Audit of Sales and Collection Cycle

1
Audit of Sales and Collection Cycle
2
Accounts
Cash in Bank
Cash Discounts Taken
Sales Returns and Allowances
A
Bad Debt Expense
Write-off of uncollectible accounts
Beginning Balance
A
Est. of Bad Debt Expense
Ending Balance
3
Business Functions Related Documents/Records

• Cycle begins with request by customer, ends with
  conversion into cash
• Business functions for Sales and Collection cycle
  (Table 14-1) related to the five classes of
  transactions
• Each business function has related documents and
  records

4
Designing TOC and TOT
5
Understand Internal Controls

• Clients documentation and inquiries
• Prepare internal control questionnaire/flowchart
• Perform walkthroughs of sales and cash receipts

6
Process Issues

• Identify key controls
• Assess control risk
• Determine extent of testing
• Public companies
• Private companies

7
Important Control Activities

• Adequate Separation of Duties
• Credit granting and sales, Custody of cash and
  data input
• Proper Authorization
• Credit, Shipping and Terms
• Adequate Documents and Records
• Pre-numbered Documents
• Monthly Statements
• Internal Verification Procedures

8
Designing Tests of Controls

• One or more TOC for each key control
• Table 14-2 (pg. 452-453) - Sales
• Table 14-3 (pg. 461) Cash Receipts
• Testing multiple objectives

9
Designing TOT for Sales

• TOT procedures may be
• Performed on every audit
• Depend on adequacy of controls and TOC results
• Audit procedures affected by
• Materiality
• Internal controls and TOC results
• Results from prior year