Chapter 13 Audit of The Sales and Collection Cycle

AUDITING – AK0041
Audit of the Sales and Collection Cycle: Tests of

Controls and Substantive Tests of Transactions
ACCOUNTING PROGRAM
Objectives
Identify the accounts and the classes of transactions
in the sales and collection cycle.
Contents
• Accounts and Classes of Transactions in the Sales and
Collection Cycle
• Business Functions in the Cycle and Related Documents
and Records
• Methodology For Designing Test of Controls and
Substantives Test of Transaction for Sales
• Sales Returns and Allowences
• Methodologi for Designing Test on Controls and
Substantive Test of Transactions for Cash Receipts
• Audit Tests for Uncollectible Accounts
• Effect of Results of Tests of Controls and Substantive
Test of Transactions
Audit of the Sales and Collection
Cycle: Tests of Controls and
Substantive Tests of Transactions
Accounts in the Sales and Collection
Cycle
Learning Objective 2
Describe the business functions and the related
documents and records in the sales and collection
cycle.
Sales Transaction
Accounts Business Functions Documents and Records
Sales Processing Customer order
Accounts customer orders Sales order
Customer order or
receivable Granting credit sales order
Shipping goods Shipping document
Billing customers Sales invoice
and recording Sales transaction file
sales Sales journal or listing
Accounts receivable
master file
Accounts receivable
trial balance
Monthly statements
Cash Receipts Transaction
Cash in bank Processing and Remittance advice
(debits from recording cash Prelisting of cash
cash receipts) receipts receipts
Accounts Cash receipts
receivable transaction file
Cash receipts journal
or listing
Sales Returns and Allowances
Transaction
Sales returns Processing and Credit memo
and recording sales Sales and returns and
allowances returns and allowances journal
Accounts allowances
receivable
Write-off of Uncollectible Accounts
Transaction
Accounts Writing off Uncollectible account
receivable uncollectible authorization form
Allowance for accounts General journal
uncollectible receivable
accounts
Bad Debt Expense Transaction
Bad debt Providing for bad General journal
expense debts
Allowance for
uncollectible
accounts
Processing Customer Orders
Customer Order:
➢ A request for merchandise by a customer
Sales Order:
➢ A document describing the goods ordered
by a customer
Granting Credit
Before goods are shipped, a properly

authorized person must approve credit
to the customer for sales on account
Shipping Goods
➢ 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 shipping
Billing Customers and Recording Sales
Sales Sales
transaction journal
file
Accounts Accounts
receivable receivable
file trial balance
Processing and Recording Cash Receipts
Prelisting
of
Cash
receipts
Remittance advice
Cash receipts
transaction
file
Cash receipts listing
Processing and Recording Sales Returns
and Allowances
➢ Credit memo
➢Sales returns and allowances journal

Writing Off Uncollectible
Accounts Receivable
Uncollectible account authorization form
This is a document used internally to

indicate authority to write an account
receivable off as uncollectible
Providing for Bad Debts
This provision represents a residual,

resulting from management’s
end-of-period adjustment of the
allowance for uncollectible accounts
Understand internal control, and design and
perform tests of controls and substantive tests of
transactions for sales.
Methodology for Designing Controls and
Substantive Tests
Understand internal control – sales
Assess planned control risk – sales
Determine extent of testing controls
Design tests of controls and Audit procedures

substantive tests of transactions Sample size
for sales to meet transaction- Items to select
related audit objectives Timing
Understand Internal Control – Sales
Study the client’s flowcharts, prepare

an internal control questionnaire, and
perform walk-through tests of sales.
Assess Planned Control Risk – Sales
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

Assess Planned Control Risk – Sales
➢Adequate separation of duties
➢Proper authorization
➢Adequate documents and records
➢Pre-numbered documents
➢Monthly statements
➢Internal verification procedures

Determine Extent of Testing Controls
Control
effectiveness
Control
risk
Direction of Tests for Sales
Transaction-related Audit
Objectives for Sales
Occurrence:
Recorded sales are for shipments actually made.
Completeness:
Existing sales transactions are recorded.
Accuracy:
Recorded sales are for the
amount shipped.
Transaction-related Audit
Objectives for Sales
Posting and summarization:
Sales transactions are correctly included
in the accounts receivable master file.
Classification:
Sales transactions are correctly classified.
Timing:
Sales are recorded on the
correct dates.
COSO Report Identifies Revenue
Misstatement Techniques
Improper Premature
sales cutoff revenue
Sham sales
recognition
Unauthorized
Improper shipments
Fraudulent
% of completion
Techniques
Bill and hold
Conditional sales
Round-tripping
Consignment
loans as sales
sales
Summary of Methodology
for Sales
➢ 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
Apply the methodology for controls over sales
transactions to controls over 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.
There are, however, two important differences:
Emphasis
Materiality
on
objectives
Understand internal control, and design and
perform tests of controls and substantive tests of
transactions for cash receipts.
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*
* Only performed when fraud is suspected

Apply the methodology for controls over the sales
and collection cycle to controls related to
uncollectible accounts receivable
Audit Tests for the Write-Off
of Uncollectible Accounts
➢ Occurrence transaction-related audit objective
➢ Proper authorization of the write-off of

uncollectible accounts
➢ Verification of accounts written off

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:
Allowance for
Accounts doubtful accounts
receivable
Bad debt expense
Cash

Chapter 13 Audit of The Sales and Collection Cycle

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AUDITING – AK0041

Audit of the Sales and Collection Cycle: Tests of

Before goods are shipped, a properly

➢ This is the first point in the cycle

➢One type of shipping document is a

➢Bills of lading are often transmitted once

➢Sales returns and allowances journal

Uncollectible account authorization form

This is a document used internally to

This provision represents a residual,

Assess planned control risk – sales

Determine extent of testing controls

Design tests of controls and Audit procedures

Study the client’s flowcharts, prepare

1. Framework for assessing control risk

2. Identify key internal controls and deficiencies

3. Associate controls and deficiencies with the

4. Assess control risk for each objective

➢Adequate documents and records

➢Internal verification procedures

➢ Identify key transaction-related audit objectives

The transaction-related audit objectives and

There are, however, two important differences:

➢ Determine whether cash received was recorded

* Only performed when fraud is suspected

➢ Occurrence transaction-related audit objective

➢ Proper authorization of the write-off of

➢ Verification of accounts written off

The parts of the audit most affected by the

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