Chapter 14 Audit of the Sales and Collection Cycle.ppt

14 - 1
©2006 Prentice Hall Business Publishing, Auditing 11/e, Arens/Beasley/Elder
Audit of the Sales and
Collection Cycle:
Tests of Controls and
Substantive Tests of
Transactions
Chapter 14

14 - 2
Learning Objective 1
Identify the accounts and the
classes of transactions in the
sales and collection cycle.

14 - 3
Accounts in the Sales and
Collection Cycle
Sales
Cash
sales
Sales on
account
Accounts Receivable
Cash receipts
Sales returns
and allowances
Charge-off of
uncollectible
accounts
Beginning
balance
Sales on
account
Ending
balance
Cash in Bank
Cash Discounts
Taken
Bad Debt
Expense
Sales Returns
and Allowances

14 - 4
Accounts in the Sales and
Collection Cycle
Accounts Receivable
Cash receipts
Sales returns
and allowances
Charge-off of
uncollectible
accounts
Beginning
balance
Sales on
account
Ending
balance
Allowance for
Uncollectible Accounts
Charge-off of
uncollectible
accounts
Beginning
balance
Estimate of
bad debt
expense
Ending
balance
Bad Debt
Expense

14 - 5
Describe the business functions
and the related documents and
records in the sales and
collection cycle.

14 - 6
Sales Transaction
Accounts
 Sales
 Accounts
receivable
Business functions
 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 document
 Sales invoice
 Sales transaction file
 Sales journal or listing
 Accounts receivable
master file
 Accounts receivable
trial balance
 Monthly statements

14 - 7
Cash Receipts Transaction
Accounts
 Cash in bank
(debits from
cash receipts)
 Accounts
receivable
Business functions
 Processing and
recording cash
receipts
Remittance advice
 Prelisting of cash
receipts
 Cash receipts
transaction file
 Cash receipts journal or
listing

14 - 8
Sales Returns and Allowances
Transaction
Accounts
 Sales returns
and
allowances
 Accounts
receivable
Business functions
 Processing and
recording sales
returns and
allowances
 Credit memo
 Sales and returns and
allowances journal

14 - 9
Charge-off of Uncollectible
Accounts Transaction
Accounts
 Accounts
receivable
 Allowance for
uncollectible
accounts
Business functions
 Charging off
uncollectible
accounts
receivable
 Uncollectible account
authorization form
 General journal

14 - 10
Bad Debt Expense Transaction
Accounts
 Bad debt
expense
 Allowance for
uncollectible
accounts
Business functions
 Providing for bad
debts
 General journal

14 - 11
Processing Customer Orders
Customer Order:
A request for merchandise by a customer
Sales Order:
A document describing the goods ordered
by a customer

14 - 12
Granting Credit
Before goods are shipped, a properly
authorized person must approve credit
to the customer for sales on account.

14 - 13
Shipping Goods
This is the first point in the cycle
where company assets are given up.

14 - 14
Billing Customers and Recording
Sales
Sales invoice
Sales transaction file
Sales journal or listing
Accounts receivable master file
Accounts receivable trial balance
Monthly statement

14 - 15
Processing and Recording Cash
Receipts
Remittance advice
Prelisting of cash receipts
Cash receipts transaction file
Cash receipts journal or listing

14 - 16
Processing and Recording Sales
Returns and Allowances
Credit memo
Sales returns and allowances journal

14 - 17
Charging 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.

14 - 18
Providing for Bad Debts
This provision represents a residual,
resulting from management’s
end-of-period adjustment of the
allowance for uncollectible accounts.

14 - 19
Understand how e-commerce
activities affect the sales
and collection cycle.

14 - 20
Effect of E-Commerce on the
Sales and Collection Cycle
The Internet and other developing
technologies allow companies to
develop new business models.

14 - 21
Business-to-business (B2B)
Business-to-consumer (B2C)
Management’s assertions for sales and
collection activities remain the same.

14 - 22
Auditors should obtain an understanding
of the design and operation of key internal
controls over e-commerce revenues.
Evidence for e-commerce activities is
likely to be in electronic form.

14 - 23
Understand internal control,
and design and perform tests
of controls and substantive
tests of transactions for sales.

14 - 24
Methodology for Designing
Controls and Substantive Tests
of Sales Transactions for Sales
Understand internal
control – sales.
Audit procedures
Sample size
Items to select
Timing
Assess planned
control risk – sales.
Determine extent of
testing controls.
Design tests of controls and
substantive tests of transactions
for sales to meet transaction
-related audit objectives.

14 - 25
Understand Internal Control –
Sales
Study the client’s flowcharts, prepare
an internal control questionnaire, and
perform walk-through tests of sales.

14 - 26
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

14 - 27
Proper authorization
Assess Planned Control Risk –
Sales
Internal verification
procedures
Prenumbered
documents
Monthly statements
Adequate documents
and records
Adequate separation
of duties

14 - 28
Determine Extent of Testing
Controls
Audits of public
companies
Audits of nonpublic
companies

14 - 29
Transaction-Related Audit
Objectives for Sales
Existence:
Recorded sales are for shipments actually made.
Accuracy:
Recorded sales are for the amount shipped.
Completeness:
Existing sales transactions are recorded.

14 - 30
Transaction-Related Audit
Objectives for Sales
Classification:
Sales transactions are properly classified.
Timing:
Sales are recorded on the correct dates.
Posting and summarization:
Sales transactions are properly included
in the accounts receivable master file.

14 - 31
Direction of Tests for Sales
Completeness
start
Existence
start
Customer
order
Shipping
document
Duplicate
sales
invoice
Sales
journal
General
journal
Accounts
receivable
master file
=

14 - 32
Summary of Methodology for
Sales
Transaction-related audit objectives (Column 1)
Key existing controls (Column 2)
Tests of control (Column 3)
Deficiencies (Column 4)
Substantive tests of transactions (Column 5)

14 - 33
Apply the methodology for
controls over sales transactions
to controls over sales returns
and allowances.

14 - 34
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.

14 - 35
There are, however, two important differences.
Materiality
Emphasis on
objectives

14 - 36
Understand internal control, and
design and perform tests of
controls and substantive tests
of transactions for cash receipts.

14 - 37
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.

14 - 38
Apply the methodology for
controls over the sales and
collection cycle to write-offs
of uncollectible accounts
receivable.

14 - 39
Audit Tests for Uncollectible
Accounts
Existence of recorded write-offs is the most
important transaction-related audit objective.
What is a major concern in testing accounts
charged off as uncollectible?
– covering up a defalcation by charging off
accounts receivable that have been collected

14 - 40
Additional Internal Controls Over
Account Balances
Realizable value
Credit approval
Aged accounts receivable trial balance
Charging off uncollectibles

14 - 41
Additional Internal Controls Over
Account Balances
Rights and obligations
Presentation and disclosure

14 - 42
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:
Accounts receivable
Bad debt expense
Cash
Allowance for
doubtful accounts

14 - 43
Types of Audit Tests for the Sales
and Collection Cycle
Sales
Accounts
Receivable
Cash in
Bank
Sales
transactions
Cash receipts
transactions
Ending
balance
Ending
balance
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
Audited by
TOC, STOT, and AP
Audited by AP and TDB
Audited by
TOC, STOT, and AP

14 - 44
End of Chapter 14

Chapter 14 Audit of the Sales and Collection Cycle.ppt

In this document

More Related Content

What's hot

Similar to Chapter 14 Audit of the Sales and Collection Cycle.ppt

Recently uploaded

Chapter 14 Audit of the Sales and Collection Cycle.ppt