Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions Chapter 14 http://www.authorstream.com/shengv n/ ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Identify the accounts and the classes of transactions in the sales and collection cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - Accounts in the Sales and Collection Cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - Learning Objective Describe the business functions and the related documents and records in the sales and collection cycle ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - Sales Transaction Accounts Sales Accounts receivable Business Functions Documents and Records Processing customer orders Granting credit Shipping goods Billing customers and recording sales ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 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 - Cash Receipts Transaction Accounts Cash in bank (debits from cash receipts) Accounts receivable Business Functions Documents and Records Processing and recording cash receipts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Remittance advice Prelisting of cash receipts Cash receipts transaction file Cash receipts journal or listing 14 - Sales Returns and Allowances Transaction Accounts Sales returns and allowances Accounts receivable Business Functions Documents and Records Processing and recording sales returns and allowances ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Credit memo Sales and returns and allowances journal 14 - Write-off of Uncollectible Accounts Transaction Accounts Accounts receivable Allowance for uncollectible accounts Business Functions Documents and Records Writing off uncollectible accounts receivable ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Uncollectible account authorization form General journal 14 - Bad Debt Expense Transaction Accounts Bad debt expense Allowance for uncollectible accounts Business Functions Documents and Records Providing for bad debts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley General journal 14 - Processing Customer Orders Customer Order:  A request for merchandise by a customer Sales Order:  A document describing the goods ordered by a customer ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 10 Direction of Tests for Sales ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 24 Transaction-related Audit Objectives for Sales Occurrence: Recorded sales are for shipments actually made Completeness: Existing sales transactions are recorded Accuracy: Recorded sales are for the amount shipped ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 25 Transaction-related Audit Objectives for Sales Posting and summarization: Sales transactions are correctly included in the accounts receivable master file Classification: Sales transactions are correctly classified Timing: Sales are recorded on the correct dates ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 26 COSO Report Identifies Revenue Misstatement Techniques Sham sales Improper % of completion Improper sales cutoff Fraudulent Techniques Premature revenue recognition Unauthorized shipments Bill and hold Conditional sales Round-tripping loans as sales ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Consignment sales 14 - 27 Summary of Methodology for 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 28 Learning Objective Apply the methodology for controls over sales transactions to controls over sales returns and allowances ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 29 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 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 30 Sales Returns and Allowances There are, however, two important differences: Materiality ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Emphasis on objectives 14 - 31 Learning Objective Understand internal control, and design and perform tests of controls and substantive tests of transactions for cash receipts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 32 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* * Only performed when fraud is suspected ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 33 Learning Objective Apply the methodology for controls over the sales and collection cycle to write-offs of uncollectible accounts receivable ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 34 Audit Tests for the Write-Off of Uncollectible Accounts  Occurrence transaction-related audit objective  Proper authorization of the write-off of uncollectible accounts  Verification of accounts written off ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 35 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: Allowance for doubtful accounts Accounts receivable Bad debt expense Cash ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 36 Types of Audit Tests for the Sales and Collection Cycle Sales Accounts Cash in Receivable Bank Sales Cash receipts transactions transactions Audited by TOC, STOT, and AP Ending balance Audited by TOC, STOT, and AP Ending balance Audited by AP and TDB TOC + STOT + AP + TDB = Sufficient appropriate evidence ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 14 - 37 End of Chapter 14 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... Business Publishing, Auditing 14/ e, Arens/ Elder/Beasley Cash receipts listing 14 - 14 Processing and Recording Sales Returns and Allowances  Credit memo Sales returns and allowances journal... Prentice Hall Business Publishing, Auditing 14/ e, Arens/ Elder/Beasley 14 - 17 Learning Objective Understand internal control, and design and perform tests of controls and substantive tests of transactions... Business Publishing, Auditing 14/ e, Arens/ Elder/Beasley 14 - 23 Direction of Tests for Sales ©2012 Prentice Hall Business Publishing, Auditing 14/ e, Arens/ Elder/Beasley 14 - 24 Transaction-related