Chapter 14

Audit of the Sales and Collection Cycle 1

Iffy

what are the primary transactions in the sales and collection cycle ?

2

•

Sales (cash sales and credit sales)

•

Cash receipts

• Sales returns and allowances • Write-off of uncollectible accounts • Estimate bad debt expense Page 243 3

Sales & Collection Transaction cycle

“credit sales” accounts receivable sales “cash receipts” cash accounts rec x.xx

x.xx

x.xx

x.xx

4

auditing account balances cash 250 450 350 550 200 100 375 190 300 200 275 100 450 300 190 320 330 accounts receivable 800 550 200 100 375 190 480 365 450 350 550 200 100 375 190 845 sales 550 200 100 375 190 480 365 2,260 5

auditing transaction cycles 450 350 550 200 100 375 190 cash 250 300 200 275 100 450 300 190 320 accounts receivable 800 550 200 100 375 190 480 365 450 350 550 200 100 375 190 330 845 sales 550 200 100 375 190 480 365 2,260 6

Cash Receipts = + beginning Accounts Receivable Sales ending Accounts Receivable 7

Courtney

the SEC requires four criteria be satisfied in order to recognize revenue what are those four criteria ?

8

Revenue Recognition “SEC”

1. Persuasive evidence of an arrangement exists provided 3.

Seller’s price is fixed 9

COSO components of internal control Control environment Risk assessment Control activities adequate separation of duties proper authorization of transactions & activities p. 166 adequate documents & records physical control over assets & records page 243-7 independent checks on performance Information and communication Monitoring 10

Documents & Records

Customer order

Sales order Shipping document Sales invoice

Sales journal Accounts receivable trial balance

Remittance advice Prelisting of cash receipts

Cash receipts journal

p. 244 p. 244 p. 244 p. 245 p. 245 p. 246 p. 246 p. 246 p. 247 11

Melanie

what is the objective of AU-C section 315?

12

AU-C 315 Assessing RoMM & Understanding the Entity & Its Internal Control

.03 The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby providing a basis for designing and implementing responses to the assessed risks of material misstatement.

13

JP

What steps must we document to demonstrate a minimal understanding of the accounting system ?

14

page 160/169 The classes of transactions that are significant Procedures by which those transactions are: Initiated & authorized, Documented & recorded what accounting records exist, Processed through the accounting system into the GL, and reported in the financial statements.

How the info system captures other events that are significant to the financial statements Reporting process used to prepare the financial statements, including significant estimates and disclosures.

15

16

Assessing Control Risk significant classes of Transactions

For each Significant Class of Transaction we must document our understanding of the Accounting Process from Initiation --- into Financial Statements (probably with a flowchart) and assess Control Risk for each of the 5 management assertions 17

18

Matt F

What is the objective of AU-C section 500?

19

AU-C 500 Audit Evidence

.04 The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

20

Assessing Control Risk significant classes of Transactions

For each Significant Class of Transaction for mgmt assertions that we assess CR < MAX we must identify specific Control Procedures 21

preliminary Control Risk assessment significant classes of Transactions

preliminary Control Risk assessment

pages 176 & 260 Credit sales Cash receipts

Payroll Cash Disburse Purchasing

occur complete accurate med Low

Low Low Low

Low med

Low Low Low

Low Low

Max Low Low

class Low Low

Low Low Low

cutoff Med Low

Max Low Low 22

whenever we assess Control Risk less than Max

Credit Sales Transactions

p. 176 Control activity Test of Control Proc Results Of ToC

Occurrence med Completeness Low Accuracy Low Classification Low Cutoff med n/a n/a n/a 23

whenever we assess Control Risk less than Max

Cash R

ecei

pts Transactions

p. 260 Control activity Test of Control Proc Results Of ToC

Occurrence Low Completeness med Accuracy Low Classification Low Cutoff Low 24

Cyle

Test of Controls

sales & collection

Class of transactions

credit sales

Table 2 on

page 252

25

p. 252 26

Substantive Tests of Transactions

Cycle Class of transactions

sales & collection

credit sales

Table 2 on

page 252

27

28

Megan

Describe Vouching Describe Tracing 29

Cycle

Test of Controls

sales & collection

Class of transactions

cash receipts

Table 3 on

page 261

30

whenever we assess Control Risk less than Max

Cash R

ecei

pts Transactions

p. 260 Control activity Test of Control Proc Results Of ToC

Occurrence Low Completeness med Accuracy Low Classification Low Cutoff Low 31

see CR Matrix p. 260

32

Substantive Tests of Transactions

Cycle

sales & collection

Class of transactions

cash receipts

Table 3 on

page 261

33

34

bank reconciliation

per bank statement

ADD: deposits in transit 120,262 outstanding checks adjusted balance 3086 3087 3088 3089 3090 1440 1441 8,425 17,845 226 21,600 47 1,428 1,000 832 41 26,270 -25,174 121,358

per General Ledger

less NSF check adjusted balance 121,558 -200 121,358 35

page 329

proof of cash

balance 12/31/LY

per bank statement

115,261 deposits in transit @ 12/31/LY @ 12/31/CY outstanding checks @ 12/31/LY @ 12/31/CY

adjusted balance

21,321 (27,264)

