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Chapter 14
Audit of the Sales
and Collection
Cycle:
Tests of Control and
Substantive Tests of
Transactions
Copyright © 2014 Pearson Education
Identify the accounts and the classes of
transactions in the sales and collection
cycle.
Describe the business functions and the
related documents and records in the sales
and collection cycle.
Understand internal control, and design
and perform tests of controls and
substantive tests of transactions for sales.
14-2
Copyright © 2014 Pearson Education
Apply the methodology for controls over
sales transactions to controls over sales
returns and allowances.
Understand internal control, and design
and perform tests of controls and
substantive tests of transactions for cash
receipts.
Apply the methodology for controls over
the sales and collection cycle to write-offs
of uncollectible accounts receivable.
14-3
Copyright © 2014 Pearson Education
1
Identify the accounts and the classes of
transactions in the sales and collection cycle.
14-4
Copyright © 2014 Pearson Education
14-5
Copyright © 2014 Pearson Education
2
Describe the business functions and the related
documents and records in the sales and
collection cycle.
14-6
Copyright © 2014 Pearson Education
Accounts
Sales
Accounts
receivable
14-7
Business Functions Documents and Records
Processing
customer orders
Granting credit
Shipping goods
Billing customers
and recording
sales
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
Copyright © 2014 Pearson Education
Accounts
Cash in bank
(debits from
cash receipts)
Accounts
receivable
14-8
Business Functions Documents and Records
Processing and
recording cash
receipts
Remittance advice
Prelisting of cash
receipts
Cash receipts
transaction file
Cash receipts journal
or listing
Copyright © 2014 Pearson Education
Accounts
Sales returns
and
allowances
Accounts
receivable
14-9
Business Functions Documents and Records
Processing and
recording sales
returns and
allowances
Credit memo
Sales and returns and
allowances journal
Copyright © 2014 Pearson Education
Accounts
Accounts
receivable
Allowance for
uncollectible
accounts
14-10
Business Functions Documents and Records
Writing off
uncollectible
accounts
receivable
Uncollectible account
authorization form
General journal
Copyright © 2014 Pearson Education
Accounts
Bad debt
expense
Allowance for
uncollectible
accounts
Business Functions Documents and Records
Providing for bad
debts
General journal
14-11
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Customer Order:
 A request for merchandise by a customer
Sales Order:
 A document describing the goods ordered
by a customer
14-12
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Before goods are shipped, a properly
authorized person must approve credit
to the customer for sales on account
14-13
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 This is the first point in the cycle
at which the company gives up assets.
 One type of shipping document is a
bill of lading.
 Bills of lading are often transmitted once
goods have been shipped
14-14
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Sales
transaction
file
Accounts
receivable
file
14-15
Sales
journal
Accounts
receivable
trial balance
Copyright © 2014 Pearson Education
Prelisting
of
Cash
receipts
Cash receipts
transaction
file
14-16
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 Credit memo
Sales returns and allowances journal
14-17
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Uncollectible account authorization form
This is a document used internally to
indicate authority to write an account
receivable off as uncollectible
14-18
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This provision represents a residual,
resulting from management’s
end-of-period adjustment of the
allowance for uncollectible accounts
14-19
Copyright © 2014 Pearson Education
3
Understand internal control, and design and
perform tests of controls and substantive tests of
transactions for sales.
14-20
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Understand internal control – sales
Assess planned control risk – sales
Determine extent of testing controls
Audit procedures
Design tests of controls and
Sample size
substantive tests of transactions
for sales to meet transactionItems to select
related audit objectives
Timing
14-21
Copyright © 2014 Pearson Education
Study the client’s flowcharts, prepare
an internal control questionnaire, and
perform walk-through tests of sales.
14-22
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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
14-23
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Adequate separation of duties
Proper authorization
Adequate documents and records
Pre-numbered documents
Monthly statements
Internal verification procedures
14-24
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Control
effectiveness
Control
risk
14-25
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14-26
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Occurrence:
Recorded sales are for shipments actually made.
Completeness:
Existing sales transactions are recorded.
Accuracy:
Recorded sales are for the
amount shipped.
14-27
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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.
14-28
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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
14-29
Consignment
sales
Copyright © 2014 Pearson Education
 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
14-30
Copyright © 2014 Pearson Education
4
Apply the methodology for controls over sales
transactions to controls over sales returns and
allowances.
14-31
Copyright © 2014 Pearson Education
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.
14-32
Copyright © 2014 Pearson Education
There are, however, two important differences:
Materiality
14-33
Emphasis
on
objectives
Copyright © 2014 Pearson Education
5
Understand internal control, and design and
perform tests of controls and substantive tests
of transactions for cash receipts.
14-34
Copyright © 2014 Pearson Education
 Determine whether cash received was recorded
 Prepare proof of cash receipts*
Test to discover lapping of accounts receivable*
14-35
Copyright © 2014 Pearson Education
6
Apply the methodology for controls over the
sales and collection cycle to write-offs of
uncollectible accounts receivable.
14-36
Copyright © 2014 Pearson Education
 Occurrence transaction-related audit objective
 Proper authorization of the write-off of
uncollectible accounts
 Verification of accounts written off
14-37
Copyright © 2014 Pearson Education
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
14-38
Copyright © 2014 Pearson Education
Sales
Cash in
Accounts
Bank
Receivable
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
14-39
Copyright © 2014 Pearson Education
14-40
Copyright © 2014 Pearson Education
Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
14-41
Copyright © 2014 Pearson Education
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