Chapter 14 Audit

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Chapter 14
Audit of the Sales and
Collection Cycle

Key objectives:

1.Identify the accounts and classes of transactions in the sales and collection cycle. 2.Describe the business functions and related documents and records in the sales and collection cycle. 3.Understand internal control and design appropriate tests of controls and substantive tests of transactions for sales. 4.Understanding the accounting and controls for sales returns and allowances. 5.Understand internal control and design appropriate tests of controls and substantive tests of transactions for cash receipts. 6.Understanding the accounting and controls for write-offs of uncollectible accounts.

1.Introduction to Transactions (Figure 14-1, p. 442 of text)

The accounting for these transactions should be familiar. Sales and cash receipts are examined simultaneously because they are interrelated, and both affect accounts receivables. (Tests applied to each balance/transaction in parentheses.)

|Accounts receivable | |Beginning |Cash receipts (TOT) | |balance (PY) |Sales returns | | |and allowances | |Sales on | | |account (TOT) |Bad debt | | |charge-off | |Ending | | |balance (TODB) | |

Sales returns and bad debts are non-cash credits to accounts receivable (TOT and TODB). Both activities and ending balanced are tested using analytical procedures.

2.Documents in the cycle - The attached chart (p. 106-107) can be used to familiarize you with the documents in the cycle when studying Table 14-2 and Table 14-3 in the text. We are especially interested in controls associated with each document. Documents in Sales Cycle

|Document |Controls (objective) |Comments | |Customer order | |Process is initiated with the customer order. The customer order is| | | |not primary for the existence assertion (shipping document is). | | | |Order could be received by mail, phone, over the internet, or | | | |through EDI. | |Sales order |Credit approval and authorization of shipment |Sales orders should receive approval prior to shipment, including | | |(occurrence). |authorization of credit (specific or general). Credit should be | | | |authorized by someone independent of sales (often done automatically| | | |by computer). (1) Credit approval process affects extent of net | | | |realizable value tests (test of allowance for doubtful accounts). | |Shipping document |Checking of quantities (accuracy). |Shipper is primary evidence of occurrence, because all recorded | |(bill of lading) |Account for sequence (completeness). |sales should be supported by a shipper. | | | |Account for numerical sequence to ensure completeness (all shippers | |...
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