Audit of Revenue and Collection Cycle PDF

AUDIT OF THE REVENUE AND COLLECTION CYCLE: TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS REVENUE AND COLLECTION CYCLE Consists of activities relating to the exchange of goods and services with customers and the collection of the revenue in cash. Classes of Transactions for...

AUDIT OF THE REVENUE AND COLLECTION CYCLE: TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS REVENUE AND COLLECTION CYCLE Consists of activities relating to the exchange of goods and services with customers and the collection of the revenue in cash. Classes of Transactions for Trading Concern A. Sales (cash and credit) B. Sales Adjustments (discounts, returns and allowances and uncollectible accounts provisions and write-offs) C. Cash Receipts (collections on accounts and cash sales) Typical Accounts Affected 1. Sales 2. Accounts and Notes Receivable 3. Sales Returns and Allowanced 4. Cash in Bank (debits from cash receipts) 5. Sales discounts 6. Allowance for uncollectible accounts 7. Uncollectible accounts expense 8. Inventories (merchandise, finished goods) Documents Used in the Revenue and Collection Cycle 1. Customer’s Purchase Order - May be received by telephone, letter, a printed form that has been sent to prospective and existing customers, though salespeople, or in other ways. - It provides evidence that a customer actually ordered the goods. - Purchase order numbers are generally recorded on sales invoices so that auditor can determine the purchase order to which an invoice relates. 2. Sales Order - A prenumbered document for recording the description, quantity, and related information for goods ordered by a customer. - Frequently used to show credit approval and authorization for shipment - It contains the seller’s understanding of the sales terms. - A seller should account for the numerical sequence to help ensure that shipments are made for sales orders and that all sales are billed. 3. Shipping Document or Bill of Lading - A prenumbered document prepared to initiate shipment of the goods indicating the description of the merchandise, the quantity shipped and other relevant data - The signature of the carrier or the customer on the shipping document provides externally created evidence that goods have been shipped. - Sellers should account for the numerical sequence to help ensure that all shipments are recorded as sales. 4. Sales Invoice - A prenumbered document indicating the description and quantity of goods sold, the price including freight, insurance, terms and other relevant data. - It indicated credit terms, shipping terms, and price charged for merchandise. - Sellers should account for the numerical sequence to help ensure that all sales are recorded. 5. Credit Memo - Prenumbered document indicating a reduction in the amount due from a customer because of returned goods or an allowance granted/ - It often takes the same general form as a sales invoice, but it supports reductions in accounts receivable rather than increases - It provides evidence that a seller has reduced the amount previously billed to a customer - Sellers should account for the numerical sequence to help ensure that all credit memos are recorded 6. Remittance Advice - A document that a customer attaches to a check in payment of an invoice. - It may be a turnaround document, a part of a check, or a statement identifying the invoices being paid. - It facilitates recording of cash receipts - If a customer does not return a remittance advice, the employee opening the mail generally prepares one. - It usually indicated the date and amount of payment and the invoiced paid. - Sellers generally file remittance advices by date 7. Uncollectible Account Authorization Form - A prenumbered document, indicating authority to write an account receivable off as uncollectible - Sellers should account for the numerical sequence to ensure that all write-offs are recorded 8. Monthly Statement - A document sent to each customer indicating the beginning balance of accounts receivable, the amount and date of each sale, cash payments received, credit memos issued, and ending balance due - A statement mailed to a customer reporting a beginning balance and transactions that occurred during the period. - If the statement is inaccurate, many customers would contact the seller. Accounting Records in the Revenue and Collection Cycle 1. Sales Journal - A journal for recording sales transactions - Usually indicates gross sales for different classifications, such as product lines, the entry to accounts receivable, and miscellaneous debits and credits. - It can also include sales returns and allowances transactions 2. Sales Returns and Allowances Journal - A journal similar to the sales journal except the merchandisers use it to record returns of merchandised or adjustments to invoice prices. 3. Cash Receipts Journal - A journal for recording cash receipts from collections, cash sales, and all other cash receipts 4. General Journal - A journal in which are recorded all transactions for which a special journal has not been created - Sales and collections cycles transactions frequently recorded in the general journal include entries to estimate uncollectible accounts expense and entries to write – off accounts identified as uncollectible 5. Accounts Receivable Master File/Subsidiary Ledger - A file for recording individual sales, cash receipts and sales returns and allowanced for each customer and maintaining customer account balances. 6. Accounts Receivable Trial Balance - A listing of the amount owed by each customer at a point in time. - Prepared directly from the accounts receivable master file AUDIT OF SALES TRANSACTIONS Business Activities under Sales Transactions 1. Accepting sales order 2. Approving credit 3. Filling sales order 4. Shipping sales order 5. Billing customers Evaluation of Internal Control over Sales Transactions Information concerning specific controls over sales transactions is obtained through: o Inquiry o Observation o Review of documentation Test of Controls over Sales and Receivables Assertions 1. Existence or Occurrence: Recorded sales are for shipments actually made to customers 2. Completeness: all sales transactions that occurred are recorded 3. Rights and Obligations: sales recorded represent only sales transactions 4. Valuation or Allocation: Sales are correctly billed and recorded 5. Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance with PAS/PFRS Existence or Occurrence: Recorded sales are for shipments actually made to customers CONTROLS TESTS OF CONTROLS 1. Recording of sales is supported by customers’ orders, The auditor examines approved customer order, sales sales orders approved by credit department and order, shipping document and copy of sales invoice approved and executed shipping documents. for a sample entries in the sales journal The documents should bear the required approval The description, quantity of goods shipped, name, address and other details regarding the transactions should be consistent. 