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2003 Prentice Hall Business Publishing,Auditing and Assurance Services 9/e,Arens/Elder/Beasley 13 - 1
Audit of the Sales and
Collection Cycle
Chapter 13
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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
Sales on
account
Cash in Bank
Cash Discounts
Taken
Sales Returns
and Allowances
Bad Debt
Expense
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on and allowances
accountCharge-off of
Ending uncollectible
balance accounts
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Processing Customer Orders
Customer Order:
A request for merchandiseby a customer
Sales Order:
A document describing thegoods ordered by a customer
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Granting Credit
Before goods are shipped, a properlyauthorized person must approve credit
to the customer for sales on account.
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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
Sales invoice, Sales journal or listing, Sales
transaction file, Accounts receivable master
file and trial balance, Monthly statements
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Cash Receipts Transaction
Accounts
Business
Functions
Documents
and Records
Cash in bank (debits from cash receipts)
Accounts receivable
Processing and recording cash receipts
Remittance advise, Prelisting of cash receipts,
Cash receipts transaction file,
Cash receipts journal or listing
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Charge-off of Uncollectible
Accounts Transaction
Accounts
Business
Functions
Documents
and Records
Accounts receivable
Allowance for uncollectible accounts
Charging off uncollectible
accounts receivable
Uncollectible account authorization form
General journal
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Bad Debt Expense
Transaction
Accounts
Business
Functions
Documents
and Records
Bad debt expense
Allowance for uncollectible accounts
Providing for bad debts
General journal
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Shipping Goods
This is the first point in the cycle
where company assets are given up.
Shipping
document
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Processing and Recording
Cash Receipts
Remittance advisePrelisting of cash receipts
Cash receipts transaction file
Cash receipts journal or listing
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Lockbox Systems and
Electronic Funds Transfer
Customer
Bank
Order/Payment
Information
Company
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Processing and Recording
Sales Returns and Allowances
Credit memo
Sales returns and
allowances journal
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Providing for Bad Debts
This provision represents a residual,
resulting from managements
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
The Internet andother developing
technologies allow
companies to developnew business models.
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Effect of E-Commerce on the
Sales and Collection Cycle
Business-to-business (B2B)
Business-to-consumer (B2C)
Managements 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 internalcontrols 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: Sales
Understand internal
controlsales
Assess planned
control risksales
Evaluate cost-benefit
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
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Understanding Internal
ControlSales
Study the clients flowcharts,
prepare an internal control
questionnaire, and performwalk-through tests of sales.
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Assess Planned
Control RiskSales
Adequate separationof duties
Proper authorizationAdequate documentsand records Prenumbered
documentsMonthly statements
Internal verificationprocedures
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Internal Verification
Procedures
Evaluate cost-benefit
of testing controls.
Design tests of
controls for sales.
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Transaction-Related Audit
Objectives for Sales
Existence:
Recorded sales are for shipments actually made.
Accuracy:Recorded sales are for the amount shipped.
Completeness:
Existing sales transactions are recorded.
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Design Substantive Tests
of Transactions 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
Customerorder
Shippingdocument
Duplicatesales invoice
Salesjournal
Generalledger
Accountsreceivablemaster file
=
Completeness Start
Existence Start
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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 clients methods of controlling
misstatements are essentially the same
for processing credit memos as those
described for sales.
l
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Sales Returns
and Allowances
There are, however, two important differences.
MaterialityEmphasis on
objectives
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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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Learning Objective 7
Apply the methodology for controls
over the sales and collection cycle
to write-offs of uncollectible
accounts receivable.
A di T f
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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 offaccounts receivable that have been collected
Addi i l I l C l
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Additional Internal Controls
Over Account Balances
Realizable value
Rights and obligations
Presentation and disclosure
Eff t f R lt f C t l d
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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
R l f ll A dit T t i th
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Role of all Audit Tests in the
Sales and Collection Cycle
SalesAccounts
ReceivableCash inBank
Sales
transactions
Cash receipts
transactions
Endingbalance
Endingbalance
TOC+STOT+AP+TDP= Sufficient competent evidence per GAAS
Audited byTOC,STOT, and AP
Audited by AP and TDP
Audited byTOC, STOT, and AP
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End of Chapter 13