulting from management’send-of-period adjustment of theallowance for uncollectible accounts
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Understand internal control, and design and perform tests of controls and substantive tests of
transactions for sales.
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Understand internal control – sales
Assess planned control risk – sales
Determine extent of testing controls
Design tests of controls andsubstantive tests of transactions
for sales to meet transaction-related audit objectives
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Study the client’s flowcharts, preparean internal control questionnaire, andperform walk-through tests of sales.
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1. Framework for assessing control risk
2. Identify key internal controls and deficiencies
3. Associate controls and deficiencies with the objectives
4. Assess control risk for each objective
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Adequate separation of duties
Proper authorization
Adequate documents and records
Pre-numbered documents
Monthly statements
Internal verification procedures
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Control risk
Control effectiveness
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Occurrence:Recorded sales are for shipments actually made.
Completeness:Existing sales transactions are recorded.
Accuracy:Recorded sales are for the amount shipped.
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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.
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Improper sales cutoffSham sales
Improper % of completion
Conditional sales
Round-tripping loans as sales
Fraudulent
Techniques
Premature revenue
recognition
Unauthorized shipments
Bill and hold
Consignment sales
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Identify key transaction-related audit objectives Determine key existing controls Design tests of controls to verify effectiveness Evaluate any control deficiencies Determine extent of substantive tests
of transactions
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Apply the methodology for controls over sales transactions to controls over sales returns and
allowances.
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The transaction-related audit objectives andclient’s methods of controlling misstatementsare essentially the same for processing creditmemos as those described for sales.
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There are, however, two important differences:
Materiality Emphasis on
objectives
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Understand internal control, and design and perform tests of controls and substantive tests
of transactions for cash receipts.
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Determine whether cash received was recorded
Prepare proof of cash receipts*
Test to discover lapping of accounts receivable*
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Apply the methodology for controls over the sales and collection cycle to write-offs of
uncollectible accounts receivable.
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Occurrence transaction-related audit objective
Proper authorization of the write-off ofuncollectible accounts
Verification of accounts written off
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The parts of the audit most affected by thetests for the sales and collection cycle are:
Accounts receivable
Cash
Allowance for doubtful accounts
Bad debt expense
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Audited byTOC, STOT, and AP
Audited by AP and TDB
Audited byTOC, STOT, and AP
SalesAccounts
ReceivableCash inBank
Salestransactions
Cash receiptstransactions
Endingbalance
Endingbalance
TOC + STOT + AP + TDB= Sufficient appropriate evidence
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Copyright © 2014 Pearson Education
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