Audit of Sales and Collection Cycle

Statement

Identify sales and collection cycle classes of transaction and account balances in a typical company. To apply the audit process in sales and collection cycles, we need documents and record in order to understand the typical documents and record used in the cycle. To evaluate whether the account balances affected by the cycle are fairly presented in accordance with generally accepted accounting principles.

Sales Cash sales Sales on account Accounts Receivable Beginning Cash receipts balance Sales returns Sales on and allowances account Charge-off of Ending uncollectible balance accounts

Cash in Bank

Cash Discounts Taken

Sales Returns and Allowances

Bad Debt Expense

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

Sales Transaction

Collection of Cash

1) Sales 2) Accounts receivables

1) Cash in bank 2) Accounts receivable

SalesBusiness Function Processing customer orders Granting credit Shipping goods Billing customers and recording sales Documents and records Customer order Sales order Customer order or Sales order Shipping documents Sales invoice Sales Journal

Collection of CashBusiness Function Processing and recording cash receipts Documents and records Cash receipts transaction file Cash receipts journal

Understand internal control sales

Design tests of controls and substantive tests of transactions for sales to meet transactionrelated audit objectives.

Assess planned control risk sales Audit procedures Sample size Evaluate cost-benefit of testing controls. Items to select Timing

Transaction Objective

Test of ControlComputer-assisted auditing techniques (CAATs) Examine Sales Invoice packets for supporting documentation Account for sequence of shipping documents Observe and review evidence for document control CAATs Confirm agreement between supporting documentation sources Account for sequence of supporting documents. Confirm period reviews of open files CAATs

Substantive TestsReview sequence of sales invoices Review journal for unusual transactions Vouch from the sales journal to the supporting documents Trace from the shipping documents to the sales journal Recalculate prices and extensions on sales invoice Trace a few transactions from inception to completion Analyze Sales Invoices and Shipping Documents close to year end to confirm appropriate recording Trace transactions from Sales Invoice to the Sales Journal, verifying appropriate classification11

Occurrence

Completeness

Accuracy

Cutoff

Classification

Transaction Objective

Analytical Procedures

Substantive Tests Review subsidiary ledger for unusual amounts Confirm receivables Alternative procedures Trace from the A/R master to the aging schedule Review BOD minutes for A/R pledging or factoring Review material sales contracts for terms and conditions Inquire of management Inquire as to likelihood of collection for older accounts Assess appropriateness based on independent estimates and other knowledge obtained regarding collection12

Existence

Compare gross margins w/ prior years Consider monthly sales over time Compare A/R turnover w/prior years

Completeness

Rights & Obligations

N/A

Valuation & Allocation

Compare bad debts to prior years Compare allowance account to prior years Compare A/R turnover w/ prior years Compare amounts in aging categories w/ prior years

Identify client business risks affecting account receivable

Phase I

Set tolerable misstatement and assess inherent risk for accounts receivable

Phase I

Assess control risk for sales and collection cycle

Phase I

Design and perform tests of controls and substantive tests of transactions for sales and collection cycle.

Phase II

Design and perform analytical procedures for accounts receivable balance

Phase III

Audit procedures Design tests of details of accounts receivable balance to satisfy balancerelated audit objectives Sample size Item to select Timing

Phase III

Review accounts receivable trial balance for large and unusual receivables. Calculate analytical procedure indicated in carryforward audit schedules and follow up on any significant changes from prior years. Review the receivables listed on the aged trial balance for notes and related party receivables. Inquire of management whether there are any related party, notes, or long term receivables included in trial balance. Trace the balance to the general ledger.

Refer to page 496 (TABLE 16-5)

Analytical Procedure Compare gross margin percentage with previous years

Possible Misstatement Overstatement or understatement of sales and accounts receivable.

Compare sales by month over time Overstatement or understatement of sales and accounts receivable. Compare sales returns and allowance as a percentage of gross sales with previous years Compare individual customer balances over a stated amount with previous year Compare bad debt expenses as a percentage of gross sales with previous years Overstatement or understatement of sales returns and allowances and accounts receivable. Misstatements in accounts receivable and related income statement accounts Uncollectable accounts receivable that have not been provided for