AUDITINGCHAPTER 10
Sales & Cash Receipts Transactions ByDavid N. Ricchiute
GBW 8th ed. Ch. 102
TOPICS
Nature of revenue/receipt cycle Flow of information
Auditor’s assessment of control risk Audit of internal2 control for sales,
cash receipts
Computer auditing, sampling, tests of controlsAssurance, consulting services
GBW 8th ed. Ch. 103
NATURE OF REVENUE/RECEIPT CYCLE
Goods, services sold to customers in exchange for future promises to payCash collected from customers
GBW 8th ed. Ch. 104
REVENUE/RECEIPT CYCLEFlow of Information
Customer order receivedSales order prepared Price, quantity, goods, terms
Shipping document Identifies goods shipped Contract between seller, carrier
Sales invoice (bill)Customer remittance advice Returned with payment from customer
GBW 8th ed. Ch. 105
SELLER’S DOCUMENTSSales order Identifies goods ordered, price,
quantity, terms, etc.
Shipping document (bill of lading) Identifies good shipped
Contract between seller & carrierSales invoice Formal notice to customer of amount &
payment terms
Customer remittance advice Returned with payment
GBW 8th ed. Ch. 106
CONTROLS FOR CREDIT SALES
Multicopy, prenumbered sales order preparedCustomer credit reviewed, approvedAuthorized copy sales order accompanies goods from Inventory Control to ShippingGoods received in Shipping compared with sales order; shipping document preparedCommon carrier provides receipt for goods shippedShipping document, approved sales order sent to billing for preparation of invoice, daily sales summariesInvoice copy sent to General Accounting for recording
GBW 8th ed. Ch. 107
CASH COLLECTION
Process Checks by mail listed, endorsed List copy to Accounts Receivable with
remittance for posting List copy with checks to Cash Receipts Dept.
for daily deposit
Sales returns separate from cash collectionUncollected accounts Reviewed for credit limits, aged, written off as
necessary
GBW 8th ed. Ch. 108
INTERNAL CONTROL & RISK
Controls Risks
Authorization
Prenumbered shipping documents Recording controls
Restricted access
Credit risk, uncollectible accountsShipment, billing not timely
Items recorded in improper amounts, accountsTheft
GBW 8th ed. Ch. 109
ASSESSING CONTROL RISKObtain Understanding
Review Sarbanes-Oxley Section 404 documentation for sales processDocument the client’s system Flowchart, questionnaire, narrative
Perform transaction walk-throughIdentify control activitiesTest controls to reduce control risk below maximumAssess control risk
GBW 8th ed. Ch. 1010
TESTS OF CONTROLSSales, Collection
Provide a reasonable degree assurance that employees comply with management’s proceduresSales Properly authorized, executed, recorded
Cash collections Cash receipts recorded, deposited promptly
Returns, uncollectible accounts Proper authorization, recording
GBW 8th ed. Ch. 1011
CONTROL RISKShipping
Major risks Unauthorized shipment
Fictitious or related parties Goods properly shipped, not billed,
recorded
GBW 8th ed. Ch. 1012
TESTING CONTROLS: Shipping
Select random sample shipping documents Examine sample for authorized sales order
& agreement
Trace sample shipping documents to invoices (completeness)Trace invoices to sales journal, A/R ledgersTrace invoices to inventory records
GBW 8th ed. Ch. 1013
CONTROL RISKBilling
Major risks Bills sent but goods not shipped Bills not properly prepared, recorded
GBW 8th ed. Ch. 1014
TESTING CONTROLS: Billing
Select sample invoices from Billing dept.Verify unit prices & mathematical accuracyTrace invoices to shipping documents (existence/occurrence)Trace invoices to sales journal, A/R ledgersTrace invoices to inventory records
GBW 8th ed. Ch. 1015
CONTROL RISKRecording
Periodic summaries not prepared or not prepared correctly
GBW 8th ed. Ch. 1016
TESTING CONTROLS: Recording
Review evidence of procedures for Reconciliation daily sales summaries with
sales journal totals Periodic reconciliation A/R trial balance with
general ledger control
Scan sales journal for unusual transactions, large amountsVerify mathematical accuracy sales journal for selected periods; trace postings to general ledger
GBW 8th ed. Ch. 1017
CONTROL RISKCash Collection, Deposit
Risk of embezzlement, deposit into improper accounts
GBW 8th ed. Ch. 1018
TESTING CONTROLS: Cash Collection & Deposit
Cash collection Surprise basis: take control bank deposits Compare total checks to total deposit slip Compare check details to cash receipt
records & A/R ledger Determine timeliness
Deposits Interim: compare deposits CRJ with bank
statements Trace CRJ to general ledger
GBW 8th ed. Ch. 1019
CONTROL RISKSales Returns, Allowances
Risk that credit memoranda Not approved Not properly recorded
GBW 8th ed. Ch. 1020
TESTING CONTROLS:Sales Returns & Allowances
Test details random sample credit memoranda Receiving reports Perpetual inventory records Entries A/R ledger & general ledger
Review credit register for unusual items
GBW 8th ed. Ch. 1021
CONTROL RISKUncollectible Accounts
Risk that account write-offs Properly authorized Properly recorded
GBW 8th ed. Ch. 1022
TESTING CONTROLS:Uncollectible Accounts
For written-off entries: Select sample Trace to authorization Trace to posting
Review write-offs for unusual entries
GBW 8th ed. Ch. 1023
ASSESSING CONTROL RISK
2 Questions Are controls effective? Can controls be relied upon?
If answer is yes to both Assess control risk below maximum Assess detection risk above minimum Restrict substantive tests of sales,
receivables, cash
GBW 8th ed. Ch. 1024
PRELIMINARY OPINION ON INTERNAL CONTROL
Required by Sarbanes-Oxley Auditor must form opinion on
management’s assessment of internal control over financial reporting based on Reports of internal auditors Auditor’s tests of controls Substantive audit tests
GBW 8th ed. Ch. 1025
TESTS OF CONTROLSDeduction Management
3 Critical questions Does Accounts Receivable monitor
deductions? Does Account Operations approve
deduction inquiries Does senior management review
decisions made by Accounts Receivable, Account Operations?
GBW 8th ed. Ch. 1026
COMPUTER AUDITING & SAMPLING
Understand the systemTests of controls Input controls
Code verification Data entry controls
Processing controls Control totals Limit tests
Assess control risk
GBW 8th ed. Ch. 1027
TESTS OF BILLING CONTROLSAn Example
Randomly select sample sales invoicesVerify unit prices, clerical accuracyTrace details of invoices to shipping documentsTrace sales invoices to inventory records
GBW 8th ed. Ch. 1028
ASSURANCE, CONSULTING SERVICES
Sarbanes-Oxley restricts Information systems consulting to
non-audit public clients, and any non-public clients
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