Transcript Chapter 14 – Audit of the Sales and Collection Cycle
Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions Chapter 14 14 - 1
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Learning Objective 1 Identify the accounts and the classes of transactions in the sales and collection cycle.
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Accounts in the Sales and Collection Cycle Sales Cash sales Cash in Bank Sales on account Accounts Receivable Beginning balance Cash receipts Cash Discounts Taken Sales on account Sales returns and allowances Sales Returns and Allowances Ending balance Charge-off of uncollectible accounts Bad Debt Expense 14 - 3
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Accounts in the Sales and Collection Cycle Accounts Receivable Beginning balance Cash receipts Allowance for Uncollectible Accounts Charge-off of uncollectible accounts Beginning balance Sales on account Sales returns and allowances Estimate of bad debt expense Ending balance Charge-off of uncollectible accounts Ending balance Bad Debt Expense
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Learning Objective 2 Describe the business functions and the related documents and records in the sales and collection cycle.
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Sales Transaction Accounts Business functions Documents and records
Sales Accounts receivable
Processing customer orders Granting credit Shipping goods Billing customers and recording sales
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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 14 - 6
Cash Receipts Transaction Accounts Business functions
Cash in bank (debits from
cash receipts) Accounts receivable
Processing and recording cash receipts Documents and records
Remittance advice
Prelisting of cash
receipts Cash receipts
transaction file Cash receipts journal or listing 14 - 7
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Sales Returns and Allowances Transaction Accounts
Sales returns and allowances
Accounts receivable Business functions
Processing and recording sales returns and allowances Documents and records
Credit memo Sales and returns and allowances journal 14 - 8
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Charge-off of Uncollectible Accounts Transaction Accounts Business functions
Accounts receivable
Allowance for uncollectible accounts
Charging off uncollectible accounts receivable Documents and records
Uncollectible account
authorization form General journal 14 - 9
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Bad Debt Expense Transaction Accounts Business functions
Bad debt expense
Allowance for uncollectible accounts
Providing for bad debts Documents and records
General journal 14 - 10
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Processing Customer Orders
Customer Order: A request for merchandise by a customer Sales Order: A document describing the goods ordered by a customer ©2006 Prentice Hall Business Publishing,
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Granting Credit
Before goods are shipped, a properly authorized person must
approve credit
to the customer for sales on account.
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Shipping Goods
This is the first point in the cycle where company assets are given up.
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Billing Customers and Recording Sales Sales invoice Sales transaction file Sales journal or listing Accounts receivable master file Accounts receivable trial balance Monthly statement 14 - 14
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Processing and Recording Cash Receipts
Remittance advice Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing
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Processing and Recording Sales Returns and Allowances
Credit memo Sales returns and allowances journal
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Charging Off Uncollectible Accounts Receivable
Uncollectible account authorization form This is a document used internally to indicate authority to write an account receivable off as uncollectible
.
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Providing for Bad Debts
This provision represents a residual, resulting from management’s end-of-period adjustment of the allowance for uncollectible accounts
.
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Learning Objective 3 Understand how e-commerce activities affect the sales and collection cycle.
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Effect of E-Commerce on the Sales and Collection Cycle
The Internet and other developing technologies allow companies to develop new business models.
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Effect of E-Commerce on the Sales and Collection Cycle
Business-to-business (B2B) Business-to-consumer (B2C) Management’s assertions for sales and collection activities remain the same.
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Effect of E-Commerce on the Sales and Collection Cycle
Auditors should obtain an understanding of the design and operation of key internal controls over e-commerce revenues.
Evidence for e-commerce activities is likely to be in electronic form.
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Learning Objective 4 Understand internal control, and design and perform tests of controls and substantive tests of transactions for sales.
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Methodology for Designing Controls and Substantive Tests of Sales Transactions for Sales Understand internal control – sales.
Assess planned control risk – sales.
Determine extent of testing controls.
Design tests of controls and substantive tests of transactions for sales to meet transaction -related audit objectives.
Audit procedures Sample size Items to select Timing 14 - 24
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Understand Internal Control – Sales
Study the client’s flowcharts, prepare an internal control questionnaire, and perform walk-through tests of sales.
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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 4. Assess control risk for each objective ©2006 Prentice Hall Business Publishing,
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Assess Planned Control Risk – Sales
Adequate separation of duties Adequate documents and records Monthly statements ©2006 Prentice Hall Business Publishing,
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Determine Extent of Testing Controls
Audits of public companies Audits of nonpublic companies ©2006 Prentice Hall Business Publishing,
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Transaction-Related Audit Objectives for Sales
Existence: Recorded sales are for shipments actually made.
Completeness: Existing sales transactions are recorded.
Accuracy: Recorded sales are for the amount shipped.
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Transaction-Related Audit Objectives for Sales
Classification: Sales transactions are properly classified.
Timing: Sales are recorded on the correct dates.
Posting and summarization: Sales transactions are properly included in the accounts receivable master file.
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Direction of Tests for Sales Customer order Shipping document Duplicate sales invoice Sales journal General journal
=
Accounts receivable master file Completeness start Existence start
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Summary of Methodology for Sales
Transaction-related audit objectives (Column 1) Key existing controls (Column 2) Tests of control (Column 3) Deficiencies (Column 4) Substantive tests of transactions (Column 5) ©2006 Prentice Hall Business Publishing,
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Learning Objective 5 Apply the methodology for controls over sales transactions to controls over sales returns and allowances.
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Sales Returns and Allowances
The transaction-related audit objectives and client’s methods of controlling misstatements are essentially the same for processing credit memos as those described for sales.
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Sales Returns and Allowances
There are, however, two important differences.
Materiality ©2006 Prentice Hall Business Publishing,
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Learning Objective 6 Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts.
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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.
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Learning Objective 7 Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable.
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Audit Tests for Uncollectible Accounts
Existence of recorded write-offs is the most important transaction-related audit objective.
What is a major concern in testing accounts charged off as uncollectible?
– covering up a defalcation by charging off accounts receivable that have been collected ©2006 Prentice Hall Business Publishing,
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Additional Internal Controls Over Account Balances
Realizable value Credit approval Aged accounts receivable trial balance Charging off uncollectibles ©2006 Prentice Hall Business Publishing,
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Additional Internal Controls Over Account Balances
Rights and obligations Presentation and disclosure
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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 Cash Bad debt expense Allowance for doubtful accounts ©2006 Prentice Hall Business Publishing,
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Types of Audit Tests for the Sales and Collection Cycle
Sales Accounts Receivable Sales transactions Cash receipts transactions
Audited by TOC , STOT , and AP Audited by TOC , STOT , and AP
Cash in Bank Ending balance Ending balance
Audited by AP and TDB
TOC + STOT + AP + TDB = Sufficient competent evidence per GAAS ©2006 Prentice Hall Business Publishing,
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End of Chapter 14
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