Transcript Sales Transaction Assertions

Chapter 14
Audit of the Sales and Collection
Cycle
Statement
Presentation Outline
I.
Accounts and Documents in the Sales and
Collection Cycle
II. Segregation of Duties
III. Sales Transaction Audit Objectives
IV. Sales Return and Allowance Audit Objectives
V. Cash Collection Transaction Audit Objectives
VI. Other Sales and Collection Cycle
Considerations
I. Accounts and Documents in the
Sales and Collection Cycle
A. Accounts in the Sales and Collection Cycle
B. Documents in the Sales and Collection Cycle
A. Accounts in the Sales
and Collection Cycle
Sales
Cash
sales
Sales on
account
Cash in Bank
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on
and allowances
account
Charge-off of
Ending
uncollectible
balance
accounts
Cash Discounts
Taken
Sales Returns
and Allowances
Bad Debt
Expense
A. Accounts in the Sales
and Collection Cycle (continued)
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
B. Documents in the Sales and Collection
Cycle
 Bill of lading – a written contract between a carrier and
seller for the receipt and shipment of goods.
 Sales invoice – a document indicating the description
and quantity of goods sold, the price, freight charges,
insurance, terms, and other relevant data.
 Credit memo – a document indicating a reduction in the
amount due from a customer because of returned goods
or an allowance granted
 Remittance advice – a document that accompanies the
sales invoice mailed to the customer that can be returned
to the seller with the cash payment
 Customer statement – A document summarizing
customer balance and account activity, that is sent to the
customer for billing purposes.
II. Segregation of Duties in the
Revenue Cycle
A. Authorizing sales transactions
B. Approving credit
C. Recording sales
D. Maintaining custody of goods
E. Suggested List of Duties to be Segregated
A. Authorizing Sales Transactions
Sales transactions are
initiated by a customer
order. The customer
order provides the
basis for preparing a
sales order.
B. Approving Credit
A copy of the sales order
is sent to the credit
department for
approval. A computer
may simply compare
preestablished credit
limits to see if the
customer has credit
available
C. Recording Sales
 Accounts receivable
maintains the accounts
receivable subsidiary
ledger. May be a
computerized
accounts receivable
master file.
 General accounting
maintains control
accounts in the
general ledger.
D. Maintaining Custody of Goods
Custody of goods in
warehouse or awaiting
shipment.
E. Suggested List of Duties to be
Segregated
Authorization Functions:
 Receiving orders for sales
 Granting credit and pursuing unpaid accounts
Recordkeeping Functions:
 Billing customers and recording sales
 Maintaining inventory records
 Maintaining general ledger accounting records
 Maintaining detailed accounts receivable records
Custody of Asset Functions:
 Shipping goods
 Processing cash receipts
III. Sales Transaction Audit
Objectives
A.
B.
C.
D.
E.
F.
Existence
Completeness
Accuracy
Classification
Timing
Posting and Summarization
Note: See Table 13-2 on pages 382-383 for a full description of
Transaction-related objectives for sales
A. Sales Transactions
Existence

Test of control – Examine sales invoice for supporting bill
of lading and customer order.
Substantive test – Auditor is concerned with three types of
misstatements:
 Recorded sale with no shipment – Trace from sales journal
entry to shipping document
 Sale recorded more than once – Check cancellation of
shipping documentation.
 Shipments made to nonexistent customers – Person
recording sales should not authorize shipments.

B. Sales Transactions
Completeness

Test of control – Account for sequence of shipping
documents.
Substantive test – Many audits ignore
completeness on the grounds that overstatement
of income are of greater concern. However, errors
may still misstate financial statements. One
effective procedure is to trace from shipping
documents to the sales invoice and entry in the
sales journal.

C. Sales Transactions
Accuracy

Test of control – Examine the approved price list
for accuracy and proper authorization.

Substantive test – Start with entries in the sales
journal and compare the total of selected
transactions with accounts receivable master file
entries and duplicate sales invoices.
D. Sales Transactions
Classification


Test of control – Examine document package for
duplicate verification.
Substantive test – When there are cash and credit
sales, it is important not to debit accounts
receivable for a cash sale or to credit sales for
collection of a receivable. It is also important not
to classify sales of operating assets as sales. A
common procedure is to examine duplicate sales
invoice for proper account classification.
E. Sales Transactions
Timing

Test of control –Account for sequence of shipping
documents.
Substantive test – Sales should be billed when
ownership is transferred to the customer. A
common procedure is to compare the date of
recording a sale in the sales journal with the date
on the duplicate sales invoice and bill of lading.

