Arens14e Ch14 Ppt Ge

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

Audit of the Sales and Audit of the Sales and Collection Cycle: Tests of Collection Cycle: Tests of Controls and Substantive Controls and Substantive

Tests of TransactionsTests of Transactions

Chapter 14Chapter 14

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 14 - 14 - 22

Learning Objective 1Learning Objective 1

Identify the accounts and the classes Identify the accounts and the classes of transactions in the sales and of transactions in the sales and collection cycle.collection cycle.


Accounts in the Sales and Accounts in the Sales and Collection CycleCollection Cycle



Describe the business functions and Describe the business functions and the related documents and records in the related documents and records in the sales and collection cycle.the sales and collection cycle.


Sales TransactionSales Transaction

Accounts

Sales Accounts receivable

Business Functions

Processing customer orders 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 Monthly statements


Cash Receipts TransactionCash 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

Accounts Business FunctionsDocuments and Records


Sales Returns and Sales Returns and Allowances TransactionAllowances Transaction

Sales returns and allowances Accounts receivable

Processing and recording sales returns and allowances

Credit memo Sales and returns and allowances journal



Write-off of Uncollectible Write-off of Uncollectible Accounts TransactionAccounts Transaction

Accounts receivable Allowance for uncollectible accounts

Writing off uncollectible accounts receivable

Uncollectible account authorization form General journal



Bad Debt Expense Bad Debt Expense TransactionTransaction

Bad debt expense Allowance for uncollectible accounts

Providing for bad debts

General journal



Processing Customer OrdersProcessing Customer Orders

Customer Order: A request for merchandise by a customer

Sales Order: A document describing the goods ordered

by a customer


Granting CreditGranting Credit

Before goods are shipped, a properlyauthorized person must approve creditto the customer for sales on account


Shipping GoodsShipping Goods

This is the first point in the cycle at which the company gives up assets.

One type of shipping document is a bill of lading.

Bills of lading are often transmitted once goods have been shipping


Billing Customers and Billing Customers and Recording SalesRecording Sales

Sales transaction

file

Sales journal

Accounts receivable

file

Accounts receivable

trial balance


Processing and Recording Processing and Recording Cash ReceiptsCash Receipts

Remittance advice

Cash receiptstransaction

file

Cash receipts listing

Prelisting of

Cash receipts


Processing and Recording Processing and Recording Sales Returns and Sales Returns and

AllowancesAllowances

Credit memo

Sales returns and allowances journal


Writing Off UncollectibleWriting Off UncollectibleAccounts ReceivableAccounts Receivable

Uncollectible account authorization form

This is a document used internally toindicate authority to write an accountreceivable off as uncollectible


Providing for Bad DebtsProviding for Bad Debts

This provision represents a residual,resulting from management’send-of-period adjustment of theallowance for uncollectible accounts



Understand internal control, and Understand internal control, and design and perform tests of controls design and perform tests of controls and substantive tests of transactions and substantive tests of transactions for sales. for sales.


Methodology for Designing Methodology for Designing Controls and Substantive TestsControls and Substantive Tests

Understand internal control – sales

Assess planned control risk – sales

Determine extent of testing controls

Design tests of controls andsubstantive tests of transactions

for sales to meet transaction-related audit objectives


Understand Internal Control Understand Internal Control – Sales– Sales

Study the client’s flowcharts, preparean internal control questionnaire, andperform walk-through tests of sales.


Assess Planned Control Risk Assess Planned Control Risk – Sales– Sales

1. Framework for assessing control risk

2. Identify key internal controls and deficiencies

3. Associate controls and deficiencies with the objectives

4. Assess control risk for each objective


Assess Planned Control Risk Assess Planned Control Risk – Sales– Sales

Adequate separation of duties

Proper authorization

Adequate documents and records

Pre-numbered documents

Monthly statements

Internal verification procedures


Determine Extent of Testing Determine Extent of Testing ControlsControls

Control risk

Control effectiveness


Direction of Tests for SalesDirection of Tests for Sales


Transaction-related AuditTransaction-related AuditObjectives for SalesObjectives for Sales

Occurrence:Recorded sales are for shipments actually made.

Accuracy:Recorded sales are for the amount shipped.

Completeness:Existing sales transactions are recorded.


Transaction-related AuditTransaction-related AuditObjectives for SalesObjectives for Sales

Classification:Sales transactions are correctly classified.

Timing:Sales are recorded on the correct dates.

Posting and summarization:Sales transactions are correctly includedin the accounts receivable master file.


COSO Report Identifies COSO Report Identifies Revenue Misstatement Revenue Misstatement

TechniquesTechniques

Bill and hold

Improper sales cutoffSham sales

Premature revenue

recognition

Conditional sales

Round-tripping loans as sales

Fraudulent Techniques

Improper % of completion

Unauthorized shipments

Consignment sales


Summary of MethodologySummary of Methodologyfor Salesfor Sales

Identify key transaction-related audit objectives Determine key existing controls Design tests of controls to verify effectiveness Evaluate any control deficiencies Determine extent of substantive tests

of transactions



Apply the methodology for controls Apply the methodology for controls over sales transactions to controls over sales transactions to controls over sales returns and allowances.over sales returns and allowances.


Sales Returns and Sales Returns and AllowancesAllowances

The transaction-related audit objectives andclient’s methods of controlling misstatementsare essentially the same for processing creditmemos as those described for sales.


Sales Returns and Sales Returns and AllowancesAllowances

There are, however, two important differences:

Emphasis on

objectives

Materiality



Understand internal control, and Understand internal control, and design and perform tests of controls design and perform tests of controls and substantive tests of and substantive tests of transactions for cash receipts.transactions for cash receipts.


Tests of Controls and Tests of Controls and Substantive Tests of Substantive Tests of

Transactions for Cash ReceiptsTransactions for Cash Receipts Determine whether cash received was

recorded

Prepare proof of cash receipts*

Test to discover lapping of accounts

receivable*

* Only performed when fraud is suspected



Apply the methodology for controls Apply the methodology for controls over the sales and collection cycle to over the sales and collection cycle to write-offs of uncollectible accounts write-offs of uncollectible accounts receivable.receivable.


Audit Tests for the Write-OffAudit Tests for the Write-Offof Uncollectible Accountsof Uncollectible Accounts

Occurrence transaction-related audit objective

Proper authorization of the write-off ofuncollectible accounts

Verification of accounts written off


Effect of Results of Controls and Effect of Results of Controls and Substantive Tests of Substantive Tests of

TransactionsTransactionsThe parts of the audit most affected by thetests for the sales and collection cycle are:

Accounts receivable

Cash

Allowance for doubtful accounts

Bad debt expense


Types of Audit Tests for the Types of Audit Tests for the Sales and Collection CycleSales and Collection Cycle

SalesAccounts

ReceivableCash inBank

Salestransactions

Cash receiptstransactions

Endingbalance

Endingbalance

TOC + STOT + AP + TDB= Sufficient appropriate evidence

Audited byTOC, STOT, and AP

Audited by AP and TDB

Audited byTOC, STOT, and AP

©2012 Pearson Education, ©2012 Pearson Education, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

End of Chapter 14End of Chapter 14

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