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Audit of the Sales and Collection Cycle PowerPoint PPT Presentation

Audit of the Sales and Collection Cycle Chapter 14 Learning Objective 1 Identify the accounts and the classes of transactions in the sales and collection cycle. Accounts in the Sales and Collection Cycle Sales Cash sales Sales on account Cash in Bank Cash Discounts Taken

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Audit of the Sales and Collection Cycle

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Audit of the sales and collection cycle l.jpg

Audit of the Sales andCollection Cycle

Chapter 14


Learning objective 1 l.jpg

Learning Objective 1

Identify the accounts and the

classes of transactions in the

sales and collection cycle.


Accounts in the sales and collection cycle l.jpg

Accounts in the Salesand Collection Cycle

Sales

Cash

sales

Sales on

account

Cash in Bank

Cash Discounts

Taken

Accounts Receivable

BeginningCash receipts

balance

Sales returns

Sales onand allowances

account

Ending

balance

Sales Returns

and Allowances

Bad Debt

Expense


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Accounts in the Salesand Collection Cycle

Accounts Receivable

BeginningCash receipts

balance

Sales returns

Sales onand allowances

account

Charge-off of

Endinguncollectible

balanceaccounts

Allowance for Uncollectible Accounts

Charge-off ofBeginning

uncollectiblebalance

accounts

Estimate of bad

debt expense

Ending balance

Bad Debt

Expense


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Learning Objective 2

Describe the business functions

and the related documents and

records in the sales and

collection cycle.


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Processing Customer Orders

Customer/Purchase Order:

A request for merchandise

by a customer

Sales Order:

A document describing the

goods ordered by a customer

Credit check and

Authorization to ship


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Granting Credit

Before goods are shipped, a properly

authorized person (system) must approve credit

to the customer for sales on account.

Access controls (Sales Dept)


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Sales Transaction

Accounts receivable (debit) esp. B2B/Big Ticket

Sales (credit)

Accounts

Business

Functions

Processing customer orders,

Granting credit, Shipping goods,

Billing customers and recording sales (j/e)

PO,SO, Shipping Document, Sales invoice (bill),

Sales journal or listing, Accounts receivable

Master file/sub ledger (confirmation),

Monthly statements sent to customers (control)

Documents

and Records


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Cash Receipts Transaction

Cash in bank (debit: form = check, EFT, etc.);

Accounts receivable (credit)

OR B2C (McDonalds): dr. cash, cr. sales

Accounts

Business

Functions

Processing and recording cash receipts

Separation of duties key! Lapping AR

Remittance advise, Prelisting of cash receipts

Separate

Cash receipts journal or listing, Bank rec,

and A/R records

Documents

and Records


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Sales Returns and Allowances Transaction

Accounts

Sales returns and allowances (debit–contra sales)

Accounts receivable (credit)

Business

Functions

Processing and recording

sales returns and allowances

Credit memo – put inv. back and credit

customer

Separate

Sales returns and allowances journal, A/R files

Documents

and Records


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Bad Debt ExpenseTransaction

Accounts

Bad debt expense (debit-contra sales)

Allowance for uncollectible accounts

(cr. contra A/R) – Estimate! Matching Princ.

Business

Functions

Providing for bad debts – Authorization and

review,

Separate from handling of cash!

Documents

and Records

General journal - Adjustment


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Charge-off of Uncollectible Accounts Transaction

Accounts receivable (credit)

Allowance for uncollectible accounts (debit)

No I/S effect – for known uncollectibles

Accounts

Business

Functions

Charging off uncollectible

accounts receivable – Authorization, Doc.,

Separation from cash handling – WHY?

Documents

and Records

Uncollectible account authorization form

A/R master files and G/L


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Learning Objective 3

Understand internal control,

and design and perform tests

of controls and substantive

tests of transactions for sales.


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Methodology for Designing Controlsand Substantive Tests: Sales

Design tests of controls

and substantive tests

of transactions for sales

to meet transaction-

related audit objectives.