109,318 depositsw-drawals CR checks

balance 12/31/CY 912,275 907,274 120,262 (21,321) 26,270

917,224

(27,264) 25,174

905,184

26,270 (25,174)

121,358 per Gen Ledger

less NSF check

adjusted balance

109,318

109,318

917,224

917,224

904,984 200

905,184

121,558 (200)

121,358

36

page 329

proof of cash

balance 12/31/LY

per bank statement

115,261 deposits in transit @ 12/31/LY @ 12/31/CY outstanding checks @ 12/31/LY @ 12/31/CY

adjusted balance

21,321 (27,264)

109,318 depositsw-drawals CR checks

balance 12/31/CY 912,275 907,274 120,262 (21,321) 26,270

917,224

(27,264) 25,174

905,184

26,270 (25,174)

121,358 per Gen Ledger

less NSF check

adjusted balance

109,318 917,224

109,318 917,224

904,984 200

905,184

121,558 (200)

121,358

37

Cash Receipts = + beginning Accounts Receivable Sales ending Accounts Receivable 38

Donne

How do we reduce detection risk ?

39

Holly

What is the achieved detection risk (not planned detection risk) at the start of every audit ?

40

Craig

what is the audit risk model ?

41

Audit Risk Model

AAR  IR  CR  PDR AAR  RoMM  PDR rearrange PDR  AAR RoMM the required level of DR is a function of the CR assessment PDR  f ( CR )  c CR if PDR  high  limited Substantiv e Tests if PDR  low  extensive Substantiv e Tests 42

43

44

cut-off as of 12/31/2014

45

Dominic credit sales

In the Sales Journal ---- Are you going to audit the last 25 entries prior to 12/31/14 or the first 25 entries after 1/1/15 46

date

12/30 12/30 12/30 12/31 12/31 12/31 12/31 1/2 1/2 1/2 1/3

customer

Babbitt Bros.

Miller Motor Co.

Abbot Sisters Orielly RV Center Desert Toyota David Bradley Abbot Sisters Sullivan's Store Carlson Inc.

Babbitt Bros.

Holmes Tuttle

Sales Journal invoice no.

ref amount balance

7801 7802 7803 7804 7805 7806 7809 7810 7811 7812 1,060 1,135 780 930 1,540 2,121 1,457 1,440 1,690 1,960 2,560 135,000 136,135 136,915 137,845 139,385 141,506 1,440 3,130 5,090 7,650 47

Brianna

will you Vouch or Trace ?

48

Colby

what does the evidence indicate if you Vouch the last 25 entries in the Sales Journal, prior to 12/31/14 to Shipping Documents dated on or prior to 12/31/14?

49

Colleen

what does the evidence indicate if you Vouch the last 25 entries in the Sales Journal, prior to 12/31/14, to Shipping Documents which are dated on or after 1/1/15 ?

50

shipping documents sales (and receivables) cut-off

at the loading dock

51

52

shipping documents

goods shipped in 2014 2015 53

date

12/30 12/30 12/30 12/31 12/31 12/31 12/31 12/31 12/31 1/2 1/3

Sales Journal customer

Babbitt Bros.

Miller Motor Co.

Abbot Sisters Orielly RV Center Desert Toyota David Bradley Abbot Sisters Sullivan's Store Carlson Inc.

Babbitt Bros.

Holmes Tuttle

invoice no.

ref

7801 7802 7803 7804 7805 7806 7807 7808 7809 7810 7811

amount

1,060 1,135 780 930 1,540 2,121 1,457 1,440 1,690 1,960 2,560

balance

135,000 136,135 136,915 137,845 139,385 141,506 142,963 144,403 146,093 1,960 4,520 54

Adam

do you want to audit the last 25 orders that were actually shipped prior to 12/31/14 or the first 25 orders that were shipped in January of 2015 55

Kyle C

will you Vouch or Trace ?

56

Stephanie

what would the evidence indicate if you trace the last 25 shipments on Dec. 31, 2014 into the 2014 Sales Journal?

57

Bill

what would the evidence indicate if you traced the first 25 shipments on Jan. 1, 2015 into the 2015 Sales Jnl ?

58

shipping documents

goods shipped in 2014 2015 59

date

12/30 12/30 12/30 12/31 12/31 12/31 1/2 1/2 1/3 1/3

customer

Babbitt Bros.

Miller Motor Co.

Abbot Sisters Orielly RV Center Desert Toyota David Bradley Abbot Sisters Sullivan's Store Carlson Inc.

