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Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions. 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 in Bank.

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Audit of the sales and collection cycle tests of controls and substantive tests of transactions

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

Chapter 14


Learning objective 1
Learning Objective 1 and Substantive Tests of Transactions

  • Identify the accounts and the

  • classes of transactions in the

  • sales and collection cycle.


Accounts in the sales and collection cycle
Accounts in the Sales and Collection Cycle and Substantive Tests of Transactions

Sales

Cash in Bank

Cash

sales

Accounts Receivable

Cash Discounts

Taken

Sales on

account

Beginning

balance

Cash receipts

Sales on

account

Sales returns

and allowances

Sales Returns

and Allowances

Ending

balance

Write-off of

uncollectible

accounts

Bad Debt

Expense


Accounts in the sales and collection cycle1
Accounts in the Sales and Collection Cycle and Substantive Tests of Transactions

Allowance for

Uncollectible Accounts

Accounts Receivable

Beginning

balance

Cash receipts

Write-off of

uncollectible

accounts

Beginning

balance

Sales on

account

Sales returns

and allowances

Estimate of

bad debt

expense

Ending

balance

Write-off of

uncollectible

accounts

Ending

balance

Bad Debt

Expense


Learning objective 2
Learning Objective 2 and Substantive Tests of Transactions

  • Describe the business functions

  • and the related documents and

  • records in the sales and

  • collection cycle.


Sales transaction
Sales Transaction and Substantive Tests of Transactions

Accounts

Business Functions

Documents and Records

Sales

Accounts

receivable

Processing

customer orders

Granting credit

Shipping goods

Billing customers

and recording

sales

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


Cash receipts transaction
Cash Receipts Transaction and Substantive Tests of Transactions

Accounts

Business Functions

Documents and Records

Cash in bank

(debits from

cash receipts)

Accounts

receivable

Processing and

recording cash

receipts

Remittance advice

Prelisting of cash

receipts

Cash receipts

transaction file

Cash receipts journal

or listing


Sales returns and allowances transaction
Sales Returns and Allowances Transaction and Substantive Tests of Transactions

Accounts

Business Functions

Documents and Records

Sales returns

and

allowances

Accounts

receivable

Processing and

recording sales

returns and

allowances

Credit memo

Sales and returns and

allowances journal


Write off of uncollectible accounts transaction
Write-off of Uncollectible Accounts Transaction and Substantive Tests of Transactions

Accounts

Business Functions

Documents and Records

Accounts

receivable

Allowance for

uncollectible

accounts

Writing off

uncollectible

accounts

receivable

Uncollectible account

authorization from

general journal


Bad debt expense transaction
Bad Debt Expense Transaction and Substantive Tests of Transactions

Accounts

Business Functions

Documents and Records

Bad debt

expense

Allowance for

uncollectible

accounts

Providing for bad

debts

General journal


Processing customer orders
Processing Customer Orders and Substantive Tests of Transactions

  • Customer Order:

  • A request for merchandise by a customer

  • Sales Order:

  • A document describing the goods ordered

  • by a customer


Granting credit
Granting Credit and Substantive Tests of Transactions

  • Before goods are shipped, a properly

  • authorized person must approve credit

  • to the customer for sales on account


Shipping goods
Shipping Goods and Substantive Tests of Transactions

  • This is the first point in the cycle

  • where company assets are given up


Billing customers and recording sales
Billing Customers and Recording Sales and Substantive Tests of Transactions

  • Sales invoice

  • Sales transaction file

  • Sales journal or listing

  • Accounts receivable master file

  • Accounts receivable trial balance

  • Monthly statement


Processing and recording cash receipts
Processing and Recording Cash Receipts and Substantive Tests of Transactions

  • Remittance advice

  • Prelisting of cash receipts

  • Cash receipts transaction file

  • Cash receipts journal or listing


Processing and recording sales returns and allowances
Processing and Recording Sales Returns and Allowances and Substantive Tests of Transactions

  • Credit memo

  • Sales returns and allowances journal


Writing off uncollectible accounts receivable
Writing Off Uncollectible and Substantive Tests of TransactionsAccounts 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
Providing for Bad Debts and Substantive Tests of Transactions

  • This provision represents a residual,

  • resulting from management’s

  • end-of-period adjustment of the

  • allowance for uncollectible accounts


Learning objective 3
Learning Objective 3 and Substantive Tests of Transactions

  • Understand internal control, and

  • design and perform tests of

  • controls and substantive tests

  • of transactions for sales.


