AUDIT PROGRAM DESIGN PART II
Sales and Collection Cycle
The objective in the audit of the sales and collection cycle is to evaluate whether the account balance affected by the cycle are fairly presented in accordance with accounting standards.
There are five classes of transactions in the sales and collection cycle. •
Sales returns and allowances
Write-off of uncollectible accounts
Estimate of bad debt expense
(Arens, 2012, p.442)
The Key control activities are proper segregation of duties, authorization, documentation and recording, preparation of monthly statements and internal verification procedures.
With the exception of cash sales, every transaction and amount is ultimately included in one of two balance sheet accounts, accounts receivable or allowance for uncollectible accounts. There are eight business functions for the sales and collection cycle. The first four processes are for recording sales, while every other class of transactions includes only one business function. The four sales transaction functions are necessary for getting the goods into the hands of customers, correctly billing them, and reflecting the information in the accounting records. The remaining four functions involve the collection and recording of cash, sales returns and allowances, write-off of uncollectible accounts, and providing for bad debt expense.
Classes of Transactions
Processing customer orders
Billing customers and recording sales
Processing and recording cash receipts
Sales returns and allowances
Processing and recording sales returns and allowances Write-off of uncollectible accounts
Writing off uncollectible accounts receivable Bad debt expense
Providing for bad debts
(Arens, 2012, p.443)
The direction of testing for sales is as follows: Customer orders; Shipping Documents; Duplicate Sales invoices; Sales Journals; and General Ledger. (Arens, 2012, p. 455)
Tests of Controls
For each control, there should be at least one test of control, but there can be more than one. We will gather evidence for internal controls by: Documentation; Observation; Inquiries of the client; and Re-performance. The tests create audit evidence that support the common assertions for the business cycle:
Existence and Occurrence: to ensure that sales are recorded for shipments to genuine customers;
Completeness; All existing sales transaction are recorded;
Accuracy: to ensure that amounts of sales for quantities shipped is recorded and billed accurately, is summarized appropriately and is traceable to accounts receivables master file;
Presentation and disclosure/ Classification: Sales transaction are appropriately classified; and
Cut-Off: The sales are recorded in the accounting period in which these were incurred.
We propose the following tests of controls for Sales and Collections:
Examination of purchase orders from customers for evidence of customer approval;
Inspection of sales invoice for supporting documentation;
Tracing Sale invoice figures to bill of lading and customer order;
Inspection of batch control file for initials of data control clerk authenticating sign off;
Follow up on the sequential pattern of Shipping documents;
Examination of file for batch totals and initials of data control clerk;
Inspect the internal verification documentation package; and
Re-perform reconciliation of customer debtors master file totals to general ledger balance.
Substantive Tests of Transactions
For each transaction, there should be at least one substantive test, but there can be more than one. We will gather evidence for internal controls by: Documentation; Inquiries of the client; Re-performance; and Recalculation. The tests create audit evidence that support the common assertions for the business cycle: Existence and Occurrence, Completeness,...
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