Understand internal

control – sales

Assess planned

control risk – sales

Audit procedures/Staffing

Sample size/Budget

Evaluate cost-benefit

of testing controls.

Items to select

Timing


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Understanding InternalControl – Sales

Study the client’s flowcharts,

prepare an internal control

questionnaire/matrix, and perform

walk-through of sales.


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Preliminarily Assess Control Risk – Sales

Adequate separation

of duties

Proper authorization (C1)

Adequate documents

and records (C2)

Prenumbered

Documents (C5)

Monthly statements (C9)

Internal verification

procedures (C6)

See p. 452 (col 2) for

listing of controls!


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Control Risk below MAX?

Evaluate cost-benefit

of testing controls.

Design tests of

controls for sales.

See p. 452 (col 3)!


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Transaction-Related AuditObjectives for Sales

Occurrence (let’s go over I/C and ToT):

Recorded sales are for shipments actually made.

Completeness:

Existing sales transactions are recorded.

Accuracy (let’s go over I/C and ToT): :

Recorded sales are for the amount shipped.

Why are we going over Occurrence and Accuracy?

Is there a method to my madness?????????


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Direction of Tests for Sales

Customer

order

Shipping

document

Duplicate

sales invoice

Completeness Start

Sales

journal

General

ledger

Accounts

receivable

master file

=

Occurrence Start


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Design Substantive Testsof Transactions 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.


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Summary of Methodologyfor Sales

Table 14-2 p. 452:

Column 1:Transaction-related audit objectives

Column 2:Key internal controls (quest. and matrix)

Preliminary CR – test controls or CR at max?

Column 3:Test of controls – Final CR assessment

Column 4:Weaknesses – Material? Inc. CR? SOX

report? Remediate? Compensating control?

Column 5:Have DR, Substantive tests of transactions

If Prel. CR adjusted upwards for final CR– more ToT!!


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Learning Objective 5

Understand internal control and

design and perform tests of

controls and substantive tests

of transactions for cash receipts.


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Tests of Controls and Substantive Testsof Transactions for Cash Receipts

  • Table 14-3 p. 461– same process as Sales!

    Most important:

  • Determine whether cash received was recorded

    (completeness) Sep. duties, send mthly statements,

  • Test to discover lapping of accounts receivable:

  • Pocket cash and cover A/R with next cash receipt, and

  • so on – separation, vacation, compare name, timing,

  • and amount on remittance to cash receipts and A/R j/e

  • Prepare proof of cash receipts: trace from cash

    receipts journal to bank deposits, bank rec(occurrence)


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Learning Objective 6

Apply the methodology for controls

over the sales and collection cycle

to write-offs of uncollectible

accounts receivable.


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Audit Tests forUncollectible Accounts-I/C and ToT

What is a major concern in testing accounts

charged off as uncollectible?

Occurrence – writing off A/R accounts that have been

“collected.” We will hammer completeness

and real. value in A/R testing (analysis of aging).

Covering up cash pocketed by writing off accounts

receivable that have been collected. I/Cs: Separation of

duties, proper documentation and authorization.

ToTs: compare write-offs to independent credit

reports, look at past payment history.


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Effect of Results of Controls andSubstantive Tests of Transactions

In summary, the parts of the audit most affected

by the tests (I/C and ToT) for the sales and

collection cycle are:

Bad debt

Expense – bigger AP

Threshold?

Sales – only AP?

Accounts

Receivable – less confirms?

Allowance for

doubtful accounts –

bigger AP

threshold?

Cash – smaller sample

For Dep. In-transit?


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Role of all Audit Tests in the Sales and Collection Cycle

Sales

Accounts

Receivable

Cash in

Bank

Sales

transactions

Cash receipts

transactions

Audited by

TOC,STOT

Audited by

TOC, STOT

Ending

balance

Ending

balance

Ending

balance

Audited by AP and TDB

Audited by AP and TDB

TOC+STOT+AP+TDB

= Sufficient competent evidence per GAAS


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End of Chapter 14


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