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    This document outlines an audit of the sales and collection cycle for a company. It describes the key accounts and business functions in the cycle, including sales, cash receipts, returns, bad debt expense, order processing, credit approval, shipping, billing, accounts receivable, and cash receipt processing. It then discusses the methodology for designing tests of controls and substantive transaction tests for sales, cash receipts, returns and allowances, and write-offs. The primary goals are to validate that transactions are complete, accurate, properly authorized and occur only once. The results of these tests would impact account balances for receivables, cash, bad debt expense and allowance for doubtful accounts.

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    Audit of the Sales and Collection Cycle

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    This document outlines an audit of the sales and collection cycle for a company. It describes the key accounts and business functions in the cycle, including sales, cash receipts, returns, bad debt expense, order processing, credit approval, shipping, billing, accounts receivable, and cash receipt processing. It then discusses the methodology for designing tests of controls and substantive transaction tests for sales, cash receipts, returns and allowances, and write-offs. The primary goals are to validate that transactions are complete, accurate, properly authorized and occur only once. The results of these tests would impact account balances for receivables, cash, bad debt expense and allowance for doubtful accounts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Download as docx, pdf, or txt
    668 views5 pages

    Audit of The Sales and Collection Cycle

    Uploaded by

    mrs lee
    This document outlines an audit of the sales and collection cycle for a company. It describes the key accounts and business functions in the cycle, including sales, cash receipts, returns, bad debt expense, order processing, credit approval, shipping, billing, accounts receivable, and cash receipt processing. It then discusses the methodology for designing tests of controls and substantive transaction tests for sales, cash receipts, returns and allowances, and write-offs. The primary goals are to validate that transactions are complete, accurate, properly authorized and occur only once. The results of these tests would impact account balances for receivables, cash, bad debt expense and allowance for doubtful accounts.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 5

    Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of

    Transactions

    A. Accounts and Classes of Transactions in the Sales and Collection Cycle

    1. Sales

    2. Cash receipt

    3. Sales returns and allowances

    4. Write-off of uncollectible accounts

    5. Estimate of bad debt expense

    B. Business functions for the sales and collection cycle

    Processing customer orders

    - Customer order, costumer request for merchandise


    - Sales order, document description and information for goods

    Granting credit

    - Decently permitted person have to approve credit to customer for sales on account before
    the goods shipped
    - An indication of credit approval, the weak practices often result in excessive bad debts
    and account receivable also uncollectible may be occur

    Shipping goods

    - Shipping document, prepared to suggesting the description of merchandise, quantity


    shipped and include relevant data
    - Usually in the form of bill of lading or contract between carries and seller

    Billing Customers and recording sales

    These are most important aspects of billing:


    - All shipment made have been billed (completeness)
    - No shipment has been billed more than once (occurrence)
    - Each one is billed for the proper amount (accuracy)

    Sales invoice: a document or could be a electronic record contain the description and quantity of
    goods sold, price, freight charges, insurance, terms and data.

    Sales transaction file: computer generated file that includes all sales transactions

    Sales journal or listing: list or detail from sales transaction file that usually includes customer
    name, date, amount, and account classification like division or product line.

    Accounts receivable master file: to keep up customer account balances, this computer file used to
    record cash receipts, individual sales and allowances for customer.

    Accounts receivable trial balance: report that showed amount receivable from every customer at
    certain time

    Monthly statement: to let customer indicate beginning balance of their account receivable,
    monthly document can be sent by email or electronically.

    Processing and recording cash receipts

    - Remittance advice: a document sent to customer and typically returned cash payment to
    the seller. It indicates the name of the customer, the sales invoice number and the invoice
    amount
    - Prelisting of cash receipt: a list that prepared when those that have no access to
    accounting record when receive the cash
    - Cash receipt transaction file: a computer generated file that contains all transactions of
    cash receipt recorded by accounting system for a certain period of time
    - Cash receipts journal or listing

    Processing and recording sales return and allowances

    - Credit memo
    - Sales return and allowances journal
    Writing off uncollectible accounts receivable

    Uncollectible account authorization form: an internal document use to signify authority to


    write off an account receivable as uncollectible

    Providing for bad debts

    Because company can’t expect to earn 100 percent of their revenues, accounting
    principles require companies to report bad debt expense for the total sales they don’t plan
    to receive.

    C. Methodology for Designing Tests of Controls and Substantive Tests of Transactions for
    Sales
    1. Understand internal control – sales
    - Learning client’s flowchart
    - Make inquiries using questionnaires
    - Perform walkthrough test of sales
    2. Asses planned control risk – sales
    I. Auditor needs to provide a framework for resolving control risk
    II. Auditor would need classify the key internal control and deficiencies for sales
    III. After the controls and deficiencies been identified, the auditor associates them
    with the objectives
    IV. Auditor assesses control risk for each goal by analyzing the controls deficiencies
    for each objective
    Adequate separation of duties
    Because of both misstatements and fraud, proper separation of duties helps avoid both
    errors and fraud
    Proper authorization
    - Before a sale takes place, credit must be properly authorized
    - Goods should only be shipped after proper authorization
    - Price must be authorized, including basic terms, freight and discounts
    Prenumbered documents
    The purpose of prenumbering is to prevent both failure to bill or record sales and
    duplicate billings and recordings
    3. Determine extent of testing controls
    Design substantive test of transactions for sales
    Recorded sales occurred, three types of misstatements:
    - Sales included in journals for which no shipment had been made
    - Reported sales more than once
    - Shipments made to non-existent clients and reported as sales
     Existing sales transactions are recorded

    In certain audits no substantive transaction test are carried out for the purpose of
    completeness. This is because overstatements of sales transactions assets and revenues
    are more likely than understatements and overstatements are often factors which
    influence of audit risk

     Sales are accurately recorded

    Auditors also compare prices on duplicate sales invoices with an authorized price list,
    recalculate extensions and footings and compare invoice information with shipping
    records or specification, quantity and customer identification.

     Sales transactions are correctly included in the master file and correctly summarized
     Sales are recorded on the correct dates
     Recorded sales are correctly classified
    D. Sales Returns and Allowances

    1. Materiality. Auditor can ignore how so immaterial sales return and allowances are

    2. Emphasis on the occurrence objective. The auditors typically emphasize the checking
    of documented transactions to detect any theft of cash from the list of receivable accounts
    defined by a fictitious sales return or allowance

    E. Methodology for Designing Tests of Controls and Substantive Tests of Transactions for
    Cash Receipts
     Determine whether cash received was recorded
    The hardest type of cash embezzlement to identify by auditors is when it happens
    before the cash is reported in the cash receipt journal
     Prepare proof of cash receipt
    The total cash receipts reported in the cash receipts journal for a specified period,
    such as a month, shall be reconciled with actual deposits made to the bank during
    the same time
     Test to discover lapping of accounts receivable
    Lapping of accounts receivable is postponement of account receivables entries to
    cover up an existing cash shortage
    F. Audit Tests for the Write-Off of Uncollectible Accounts

    The primary concern of the auditor in the audit of the write-off of uncollectible accounts
    receivable is the risk of client personnel covering embezzlement by writing off accounts
    receivable which have already been received.

    G. Effects of results of test of controls and substantive tests of transactions

    Parts of audit that affected the most by the testing of controls and substantive tests of
    sales and collection cycle are the balances in account receivable, cash, bad debt and
    allowance for doubtful accounts.

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