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Audit of the Sales and Collection Cycle Chapter 13 Accounts in the Sales and Collection Cycle Sales Cash sales Sales on account Cash in Bank Cash Discounts Taken Accounts Receivable Beginning Cash receipts balance Sales returns Sales on and allowances account

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accounts in the sales and collection cycle
Accounts in the Salesand Collection Cycle

Sales

Cash

sales

Sales on

account

Cash in Bank

Cash Discounts

Taken

Accounts Receivable

Beginning Cash receipts

balance

Sales returns

Sales on and allowances

account

Charge-off of

Ending uncollectible

balance accounts

Sales Returns

and Allowances

Bad Debt

Expense

accounts in the sales and collection cycle3
Accounts in the Salesand Collection Cycle

Accounts Receivable

Beginning Cash receipts

balance

Sales returns

Sales on and allowances

account

Charge-off of

Ending uncollectible

balance accounts

Allowance for Uncollectible Accounts

Charge-off of Beginning

uncollectible balance

accounts

Estimate of bad

debt expense

Ending balance

Bad Debt

Expense

sales transaction
Sales Transaction

Accounts

Sales

Accounts receivable

Business

Functions

Processing customer orders,

Granting credit, Shipping goods,

Billing customers and recording sales

Documents

and Records

Sales invoice, Sales journal or listing, Sales

transaction file, Accounts receivable master

file and trial balance, Monthly statements

cash receipts transaction
Cash Receipts Transaction

Accounts

Cash in bank (debits from cash receipts)

Accounts receivable

Business

Functions

Processing and recording cash receipts

Documents

and Records

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

Accounts

Sales returns and allowances

Accounts receivable

Business

Functions

Processing and recording

sales returns and allowances

Documents

and Records

Credit memo

Sales returns and allowances journal

charge off of uncollectible accounts transaction
Charge-off of Uncollectible Accounts Transaction

Accounts

Accounts receivable

Allowance for uncollectible accounts

Business

Functions

Charging off uncollectible

accounts receivable

Documents

and Records

Uncollectible account authorization form

General journal

bad debt expense transaction
Bad Debt ExpenseTransaction

Accounts

Bad debt expense

Allowance for uncollectible accounts

Business

Functions

Providing for bad debts

Documents

and Records

General journal

effect of e commerce on the sales and collection cycle
Effect of E-Commerce on the Sales and Collection Cycle

Business-to-business (B2B)

Business-to-consumer (B2C)

Management’s assertions for sales and

collection activities remain the same.

effect of e commerce on the sales and collection cycle10
Effect of E-Commerce on the Sales and Collection Cycle

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.

methodology for designing controls and substantive tests sales
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

Sample size

Evaluate cost-benefit

of testing controls.

Items to select

Timing

transaction related audit objectives for sales
Transaction-Related AuditObjectives for Sales

Existence:

Recorded sales are for shipments actually made.

Completeness:

Existing sales transactions are recorded.

Accuracy:

Recorded sales are for the amount shipped.

design substantive tests of transactions for sales
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.

direction of tests for sales
Direction of Tests for Sales

Customer

order

Shipping

document

Duplicate

sales invoice

Completeness Start

Sales

journal

General

ledger

Accounts

receivable

master file

=

Existence Start

major audit objectives in the sales collection cycle
Major Audit Objectives in the Sales/Collection Cycle

Sales Transactions/Balance = Existence

Cash Receipts Transactions = Completeness

Sales Returns & Allowances = Existence

Write off of Bad Debts = Existence

Recording Bad Debt Expense = Existence

role of all audit tests in the sales and collection cycle
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, and AP

Audited by

TOC, STOT, and AP

Ending

balance

Ending

balance

Audited by AP and TDB

TOC+STOT+AP+TDB

= Sufficient competent evidence per GAAS