APPLICATION OF THE PART II AUDIT PROCESS TO ( Chapters 13-16) THE SALES AND COLLECTION CYCLE To understand how auditing is done in practice, it is important to understand how auditing concepts are applied to specific auditing areas Arens, Loebbecke; Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. PART II (Chapters 13 - 16) APPLICATION OF THE AUDIT PROCESS TO THE SALES AND COLLECTION CYCLE To understand how auditing is done in practice, it is important to understand how auditing concepts are applied to specific auditing areas
AUDIT OF THE SALES AND COLLECTION CYCLE TESTS OF CONTROLS AND SUBSTANTIVE TESTS 3 OF TRANSACTIONS THE CHOICE IS SIMPLE- RELY ON INTERNAL CONTROL OR RESIGN Arens, Loebbecke; Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 13 AUDIT OF THE SALES AND COLLECTION CYCLE: TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS THE CHOICE IS SIMPLE - RELY ON INTERNAL CONTROL OR RESIGN
Leaming objectives 13-1 Classes of transactions in the sales and collection cycle Sales(cash and sales on account) 2. Cash receipt 3. Sales returns and allowances 4. Charge-off of uncollectible accounts 5. Estimate of bad debt expenses Arens, Loebbecke; Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 13 - 1 Classes of transactions in the sales and collection cycle. 1. Sales (cash and sales on account) 2. Cash receipts 3. Sales returns and allowances 4. Charge-off of uncollectible accounts 5. Estimate of bad debt expenses
FIGURE 13-1 Accounts in the Sales and collection Cycle Cash in bank sales Accounts receivable Sales on account Beginning Cash receipts balance Sales returns Cash discoun ▲ Sales and allowances take account Charge-off of Ending uncollectib balance accounts Sales returns and allowances Allowance fo uncollectible accounts Charge-off of Beginning e uncollectible balance accounts Estimate of bad Bad debt debt expense expense Ending Arens, Loebbecke; Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 13 - 1 Accounts in the Sales and Collection Cycle
Classes of Transactions Accounts. Business Functions TABLE 13-1 and Related Documents and records for the sales and Collection Cycle c Documents Transacti Accounts Business Functions and records Processing customer orders Customer order Accounts rec Sales order Granting credit Customer order or sales order Shipping document Billing customers Sales invoice and recording les journa des Accounts receivable master file Accounts receivable trial balance Monthly statements Cash receipts Cash in bank( debits from Processing and recording Remittance advice cash receipts Prelisting of cash receipts Accounts receivable Cash receipts journal Sales returns and allowances Sales returns and allowances Processing and recording sales Credit memo Accounts receivable returns and allowances Sales returns and allowances journal Charge-off of uncollectible Accounts receivable Charging off uncollectible accounts Uncollectible account accounts Allowance for uncollectible receivable authorization form General journa Bad debt expense Bad debt expense Providing for bad debts General journal uncollectible accounts @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. TABLE 13 - 1 Classes of Transactions, Accounts, Business Functions, and Related Documents and Records for the Sales and Collection Cycle
Leaming Objectives 13-2 Describe the business functions and the related documents and records in the sales and collection cycle Processing Customer Orders 1. Customer order. A request for merchandise by a customer 2. Sales order. Goods ordered by a customer Arens, Loebbecke: Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 13 - 2 Describe the business functions and the related documents and records in the sales and collection cycle. Processing Customer Orders 1. Customer Order: A request for merchandise by a customer 2. Sales Order: Goods ordered by a customer
FIGURE 13-2 Understand internal control- sales Assess planned control risk- sales Methodology for Evaluate cost Designing Tests of benefit of Controls and testing controls Substantive Tests of Transactions for sales Design tests of Audit procedures controls and substantive tests of Sample size transactions for sales to meet Items to select transaction-related audit objectives Timing Arens, Loebbecke: Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. FIGURE 13 - 2 Methodology for Designing Tests of Controls and Substantive Tests of Transactions for Sales
GrantinggGredit. 1.Shipping Goods: first point in the cycle the company assets are given up 2. Shipping Document: documents prepared to initiate shipment of the goods, indicating the description of the merchandise, quantity shipped, and other data Arens, Loebbecke: Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. Granting Credit 1. Shipping Goods: first point in the cycle the company assets are given up. 2. Shipping Document: documents prepared to initiate shipment of the goods, indicating the description of the merchandise, quantity shipped, and other data
Sales invoice Billing Customers an Sales journal Recording sales 1. Sales Invoice 2. Sales journal 3. Summary Sales report 4. Accounts receivable master file 5. Accounts receivable trial balance 6. Monthly statement Arens, Loebbecke; Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. 1. Sales Invoice 2. Sales Journal 3. Summary Sales Report 4. Accounts Receivable Master File 5. Accounts Receivable Trial Balance 6. Monthly Statement Sales Invoice Sales Journal Billing Customers and Recording Sales
Processing and recording Cash Receipts M Remittance advice M Prelisting of Cash Receipts M Cash Receipts Journal 1st @tr 2nd qtr 3rd Qtr 4th Qtr Arens, Loebbecke; Auditing, 8/E @2000 Prentice hall.Inc
Arens, Loebbecke; Auditing, 8/E ©2000 Prentice Hall, Inc. Processing and Recording Cash Receipts Remittance Advice Prelisting of Cash Receipts Cash Receipts Journal 0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr