Transcript Internal controls: sales and receivables

BA 427 – Assurance and
Attestation Services
Lecture 4
Internal Controls: Sales and
Receivables
The Sales and Collection Cycle
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Five classes of transactions for the sales
and collection cycle:
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Sales (cash sales and credit sales)
Cash receipts
Sales returns and allowances
Charge-off of uncollectible accounts
Estimation of bad debt expense
The Sales and Collection Cycle
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Eight Business functions for this cycle:
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Processing customer orders
Authorizing credit and setting credit limits
Shipping goods
Invoicing customers and recording sales
Processing and recording cash receipts
Processing and recording returns and
allowances
Writing off uncollectible receivables
Providing for bad debt expense
The Sales and Collection Cycle
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Accounts involved in the sales and
collection cycle:
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Sales (I/S account)
Accounts Receivable (B/S account)
Cash (B/S account)
Allowance for uncollectible accounts (B/S)
Cash discounts taken (I/S)
Sales returns and allowances (I/S)
Bad debt expense (I/S)
The Sales and Collection Cycle
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Documents and records in this cycle:
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Customer order (completed by the customer)
Sales order (an internally-generated document)
Shipping document (packing slip)
Bill of lading
Sales invoice and monthly customer statements
Sales journal and sales returns journal
Accounts receivable subsidiary ledger
Inventory records
General ledger and general journal
Credit memo
Control Objectives
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Control Objectives, General:
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Existence
Completeness
Accuracy
Classification
Timing
Posting and Summarization
Control Objectives
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Control Objectives for Sales:
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Recorded sales are for shipments actually
made to customers (existence).
Existing sales transactions are recorded
(completeness).
Recorded sales are for the amount of
goods actually shipped, and are correctly
billed and recorded (accuracy).
Sales transactions are properly classified.
Sales are recorded on the correct dates.
Control Objectives
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Control Objectives for Sales:
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Sales transactions are properly included in
the A/R master file and are correctly
summarized.
Control Objectives
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Other control objectives for this cycle:
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Proper acceptance of customer orders.
Credit approval in accordance with credit
limits.
Safeguarding of assets associated with the
sale.
Timely shipment of goods to customers.
Recording, safeguarding, and depositing
cash and checks received.
Segregation of Duties
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Authorization of the transaction
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Credit approvals
Write-off of bad debts
Recording of the transaction
Custody over assets
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Inventory
Receivables
Cash
Examples of controls for sales
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Sales orders are routed through the credit manager,
to ensure that goods are shipped only to customers
who are likely to pay.
Sales order forms are prenumbered, to detect
unrecorded or unauthorized transactions.
The accounts receivable subsidiary ledger is
reconciled periodically with the general ledger, to
ensure that all invoices are recorded in customers’
accounts.
A copy of the sales order held by Billing is matched
to the copy routed through shipping, to ensure that
all goods shipped are invoiced.
Examples of controls for cash
receipts
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Two clerks are present in the mail room when cash
receipts are received.
Checks are immediately and restrictively endorsed.
All cash is deposited daily.
The accounts receivable subsidiary ledger is
reconciled periodically to the general ledger.
Monthly statements are sent to customers.
Employees handling cash are bonded.
Examples of controls for cash
sales
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Cash sales often cannot segregate duties as well as
credit sales. The same individual both authorizes
and records the sale, and has custody of the assets
(first the inventory and then the cash).
Compensating controls include the following:
 The use of a cash register or sales terminal.
 Limiting each register to a single sales clerk for a
specified period of time, and reconciling the cash
drawer at the end of this clerk’s shift.
 Increasing supervision of the sales clerk.
 Providing the customer a receipt.
Examples of controls for sales
returns, allowances and bad debts
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The sales department approves (authorizes)
customer returns.
Credit memos for sales returns and allowances are
approved by someone not in the sales department.
Write-off of bad debts is initiated by the credit
manager and approved by a high-level officer.
Customer
Mail
room
Cash
Receipts
Start
Mail
receipts
checks &
remittance
advices
prepare daily
remittance
list
Accounts Controller
Receivable
General
Ledger
Bank
= source document
= action
2
Daily remittance list
Checks
Remittance
advices
= summary list or
document
= journal entry
= ledger (G/L or
subledger)
Customer
Mail
room
Cash
Receipts
Accounts Controller
Receivable
Start
Mail
receipts
2
Daily
Remittance list
checks &
remittance
advices
prepare
daily
remittance
list
2
Daily remittance list
1
checks &
daily remittance list
B
prepare
deposit
slip
A
Bank
A
deposit
slip &
cash
receipts
bank
validates
deposit
slip
Checks
Remittance
advices
General
Ledger
prepare
G/L entry
C
Customer
Mail
room
Cash
Receipts
Start
Mail
receipts
Checks
Remittance
advices
B
Bank
C
A
B
prepare
daily
remittance
list
Daily remittance list
General
Ledger
2
Daily
RemitDr cash
tance list Cr A/R
Remittance
advices
checks &
remittance
advices
2
Accounts Controller
Receivable
Reconcile
Post to
A/R sub
ledger
1
checks &
daily remittance list
A/R sub
ledger
prepare
deposit
slip
A
Post to
G/L
validated
deposit
slip
prepare
G/L entry
C
General
Ledger
deposit
slip &
cash
receipts
bank
validates
deposit
slip