F. Sales Transactions
Posting and Summarization

Test of control – Examine evidence that accounts
receivable master file is reconciled to the general
ledger.

Substantive test – Use audit software to foot and
cross-foot the sales journal and trace totals to the
general ledger.
IV. Sales Return and Allowance
Audit Objectives
A. An Internal Control for Existence
B. An Internal Control for Completeness
C. Common Types of Transactions
The objectives and methodology for auditing sales returns
and allowances is the same as for sales. The same procedure
can be used to develop suitable controls, tests of controls, and
substantive tests of transactions to verify the amounts.
A. Sales Adjustment
Existence
Ensuring that recorded
sales adjustments
actually occurred is
important because a
diversion of cash
from an account
receivable collection
could be covered up
by a fictitious sales
return or allowance.
Ensure that all sales returns
and allowances and chargeoffs are approved by
appropriate personnel.
B. Sales Adjustment
Completeness
Form #36
Sales Adjustment Form
Discount for
Damaged
merchandise
$5
Approval
RS
General Journal
Sales Allowance 5
Acc. Rec.
5
Record Adjustment #36
Unrecorded sales returns
and allowances can be
material and can be
used by a company’s
management to
overstate net income.
Ensure that prenumbered sales
adjustment forms are used,
and that all forms are
accounted for.
C. Major Types of Sales Adjustment
Transactions
1. Customers may receive discounts for paying
early.
2. Customers may return goods or request selling
price reductions.
3. Incorrect billing.
4. Bad debt write-offs.
V. Cash Collection Transaction
Audit Objectives
A. Existence
B. Completeness
C. Accuracy
D. Classification
E. Timing
F. Posting and Summarization
A. Cash Collections
Existence


Test of control – Observe whether accountant
reconciles bank account.
Substantive test – Trace cash receipts entries from
the cash receipts journal entries to the bank
statement.
B. Cash Collections
Completeness


Test of control – Observe prelisting of cash
receipts.
Substantive test – Compare the prelisting with the
duplicate deposit slip.
C. Cash Collections
Accuracy


Test of control – Observe whether accountant
reconciles bank account.
Substantive test – Prepare a proof of cash receipts
to reconcile cash receipts per books with cash
receipts per bank.
D. Cash Collections
Classification


Test of control – Examine evidence of internal
verification.
Substantive test – Examine prelisting for proper
account classification.
E. Cash Collections
Timing
Test of control – Observe unrecorded cash at a
point in time to see when it is recorded.

Substantive test – Compare date of deposit in
bank statement to the dates in the cash receipts
journal and prelisting of cash receipts.

E. Cash Collections
Posting and Summarization

Test of control – Examine evidence that accounts
receivable master file is reconciled to general
ledger.

Substantive test – Use audit software to foot and
cross-foot the cash receipts journal and trace to
the general ledger.
VI. Other Sales and Collection
Cycle Considerations
A. Lapping of Accounts Receivable
B. Audit Tests for Uncollectible Accounts
A. Lapping of Accounts Receivable
Lapping is when, to cover a cash theft, an employee defers
recording cash receipts from one customer and covers the
shortage with receipts from another customer. It can be
detected by comparing the name, amount, and dates shown on
remittance advices with cash receipts journal entries and
related duplicate deposit slips.
Dishonest Employee
Customer A
Customer
A’s
Account
Customer
B’s
Account
Customer B
B. Audit Tests for Uncollectible
Accounts
 Major concern is that client covers up a theft by
charging off accounts receivable that have actually
been collected.
 Audit tests for proper authorization of write-off.
This often involves an aged analysis of
receivables. It is also usually necessary to
examine correspondence in client files to establish
uncollectibility.
 After the auditor has concluded that the accounts
should be charged off, the auditor should verify the
corresponding journal entries and postings into
the general and subsidiary ledgers.
Summary
Accounts and Documents in the Sales and
Collection Cycle
Segregation of Duties
Sales Transaction Audit Objectives
Sales Return and Allowance Transaction Audit
Objectives
Cash Collection Transaction Audit Objectives
Lapping of Accounts Receivable
Uncollectible Accounts