Test of Controls and Substantive Tests

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©2008 Prentice Hall Business Publishing,©2008 Prentice Hall Business Publishing, Auditing 12/e, Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 14 - 1

Audit o the !ales and"ollection "ycle# $ests o

"ontrols and !ubstanti%e$ests o $ransactions"ha&ter 14



©2008 Prentice Hall Business Publishing,©2008 Prentice Hall Business Publishing, Auditing 12/e, Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 14 -14 - 22

'earning (b)ecti%e 1

*dentiy the accounts and the

classes o transactions in the

sales and collection cycle+



©2008 Prentice Hall Business Publishing,©2008 Prentice Hall Business Publishing, Auditing 12/e, Auditing 12/e, Arens/Beasley/Elder Arens/Beasley/Elder 14 -14 -

Accounts in the !ales and

"ollection "ycle

Sales

Cashsales

Sales onaccount

Accounts ReceivableCash receipts

Sales returnsand allowances

Write-off of uncollectibleaccounts

Beginningbalance

Sales onaccount

Endingbalance

Cash in Bank

Cash DiscountsTaken

Bad DebtEpense

Sales Returnsand Allowances




Accounts in the !ales and

"ollection "ycle

Accounts Receivable

Cash receipts

Sales returnsand allowances

Write-off of uncollectible

accounts

Beginningbalance

Sales onaccount

Endingbalance

Allowance for !ncollectible Accounts

Write-off of uncollectibleaccounts

Beginningbalance

Esti"ate of bad debtepense

EndingbalanceBad DebtEpense





.escribe the business unctions

and the related docuents and

records in the sales and

collection cycle+




!ales $ransaction

Accounts

Sales

Accounts

receivable

Business #unctions

$rocessing

custo"er orders

%ranting credit

Shipping goods

Billing custo"ers

and recording

sales

Docu"ents and Records

Custo"er order Sales order

Custo"er order or sales order Shipping docu"ent Sales invoice Sales transaction file Sales &ournal or listing Accounts receivable "aster file Accounts receivable trial balance 'onthl( state"ents




"ash ecei&ts $ransaction

Cash in bank

)debits fro"

cash receipts* Accounts

receivable

$rocessing and

recording cash

receipts

Re"ittance advice

$relisting of cash

receipts Cash receipts

transaction file

Cash receipts &ournal

or listing

Accounts Business #unctions Docu"ents and Records




!ales eturns and Allo3ances

$ransaction

Sales returns

and

allowances Accounts

receivable

$rocessing and

recording sales

returns and allowances

Credit "e"o

Sales and returns and

allowances &ournal





5rite-o o 6ncollectible

Accounts $ransaction

Accounts

receivable

Allowance for uncollectible

accounts

Writing off

uncollectible

accounts receivable

!ncollectible account

authori+ation fro"

