Professional Documents
Culture Documents
Audit of The Sales and Collection Cycle
Audit of The Sales and Collection Cycle
Transactions
1. Sales
2. Cash receipt
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
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.
- 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
- Credit memo
- Sales return and allowances journal
Writing off uncollectible accounts receivable
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
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.
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.