Babbitt Bros.

Holmes Tuttle

Sales Journal invoice no.

ref amount balance

7801 7802 7803 7804 7805 7806 7809 7810 7811 7812 1,060 1,135 780 930 1,540 2,121 1,457 1,440 1,690 1,960 2,560 135,000 136,135 136,915 137,845 139,385 141,506 1,440 3,130 5,090 7,650 60

Katie

what would the evidence indicate if you traced the first 25 shipments on Jan. 1, 2015 into the 2014 Sales Journal?

61

date

12/30 12/30 12/30 12/31 12/31 12/31 12/31 12/31 1/3 1/3

customer

Babbitt Bros.

Miller Motor Co.

Abbot Sisters Orielly RV Center Desert Toyota David Bradley Abbot Sisters Sullivan's Store Carlson Inc.

Babbitt Bros.

Holmes Tuttle

Sales Journal invoice no.

ref amount balance

7801 7802 7803 7804 7805 7806 7809 7810 7811 7812 1,060 1,135 780 930 1,540 2,121 1,457 1,440 1,690 1,960 2,560 135,000 136,135 136,915 137,845 139,385 141,506 144,403 146,093 1,960 4,520 62

Kayla

what opinion do we issue while performing substantive tests you find material misstatements in the financial statements the client refuses to adjust their financial statements 63

Chris S

what opinion do we issue while performing substantive tests we find material misstatements in the financial statements the client agrees to make the necessary adjustments prior to issuing the financial statements 64

Eastwood

what does it imply about the effectiveness of their internal controls while performing substantive tests you find material misstatements in the financial statements 65

Cash cut off 12-31-14

66

Kelly Cash Receipts Journal

Are you going to audit the last 25 entries in CR Jnl the prior to 12/31/14 or the first 25 entries in the CR Jnl after 1/1/15 67

Connor

cash receipts - will you Vouch or Trace ?

68

Norman

cash receipts with which financial statement assertion are you most concerned if we are auditing cash receipts?

69

12/31 1/1 cash 250 450 350 550 200 300 200 275 100 450 100 375 190 300 190 320 70

Colton

cash receipts you are Vouching the last 25 entries in the cash receipts journal prior to 12/31/14?

give me an example of evidence that supports the recorded balance 71

Eric

cash receipts you are Vouching the last 25 entries in the cash receipts journal prior to 12/31/14 ?

give me an example of evidence that indicates Cash Receipts are overstated 72

Chris M Cash Disbursements Journal

will you audit the last 25 entries in the CD Jnl prior to Dec. 31st or the first 25 entries in the CD Jnl after Jan 1 st 2015 73

Mandy

cash disbursements with which financial statement assertion are you most concerned if you are auditing cash disbursements ?

74

12/31 1/1 cash 250 450 350 550 200 300 200 275 100 450 100 375 190 300 190 320 75

Calvin

You are auditing the first 25 entries in the CD Jnl dated 1/1/2015 ?

Give me an example of evidence that would indicate cash disbursements are correct 76

Manuel

You are auditing the first 25 entries in the CD Jnl dated 1/1/2015 ?

Give me an example of evidence that would indicate cash disbursements are understated 77

78

Brian C

what are two forms of receivables confirmations ?

79

forms of receivables confirmations ?

positive (also blank form) negative p 291 p 291 80

81

AU Section 330 The Confirmation Process (Supersedes section 331.03.08) Source: SAS No. 67.

Effective for audits of fiscal periods ending after June 15, 1992, unless otherwise indicated.

Introduction and Applicability 01 This section provides guidance about the confirmation process in audits performed in accordance with generally accepted auditing standards. This section ù Defines the confirmation process (see paragraph .04).

ù Discusses the relationship of confirmation procedures to the auditor's assessment of audit risk (see paragraphs .05 through .10).

ù Describes certain factors that affect the reliability of confirmations (see paragraphs .16 through .27).

82

controlling the confirmation process 83

alternative procedures --- p. 294 subsequent cash receipts Or Vouch from Acc Rec subsidiary ledger To Invoice To Bill of Lading To Purchase Order Invoice Shipping Doc Sales Order 84

aged trial balance page 285 85

Ace Applied Barry Brandt Cermetrics Columbia Drake EMC

over 90 days

1,089 501

over 60 days

2,529 743 7,310 1,261

over 30 days

2,016 15,939 3,176 30,948 3,814 740 1,048

current

11,876 27,901 8,993 24,441 8,617 4,321 2,954 16,195

balance

16,421 43,840 14,001 63,200 12,431 4,321 3,693 18,504 W&M Yancey 815 10,157 1,905 2,861 56,706 2,167 9,874 160,537 28,390 13,562 392,136 32,461 27,112 619,537 86

???

with which financial statement assertion might the aged trial balance be helpful ?

page 288 87

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