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