AUDIT OF THE SALES ANDCOLLECTION CYCLE :ILLUSTRATION

TEST OF CONTROLS AND SUBSTANTIVE TEST OF TRANSACTIONS

OBJECTIVETo evaluate whether the account balances affected by the cycle are fairly presented in accordance with GAAP

ACCOUNTS AFFECTED Sales Sales returns and allowances Bad debt expense Cash discounts taken Trade accounts receivable Allowance for collectibles Cash in the bank (debits from cash receipts)

BUSINESS FUNCTIONS AND RELATED DOCUMENTS Processing customer orders Customer order Sales order Granting credit Credit approval shipping goods Shipping document

BUSINESS FUNCTIONS AND RELATED DOCUMENTS Billing customers and recording sales Sales invoice Sales journal Summary sales report Accounts receivable master file Accounts receivable trial balance Monthly statements

BUSINESS FUNCTIONS AND RELATED DOCUMENTS Processing and recording cash receipts Remittance advice Prelisting of cash receipts Cash receipts, journal Processing and recording sales and allowances Credit memo Sales returns and allowance journal

BUSINESS FUNCTIONS AND RELATED DOCUMENTS Charging off uncollectible accounts receivable Uncollectible account authorization form Providing for bad debts

METHODOLOGY FOR DESIGNING TESTS Understand internal control structure sales Assessed Planned Control Risk sales Adequate separation of duties Proper authorization Adequate documents and records Prenumbered documents Mailing of monthly statements Internal verification procedure

METHODOLOGY FOR DESIGNING TESTS Evaluate cost benefit of testing controls Design tests of controls for sales

METHODOLOGY FOR DESIGNING TESTS Design substantive tests of transactions for sales Recorded sales exist Existing sales transactions are recorded Sales are accurately recorded Recorded sales are properly classified Sales are recorded on the proper dates Sales transactions are properly included in the master file and correctly summarized

OTHER ISSUES Sales return and allowances Internal controls and substantive tests for cash receipts Determine if cash received was recorded Prepare proof of cash receipts Test to discover lapping of accounts receivable Audit tests for uncollectible