Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
PART II
(Chapters 13 - 16)
APPLICATION OF THE
AUDIT PROCESS TO
THE SALES AND
COLLECTION CYCLE
To understand how auditing is done in
practice,it is important to understand how
auditing concepts are applied to
specific auditing areas.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
13
AUDIT OF THE SALES
AND COLLECTION CYCLE:
TESTS OF CONTROLS AND
SUBSTANTIVE TESTS
OF TRANSACTIONS
THE CHOICE IS SIMPLE - RELY ON
INTERNAL CONTROL OR RESIGN
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
13 - 1 Classes of transactions in the
sales and collection cycle.
1,Sales (cash and sales on account)
2,Cash receipts
3,Sales returns and allowances
4,Charge-off of uncollectible accounts
5,Estimate of bad debt expenses
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 13 - 1
Accounts in the Sales and Collection Cycle
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
TABLE 13 - 1 Classes of Transactions,Accounts,Business Functions,and Related Documents and Records for the Sales
and Collection Cycle
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
13 - 2 Describe the business functions and
the related documents and records
in the sales and collection cycle.
Processing Customer Orders
1,Customer Order:
A request for merchandise by a customer
2,Sales Order:
Goods ordered by a customer
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 13 - 2
Methodology for
Designing Tests of
Controls and
Substantive Tests of
Transactions for Sales
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Granting Credit
1,Shipping Goods,first point in the cycle the company assets are given up.
2,Shipping Document,documents prepared to initiate shipment of the
goods,indicating the description of the merchandise,quantity shipped,
and other data.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
1,Sales Invoice
2,Sales Journal
3,Summary Sales Report
4,Accounts Receivable Master File
5,Accounts Receivable Trial Balance
6,Monthly Statement
Sales Invoice
Sales Journal
Billing Customers
and
Recording Sales
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Processing and Recording
Cash Receipts
Remittance Advice
Prelisting of Cash Receipts
Cash Receipts Journal
0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Processing and Recording
Sales Returns and
Allowances
Credit Memo
Sales Returns and
Allowances Journal
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Uncollectible Account Authorization Form
A document used internally to
indicate authority to write an
account receivable off as
uncollectible.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
This provision represents a residual,
resulting from management’s
end-of-period adjustment of the
allowance for uncollectible accounts.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
13 - 3 Understanding internal control and design
and perform tests of controls and substantive
tests of transactions for sales.
Understand Internal
Control-Sales
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Sampling for Test of Transactions
Objective of Test
Test of Control - Determine if control is effective
Substantive Test of Transactions - Determine
existence of monetary errors in transactions
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Objective of Test of Control
and
Substantive Test of Transactions
Both are tests of transactions
Evaluated yes / no
---control is / is not effective
---transaction is / is not correctly recorded
Auditor should consider qualitative aspects of
deviations.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Understand Internal
Control-Sales
Study the client’s flowcharts,
prepare an internal control
questionnaire,and perform
a walk-through test of sales.
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Assess Planned Control
Risk-Sales
Adequate Separation of Duties
Proper Authorization
Adequate Documents and Records
Prenumbered Documents
Mailing of Monthly Statements
Internal Verification Procedures
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Design Substantive
Tests of
Transactions for
Sales
Design and
Performance
Format
Audit Procedures
Evaluate
Cost-Benefit of
Testing Controls
Design Tests of
Controls for
Sales
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Recorded Sales Exist
Existing Sales Transactions Are Recorded
Sales Are Accurately Recorded
Recorded Sales Are Properly Classified
Sales Are Recorded on the Correct Dates
Sales Transactions Included in the Master File
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
(Column 1) Transaction-Related Audit Objectives
(Column 2) Key Internal Controls
(Column 3) Test of Controls
(Column 4) Substantive Tests of Transactions
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
SALES RETURNS AND ALLOWANCES
Sales can be returned
(and come back to haunt you)
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Determine Whether Cash Received Was Recorded
Prepare Proof of Cash Receipts
Test to Discover Lapping of Accounts Receivable
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Audit Tests for Uncollectible Accounts
Additional Internal Controls Over
Account Balances
Effect of Results of Tests of Controls
and Substantive Tests of Transactions
Case Illustration - Hillsburg Hardware,
Part 1
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 13 - 3
Direction of Tests for Sales
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
FIGURE 13 - 4
Types of Audit Tests for the Sales and Collection Cycle
(see Figure 13 - 1 on page 398 for accounts)
Arens,Loebbecke; Auditing,8/E
2000 Prentice Hall,Inc.
Business functions for the sales and collection cycle
Classes of transactions in the sales and collection cycle
Design format audit program
Lapping of accounts receivable
Performance format audit program
Proof of cash receipts
Sales and collection cycle