general &ournal





Bad .ebt E7&ense

$ransaction

Bad debt

epense

Allowance for uncollectible

accounts

$roviding for bad

debts

%eneral &ournal





Processing "ustoer (rders

"ustoer (rder# A reuest or erchandise by a custoer

!ales (rder# A docuent describing the goods ordered

by a custoer




9ranting "redit

Beore goods are shi&&ed, a &ro&erly

authori:ed &erson ust approve credit

to the custoer or sales on account




!hi&&ing 9oods

$his is the irst &oint in the cycle

3here co&any assets are gi%en u&




Billing "ustoers and

ecording !ales

!ales in%oice

!ales transaction ile

!ales )ournal or listing

Accounts recei%able aster ile

Accounts recei%able trial balance ;onthly stateent




Processing and ecording

"ash ecei&ts

eittance ad%ice

Prelisting o cash recei&ts

"ash recei&ts transaction ile

"ash recei&ts )ournal or listing




Processing and ecording


"redit eo

!ales returns and allo3ances )ournal




5riting ( 6ncollectible

Accounts ecei%able

6ncollectible account authori:ation or

$his is a docuent used internally to

indicate authority to 3rite an account

recei%able o as uncollectible




Pro%iding or Bad .ebts

$his &ro%ision re&resents a residual,

resulting ro anageent<s

end-o-&eriod ad)ustent o the

allo3ance or uncollectible accounts




'earning (b)ecti%e

6nderstand internal control, and

design and &eror tests o

controls and substanti%e tests

o transactions or sales+




;ethodology or .esigning "ontrols

and !ubstanti%e $ests

!nderstand internal control , sales

Audit procedures

Sa"ple si+e

te"s to select

Ti"ing

Assess planned control risk , sales

Deter"ine etent of testing controls

Design tests of controls and

substantive tests of transactions

for sales to "eet transaction-

related audit ob&ectives




6nderstand *nternal "ontrol =

!ales

!tudy the client<s lo3charts, &re&are

an internal control uestionnaire, and

&eror 3al>-through tests o sales+




Assess Planned "ontrol is>

= !ales

1+ ?rae3or> or assessing control ris>

2+ *dentiy >ey internal controls and deiciencies

+ Associate controls and deiciencies 3ith the

ob)ecti%es

4+ Assess control ris> or each ob)ecti%e




Assess Planned "ontrol is>

= !ales

Adeuate se&aration o duties

Pro&er authori:ation

Adeuate docuents and records

Prenubered docuents

;onthly stateents

*nternal %eriication &rocedures




.eterine E7tent o $esting

"ontrols

Audits o &ublic co&anies

Audits o non&ublic co&anies




$ransaction-related Audit

(b)ecti%es or !ales

(ccurrence#

ecorded sales are or shi&ents actually ade+

Accuracy#

ecorded sales are or the aount shi&&ed+

"o&leteness#E7isting sales transactions are recorded+




$ransaction-related Audit

(b)ecti%es or !ales

"lassiication#

!ales transactions are correctly classiied+

$iing#!ales are recorded on the correct dates+

Posting and suari:ation#

!ales transactions are correctly included

in the accounts recei%able aster ile+




.irection o $ests or !ales

Co"pletenessstart

Eistencestart

"ustoer

order

!hi&&ing

docuent

.u&licate

sales

in%oice

!ales

)ournal

9eneral

)ournal

Accounts

recei%able

aster ile

==




!uary o ;ethodology

or !ales

$ransaction-related audit ob)ecti%es @"olun 1

ey e7isting controls @"olun 2

$ests o control @"olun .eiciencies @"olun 4

!ubstanti%e tests o transactions @"olun





A&&ly the ethodology or controls

o%er sales transactions to controls

o%er sales returns and allo3ances+





$he transaction-related audit ob)ecti%es and

client<s ethods o controlling isstateents

are essentially the sae or &rocessing crediteos as those described or sales+





$here are, ho3e%er, t3o i&ortant dierences+

;ateriality

E&hasis on ob)ecti%es




'earning (b)ecti%e

6nderstand internal control, and

design and &eror tests o

controls and substanti%e tests

o transactions or cash recei&ts+




$ests o "ontrols and !ubstanti%e

$ests o $ransactions or "ash

ecei&ts .eterine 3hether cash recei%ed 3as recorded

Pre&are &roo o cash recei&ts

$est to disco%er la&&ing o accounts recei%able




'earning (b)ecti%e

A&&ly the ethodology or

controls o%er the sales and

collection cycle to 3rite-os

o uncollectible accounts

recei%able+




Audit $ests or the 5rite-(

o 6ncollectible Accounts

(ccurrence transaction-related audit ob)ecti%e

Ceriication o accounts 3ritten o

Pro&er authori:ation o the 3rite-o o

uncollectible accounts




Additional *nternal "ontrols

(%er Account Balances

eali:able %alue

"redit a&&ro%al

Aged accounts recei%able trial balance

5riting o uncollectibles

ights and obligations

Presentation and disclosure




Eect o esults o "ontrols and

!ubstanti%e $ests o $ransactions

$he &arts o the audit ost aected by the

tests or the sales and collection cycle are#

Accounts recei%able

Bad debt e7&ense

"ash

Allo3ance or doubtul accounts




$y&es o Audit $ests or the

!ales and "ollection "ycle

!ales Accountsecei%able

"ash inBan>

!alestransactions

"ash recei&tstransactions

Endingbalance

Endingbalance

$(" D !$($ D AP D $.B !uicient a&&ro&riate e%idence

Audited b(T.C/ ST.T/ and A$

Audited b( A$ and TDB

Audited b(T.C/ ST.T/ and A$



©2008 P ti H ll B i P bli hi©2008 P ti H ll B i P bli hi A diti 12/A diti 12/ A /B l /EldA /B l /Eld 14

End o "ha&ter 14

Test of Controls and Substantive Tests

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