Auditing and assurance services 14e by arens chapter 14

Audit of the Sales and
Collection Cycle: Tests of
Controls and Substantive
Tests of Transactions
Chapter 14
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©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Learning Objective 1
Identify the accounts and the classes of
transactions in the sales and collection
cycle.

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Accounts in the Sales and
Collection Cycle

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Learning Objective 2

Describe the business functions and the
related documents and records in the
sales and collection cycle.

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Sales Transaction
Accounts

Sales
Accounts
receivable

Business Functions Documents and Records

Processing
customer orders
Granting credit
Shipping goods
Billing customers
and recording
sales

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Customer order
Sales order

Customer order or
sales order
Shipping document
Sales invoice
Sales transaction file
Sales journal or listing
Accounts receivable
master file
Accounts receivable
trial balance
Monthly statements
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Cash Receipts Transaction
Accounts

Cash in bank
(debits from
cash receipts)
Accounts
receivable

Business Functions Documents and Records

Processing and
recording cash
receipts

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Remittance advice
Prelisting of cash
receipts
Cash receipts
transaction file
Cash receipts journal
or listing

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Sales Returns and Allowances
Transaction
Accounts

Sales returns
and
allowances
Accounts
receivable

Business Functions Documents and Records

Processing and
recording sales
returns and
allowances

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Credit memo
Sales and returns and
allowances journal

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Write-off of Uncollectible
Accounts Transaction
Accounts

Accounts
receivable
Allowance for
uncollectible
accounts

Business Functions Documents and Records

Writing off
uncollectible
accounts
receivable

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Uncollectible account
authorization form
General journal

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Bad Debt Expense Transaction
Accounts

Bad debt
expense
Allowance for
uncollectible
accounts

Business Functions Documents and Records

Providing for bad
debts

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

General journal

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Processing Customer Orders
Customer Order:
 A request for merchandise by a customer
Sales Order:
 A document describing the goods ordered

by a customer

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Granting Credit
Before goods are shipped, a properly
authorized person must approve credit
to the customer for sales on account

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Shipping Goods
 This is the first point in the cycle
at which the company gives up assets.
One type of shipping document is a
bill of lading.
Bills of lading are often transmitted once
goods have been shipping

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Billing Customers and Recording
Sales
Sales
transaction
file

Accounts
receivable
file

Sales
journal

Accounts
receivable
trial balance

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Processing and Recording Cash
Receipts
Prelisting
of
Cash
receipts
Remittance advice

Cash receipts
transaction
file
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

Cash receipts listing

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Processing and Recording Sales
Returns and Allowances
 Credit memo
Sales returns and allowances journal

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Writing Off Uncollectible
Accounts Receivable
Uncollectible account authorization form

This is a document used internally to
indicate authority to write an account
receivable off as uncollectible

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Providing for Bad Debts
This provision represents a residual,
resulting from management’s
end-of-period adjustment of the
allowance for uncollectible accounts

©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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Learning Objective 3
Understand internal control, and design and
perform tests of controls and substantive
tests of transactions for sales.

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Methodology for Designing Controls
and Substantive Tests
Understand internal control – sales
Assess planned control risk – sales
Determine extent of testing controls
Design tests of controls and

substantive tests of transactions
for sales to meet transactionrelated audit objectives
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Understand Internal Control –
Sales
Study the client’s flowcharts, prepare
an internal control questionnaire, and
perform walk-through tests of sales.

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Assess Planned Control Risk –
Sales
1. Framework for assessing control risk
2. Identify key internal controls and deficiencies
3. Associate controls and deficiencies with the
objectives
4. Assess control risk for each objective
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Assess Planned Control Risk –
Sales
Adequate separation of duties
Proper authorization
Adequate documents and records
Pre-numbered documents
Monthly statements
Internal verification procedures
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Determine Extent of Testing
Controls

Control
effectiveness
Control
risk

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Direction of Tests for Sales

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Transaction-related Audit
Objectives for Sales
Occurrence:
Recorded sales are for shipments actually made.
Completeness:
Existing sales transactions are recorded.
Accuracy:
Recorded sales are for the
amount shipped.
©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley

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