arens13 audit cycle sales

8/12/2019 Arens13 Audit Cycle Sales

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2003 Prentice Hall Business Publishing,Auditing and Assurance Services 9/e,Arens/Elder/Beasley 13 - 1

Audit of the Sales and

Collection Cycle

Chapter 13


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Learning Objective 1

Identify the accounts and the

classes of transactions in the

sales and collection cycle.


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Accounts in the Sales

and Collection Cycle

Sales

Cash

sales

Sales on

account

Cash in Bank

Cash Discounts

Taken

Sales Returns

and Allowances

Bad Debt

Expense

Accounts Receivable

Beginning Cash receipts

balance

Sales returns

Sales on and allowances

accountCharge-off of

Ending uncollectible

balance accounts


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Processing Customer Orders

Customer Order:

A request for merchandiseby a customer

Sales Order:

A document describing thegoods ordered by a customer


7/432003 Prentice Hall Business Publishing,Auditing and Assurance Services 9/e,Arens/Elder/Beasley 13 - 7

Granting Credit

Before goods are shipped, a properlyauthorized person must approve credit

to the customer for sales on account.



Sales Transaction

Accounts

Business

Functions

Documents

and Records

Sales

Accounts receivable

Processing customer orders,

Granting credit, Shipping goods,

Billing customers and recording sales

Sales invoice, Sales journal or listing, Sales

transaction file, Accounts receivable master

file and trial balance, Monthly statements



Cash Receipts Transaction

Accounts

Business

Functions

Documents

and Records

Cash in bank (debits from cash receipts)

Accounts receivable

Processing and recording cash receipts

Remittance advise, Prelisting of cash receipts,

Cash receipts transaction file,

Cash receipts journal or listing


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Charge-off of Uncollectible

Accounts Transaction

Accounts

Business

Functions

Documents

and Records

Accounts receivable

Allowance for uncollectible accounts

Charging off uncollectible

accounts receivable

Uncollectible account authorization form

General journal



Bad Debt Expense

Transaction

Accounts

Business

Functions

Documents

and Records

Bad debt expense

Allowance for uncollectible accounts

Providing for bad debts

General journal



Shipping Goods

This is the first point in the cycle

where company assets are given up.

Shipping

document


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Processing and Recording

Cash Receipts

Remittance advisePrelisting of cash receipts

Cash receipts transaction file

Cash receipts journal or listing



Lockbox Systems and

Electronic Funds Transfer

Customer

Bank

Order/Payment

Information

Company



Processing and Recording

Sales Returns and Allowances

Credit memo

Sales returns and

allowances journal


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Providing for Bad Debts

This provision represents a residual,

resulting from managements

end-of-period adjustment of the

allowance for uncollectible accounts.




Understand how e-commerce

activities affect the

sales and collection cycle.


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Effect of E-Commerce on the

Sales and Collection Cycle

The Internet

The Internet andother developing

technologies allow

companies to developnew business models.


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Business-to-business (B2B)

Business-to-consumer (B2C)

Managements assertions for sales and

collection activities remain the same.


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Auditors should obtain an understanding

of the design and operation of key internalcontrols over e-commerce revenues.

Evidence for e-commerce activities

is likely to be in electronic form.


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Understand internal control

and design and perform tests

of controls and substantive

tests of transactions for sales.


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Methodology for Designing Controls

and Substantive Tests: Sales

Understand internal

controlsales

Assess planned

control risksales

Evaluate cost-benefit

of testing controls.

Design tests of controls

and substantive tests

of transactions for sales

to meet transaction-

related audit objectives.

Audit procedures

Sample size

Items to select

Timing


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Understanding Internal

ControlSales

Study the clients flowcharts,

prepare an internal control

questionnaire, and performwalk-through tests of sales.


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Assess Planned

Control RiskSales

Adequate separationof duties

Proper authorizationAdequate documentsand records Prenumbered

documentsMonthly statements

Internal verificationprocedures


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Internal Verification

Procedures

Evaluate cost-benefit

of testing controls.

Design tests of

controls for sales.


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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.


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Design Substantive Tests

of 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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Direction of Tests for Sales

Customerorder

Shippingdocument

Duplicatesales invoice

Salesjournal

Generalledger

Accountsreceivablemaster file

=

Completeness Start

Existence Start


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Apply the methodology for

controls over sales transactions

to controls over sales

returns and allowances.


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Sales Returns

and Allowances

The transaction-related audit objectives

and clients methods of controlling

misstatements are essentially the same

for processing credit memos as those

described for sales.

l


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Sales Returns

and Allowances

There are, however, two important differences.

MaterialityEmphasis on

objectives


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Understand internal control and

design and perform tests of

controls and substantive tests

of transactions for cash receipts.


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Apply the methodology for controls

over the sales and collection cycle

to write-offs of uncollectible

accounts receivable.

A di T f


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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 offaccounts receivable that have been collected

Addi i l I l C l


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Additional Internal Controls

Over Account Balances

Realizable value

Rights and obligations

Presentation and disclosure

Eff t f R lt f C t l d


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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

R l f ll A dit T t i th


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Role of all Audit Tests in the


SalesAccounts

ReceivableCash inBank

Sales

transactions

Cash receipts

transactions

Endingbalance

Endingbalance

TOC+STOT+AP+TDP= Sufficient competent evidence per GAAS

Audited byTOC,STOT, and AP

Audited by AP and TDP

Audited byTOC, STOT, and AP


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End of Chapter 13