Acct 460 Final Study Notes

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Lesson 6: Audit of Sales and Receivables Cycle
Note 1: Introduction
* Recording of sales transactions and collection of cash
* Accounts used: sales, a/r, bad debt expense, ADA, cash
* Documents used: customer order, sales order, shipping document, sales invoice, sales journal, remittance advice, bank deposit list, cash receipts jornal, credit memo, sales return and allowance journal, uncollectable account authorization form, a/r master file, a/r trail balance, monthly statement Note 2: Functions in the Cycle

Processing Customer Orders
* Preparation of customer order: when customer orders
* Preparation of sales order
Granting Credit
* Credit check: when sale made to new customer
* Approval/edit check: sales orders are checked by computer that does not exceed credit limit Shipping Goods
* Sales orders→ shipping dept
* Shipping document
* Copy of sales order and shipping doc à acct dept
* Bill of lading→ independent trucking company ships goods * Copy of bill of ladingà acct dept
Billing Customers and Recording Sales
* Prep invoice by authorized price list
* Edit checks: make sure entered correctly
* Updates: sales and a/r accts
Processing and Recording Cash Receipts
* Person opening mail send remittance advices àacct dept * Record in cash receipts journalà send actual cheques to cashier for deposit * Duplicate deposit slip from bank compared to cash receipts journal * Make sure recorded in acct records

* Duplicate deposit slip compared to listing that person opening mail made * Receive cash receipts: lockbox system, EFT, credit cardà EFT Processing and Recording Sales Returns and Allowances: Issue credit memo by sales dept→ acct dept Charging off Uncollectable a/r: Bankrupt info received→ Uncollectible account authorization form issued Providing for Bad debts: Estimated recorded by JE based on judgments by management Customer Master File Change

* Maintained and updated
Note 3: Characteristics of a Good System of Internal Control for this Cycle General Controls
* Adequate segregation of duties: authorization, recording and access to cash should be separate * Proper authorization and approval: key docs should be authorized by responsible official * Adequate documents and records: copies of sales orders, shipping reports, invoices should be retained * Prenumbered documents: for key documents to ensure completeness of processing and recording * Mailing monthly statements: done promptly to ensure cash flow not delayed * Internal verification procedures: such as match documents, review of invoice recording etc Note 4: Design of Tests of Controls

* Auditor must understand system of internal controls for S&R cycle and prep narratives/flowcharts * Then assess control risk
* If <maximum, rely some on controls
* Test controls
* Identify key internal controls
* Design tests that will determine if they are effective
* Tests may be review of docs or test processing
Note 5:  Test of Controls for Sales Transactions
1. Determine Sample size of test:
a. Deviation or error rate that is acceptable: if low means increase sample size b. Deviation or error rate that is expected: if high, means increase sample size c. Sample is not representative: must be large enough to be representative 2. How to select items in the sample:

d. Random
e. Stratified
3. Timing of internal control tests should be of concern
4. Performance of control tests, if auditor can rely on controls can reduce substantive work Existence: Sales recorded for shipments that have not been made: auditor trace sales entries in sales journal to invoices and to shipping docs. Invalid sales can be detected in credit entries Completeness: Understatement of sales: trace shipping docs to invoices and sales journal or review inventory count so that theft is not occurring Accuracy: Sales transactions are...
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