Auditing and Assurance Services; an Integrated Approach; Chapter 14 Solutions Manual

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Chapter 14

Audit of the Sales and Collection Cycle:
Tests of Controls and Substantive
Tests of Transactions

← Review Questions

14-1a.The bill of lading is a document prepared at the time of shipment of goods to a customer indicating the description of the merchandise, the quantity shipped, and other relevant data. Formally, it is a written contract of the shipment and receipt of goods between the seller and carrier. It is also used as a signal to bill the client. The original is sent to the customer and one or more copies are retained. b.A sales invoice is a document indicating the description and quantity of goods sold, the price including freight, insurance, terms, and other relevant data. It is the method of indicating to the customer the amount owed for the sale and the due date of the payments. The original is sent to the customer and one or more copies are retained. The sales invoice is the document for recording sales in the accounting records. c.The credit memo is a document indicating a reduction in the amount due from a customer because of returned goods or an allowance granted. It often takes the same general form as a sales invoice, but it reduces the customer's accounts receivable balance rather than increasing it. d. The remittance advice is a document that accompanies the sales invoice mailed to the customer and can be returned to the seller with the payment. It is used to indicate the customer name, sales invoice number, and the amount of the invoice when the payment is received. A remittance advice is used to permit the immediate deposit of cash receipts as a means of improving control over the custody of assets. e. The monthly statement to customers is the document prepared monthly and sent to each customer indicating the beginning balance of that customer's accounts receivable, the amount and date of each sale, cash payments received, credit memos issued, and the ending balance due. It is, in essence, a copy of the customer's portion of the accounts receivable master file.

14-2Proper credit approval for sales helps minimize the amount of bad debts and the collection effort for accounts receivable by requiring that each sale be evaluated for collection potential. Adequate controls in the credit function enable the auditor to place more reliance on the client's estimate of uncollectible accounts. Without these controls, the auditor would have to make his or her own credit checks on the customers in order to be convinced that the allowance for uncollectible accounts is reasonable.

14-3 The charge-off of uncollectible accounts receivable is a process whereby the company writes off receivables already in existence that it decides will not be collected. This usually occurs after a customer files for bankruptcy or when the account is turned over to a collection agency. The bad debt expense is a provision for sales that the company will be unable to collect in the future. It is an estimate used because of the matching concept in accounting. Bad debt expense is audited by examining past trends in uncollectibility, as it is a projection of future uncollectible amounts. The uncollectible accounts write-off must be carefully audited to assure that accounts that have been paid are not written off to cover up a defalcation. This is done by examining the authorization for the write-off and the correspondence in the files concerning that account, and possibly by confirming accounts receivable.

14-4BestSellers.com could integrate its online ordering system with its inventory system so that a book shipment is made only after the customer’s credit card company approves the customer’s purchase. Because credit card issuers often transfer funds electronically almost immediately after a sale, BestSellers.com could also set up their system to ship books only after payment has been received by the credit card issuer. Finally, BestSellers.com could arrange with an...
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