Methodology for designing controls and substantive tests

Audit procedures and Substantive Tests of Transactions

Sample size

Items to select

Timing

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

substantive tests of transactions

for sales to meet transaction-

related audit objectives


Understand internal control sales
Understand Internal Control – Sales and Substantive Tests of Transactions

Study the client’s flowcharts, prepare

an internal control questionnaire, and

perform walk-through tests of sales.


Assess planned control risk sales
Assess Planned Control Risk – Sales and Substantive Tests of Transactions

Four Steps:

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 sales1
Assess Planned Control Risk – Sales and Substantive Tests of Transactions

  • Adequate separation of duties

  • Proper authorization

  • Adequate documents and records

  • Prenumbered documents

  • Monthly statements

  • Internal verification procedures


Determine extent of testing controls
Determine Extent of Testing Controls and Substantive Tests of Transactions

  • Audits of public companies

  • Audits of nonpublic companies


Transaction related audit objectives for sales
Transaction-related Audit and Substantive Tests of TransactionsObjectives 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 sales1
Transaction-related Audit and Substantive Tests of TransactionsObjectives 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.


Direction of tests for sales
Direction of Tests for Sales and Substantive Tests of Transactions

Customer

order

Shipping

document

Duplicate

sales

invoice

Sales

journal

General

journal

=

Accounts

receivable

master file

Existence

start

Completeness

start


Summary of methodology for sales
Summary of Methodology and Substantive Tests of Transactionsfor 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)


Learning objective 4
Learning Objective 4 and Substantive Tests of Transactions

  • Apply the methodology for controls

  • over sales transactions to controls

  • over sales returns and allowances.


Sales returns and allowances
Sales Returns and Allowances and Substantive Tests of Transactions

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.


Sales returns and allowances1
Sales Returns and Allowances and Substantive Tests of Transactions

There are, however, two important differences.

  • Materiality

  • Emphasis on objectives


Learning objective 5
Learning Objective 5 and Substantive Tests of Transactions

  • 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
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


Learning objective 6
Learning Objective 6 Cash Receipts

  • Apply the methodology for

  • controls over the sales and

  • collection cycle to write-offs

  • of uncollectible accounts

  • receivable.


Audit tests for the write off of uncollectible accounts
Audit Tests for the Write-Off Cash Receiptsof Uncollectible Accounts

  • Occurrence transaction-related audit objective

  • Proper authorization of the write-off of

  • uncollectible accounts

  • Verification of accounts written off


Additional internal controls over account balances
Additional Internal Controls Over Account Balances Cash Receipts

  • Realizable value

  • Credit approval

  • Aged accounts receivable trial balance

  • Writing off uncollectibles

  • Rights and obligations

  • Presentation and disclosure


Effect of results of controls and substantive tests of transactions
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

  • Cash

  • Bad debt expense

  • Allowance for doubtful accounts


Types of audit tests for the sales and collection cycle
Types of Audit Tests for the Sales and Collection Cycle Transactions

Sales

Accounts

Receivable

Cash in

Bank

Sales

transactions

Cash receipts

transactions

Audited by

TOC, STOT, and AP

Audited by

TOC, STOT, and AP

Ending

balance

Ending

balance

Audited by AP and TDB

TOC + STOT + AP + TDB

= Sufficient appropriate evidence


End of chapter 14

End of Chapter 14 Transactions