Addthis Arens Chapter14

(1)

Audit of the Sales and

Collection Cycle: Tests of

Controls and Substantive

Tests of Transactions

Chapter 14

(2)

Learning Objective 1

Identify the accounts and the

classes of transactions in the

sales and collection cycle.

(3)

Accounts in the Sales and

Collection Cycle

Cash in Bank

(4)

Accounts in the Sales and

(5)

Learning Objective 2

Describe the business functions

and the related documents and

records in the sales and

collection cycle.

(6)

Sales Transaction

Granting credit

Shipping goods

Billing customers

and recording

sales

Documents and Records

Customer order

Sales order

Customer order or

sales order

Shipping document

Sales invoice

Sales transaction file

Sales journal or listing

Accounts receivable

master file

Accounts receivable

trial balance

(7)

Cash Receipts Transaction

Cash in bank

(debits from

cash receipts)

Accounts

receivable

Processing and

recording cash

receipts

Remittance advice

Prelisting of cash

receipts

Cash receipts

transaction file

Cash receipts journal

or listing

(8)

Sales Returns and Allowances

Transaction

Sales returns

and

allowances

Accounts

receivable

Processing and

recording sales

returns and

allowances

Credit memo

Sales and returns and

allowances journal

(9)

Write-off of Uncollectible

Accounts Transaction

Accounts

receivable

Allowance for

uncollectible

accounts

Writing off

uncollectible

accounts

receivable

Uncollectible account

authorization form

General journal

(10)

Bad Debt Expense Transaction

Bad debt

expense

Allowance for

uncollectible

accounts

Providing for bad

debts

General journal

(11)

Processing Customer Orders

Customer Order:



_{A request for merchandise by a customer}

Sales Order:



_{A document describing the goods ordered}

(12)

Granting Credit



_{Before goods are shipped, a properly}

authorized person must

approve credit

(13)

Shipping Goods



_{This is the first point in the cycle}

(14)

Billing Customers and

Recording Sales



_{Sales invoice}



_{Sales transaction file}



_{Sales journal or listing}



_{Accounts receivable master file}



_{Accounts receivable trial balance}

(15)

Processing and Recording Cash

Receipts



_{Remittance advice}



_{Prelisting of cash receipts}



_{Cash receipts transaction file}

(16)

Processing and Recording

Sales Returns and Allowances



_{Credit memo}

(17)

Writing Off Uncollectible

Accounts Receivable



_{Uncollectible account authorization form}



_{This is a document used internally to}

(18)

Providing for Bad Debts



_{This provision represents a residual,}

resulting from management’s

end-of-period adjustment of the

(19)

Learning Objective 3

Understand internal control, and

design and perform tests of

controls and substantive tests

of transactions for sales.

(20)

Methodology for Designing Controls

and Substantive Tests

Understand internal control – sales

Audit procedures

Sample size

Items to select

Timing

Assess planned control risk – sales

Determine extent of testing controls

Design tests of controls and

substantive tests of transactions

(21)

Understand Internal Control –

Sales

(22)

Assess Planned Control Risk –

Sales

1. Framework for assessing control risk

2. Identify key internal controls and deficiencies

3. Associate controls and deficiencies with the

objectives

(23)

Assess Planned Control Risk –

Sales



_{Adequate separation of duties}



_{Proper authorization}



_{Adequate documents and records}



_{Prenumbered documents}



_{Monthly statements}

(24)

Determine Extent of Testing

Controls



_{Audits of public companies}

(25)

Transaction-related Audit

Objectives for Sales

Occurrence:

Recorded sales are for shipments actually made.

Accuracy:

Recorded sales are for the amount shipped.

Completeness:

(26)

Transaction-related Audit

Objectives for Sales

Classification:

Sales transactions are correctly classified.

Timing:

Sales are recorded on the correct dates.

Posting and summarization:

(27)

Direction of Tests for Sales

Completeness

(28)

Summary of Methodology

for Sales



_{Transaction-related audit objectives (Column 1)}



_{Key existing controls (Column 2)}



_{Tests of control (Column 3)}



_{Deficiencies (Column 4)}

(29)

Learning Objective 4

Apply the methodology for controls

over sales transactions to controls

over sales returns and allowances.

(30)

Sales Returns and Allowances

(31)

Sales Returns and Allowances

There are, however, two important differences.



_Materiality

(32)

Learning Objective 5

Understand internal control, and

design and perform tests of

controls and substantive tests

of transactions for cash receipts.

(33)

Tests of Controls and Substantive

Tests of Transactions for Cash

Receipts



_{Determine whether cash received was recorded}



_{Prepare proof of cash receipts*}



_{Test to discover lapping of accounts receivable*}

(34)

Learning Objective 6

Apply the methodology for

controls over the sales and

collection cycle to write-offs

of uncollectible accounts

receivable.

(35)

Audit Tests for the Write-Off

of Uncollectible Accounts



_{Occurrence transaction-related audit objective}



_{Verification of accounts written off}



_{Proper authorization of the write-off of}

(36)

Additional Internal Controls

Over Account Balances



_{Realizable value}



_{Credit approval}



_{Aged accounts receivable trial balance}



_{Writing off uncollectibles}



_{Rights and obligations}

(37)

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}



_{Bad debt expense}



_Cash

(38)

Types of Audit Tests for the

Sales and Collection Cycle

Sales

Receivable

Accounts

Cash in

Bank

Sales

transactions

Cash receipts

transactions

Ending

balance

Ending

TOC + STOT + AP + TDB

= Sufficient appropriate evidence

Audited by

TOC, STOT, and AP

Audited by AP and TDB

Audited by

(39)

End of Chapter 14