2. A clerk independent of accounts receivable prepares The auditor can observe whether a clerk and mails monthly statements to customers for all independent of the account receivable bookkeeper trade accounts receivable and follows up on any prepares and mails monthly statements and follow complaints. ups any complaints. He can also examine files on complaints received for selected months. Completeness: all sales transactions that occurred are recorded CONTROLS TESTS OF CONTROLS 3. Prenumbered shipping documents are accounted for The auditor can observe the client performing the to determine that a sales invoice is prepared for all procedure or select a sample of shipping orders and shipments examine the invoice that bills the sale, The presence of a sales invoice copy indicates that the shipment was billed. 4. Prenumbered sales invoiced are accounted for to The auditor can observe the client recording sales if determine that all sales are recorded he is accounting for the numerical sequence of invoices and determined why any missing invoices have not been processed. The auditor can also select a sample of sales invoice copies to trace into the sales journal 5. Procedures to ensure timely recording of sales and The auditor should inquire how procedures are proper cut-off are established followed, observe procedures being followed and inspect report on the last shipments that the shipping clerk sends to the billing clerk Proper cut-off also provides evidence about the existence of transactions Rights and Obligations: sales recorded represent only sales transactions CONTROLS TESTS OF CONTROLS 6. Clerk should check sales orders and sales invoices for The auditor should observe that the control is being terms to determine that transaction is a sale rather performed than a consignment. Valuation or Allocation: Sales are correctly billed and recorded CONTROLS TESTS OF CONTROLS 7. For all goods shipped, good are counted and The auditor observed that the control is being descriptions and quantities are compared to performed and examines a sample of shipping orders quantities and descriptions on sales orders and for the signature on the shipping documents that shipping documents prior to shipping. indicates that the counting and comparison occurred 8. Customer credit is approved by a responsible official The auditor examines a sample of sales order for prior to merchandise shipment. Although approval of credit approval prior to shipment credit prior to shipment does not guarantee absence of uncollectible accounts, the procedure reduces the likelihood of the account becoming uncollectible 9. Sales invoices are checked for: The auditor performs the following: a. Proper pricing a. Inquiry about the updating and use of price lists b. Mathematical accuracy b. Examine a sample of invoice copies to c. Terms determine that they contain a signature indicating that the price, mathematical accuracy and terms have been checked 10. The accounts receivable subsidiary ledger is balanced The auditor observes that it is being performed to the general ledger control account regularly. The The auditor may also fool the account receivable absence of this control results in the possibility of subsidiary ledger and compare the total with the  careless recordkeeping and omission of postings of balance appearing in the general ledger control sales or payments account Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance with PAS/PFRS CONTROLS TESTS OF CONTROLS 11. Sales must be properly classified to generate The auditor can test this control by determining that accurate segment reporting. Entities may require a the invoice copy contains the signature that second person to independently review or check the indicated approval on account classifications used. account coding on invoices Audit Program for Test of Controls: Sales To test for Existence or Occurrence, the auditor tests from accounting records back to underlying documents that indicate that the transaction occurred. To test whether transactions are recorded, an auditor compares prenumbered documents to entries in the accounting records. Audit Procedures A. For a Sample of entries in the sales journal i. Compare data in the sales journal to approved customer order, sales order, shipping document, and copy of sales invoice for: a. Customer order number b. Invoice number c. Customer name d. Date e. Description of goods f. Quantity g. Price h. Invoice amount i. Terms ii. Determine credit approval iii. Determine that signature are on invoices indicating independent checking for: a. Proper pricing b. Mathematical accuracy c. Terms iv. Examine signature evidencing recheck of account coding B. For a sample of shipping documents, Examine signatures indicating that for goods shipped, goods are counted, quantities and descriptions of the goods shipped are compared to quantities and descriptions on sales orders and shipping documents prior to shipping, and the transactions are recorded in the sales journal C. Discuss the procedures followed with the person who mails to customers monthly statements for all trade accounts receivable and follows up on any complaints. Review the client’s correspondence files reflecting resolution of these items. D. Observe the procedures followed to ensure a proper cutoff of sales at year end. E. Observe that the accounts receivable subsidiary ledger is balance to the general ledger control account regularly. F. Examine evidence of accounting for the sequence of sales orders, shipping documents and sales invoices. The foregoing tests of controls over sales transactions may reveal the following weaknesses, possible errors and misstatements: Internal Control Weaknesses / Factors that Examples of Fraud/Error Description of Possible Errors or Increases the Risk of the Misstatement Misstatements 1. Ineffective board of directors, Recording of fictitious sales Recording of unearned revenue audit committee, or internal without receiving a customer audit function; undue pressure order or shipping the goods to meet sales targets; top Intentional over-shipment of management action not goods Early (late) recognition of conducive to ethical conduct. Holding the sales journal open revenue – Cutoff error to record next year’s sales as having occurred in the current year Recording revenue when Recording sales when the significant uncertainties exists customer is likely to return the goods Recording revenue when Recording franchise revenue significant serviced still must be when the franchises are sold performed by seller even though an obligation to perform significant services still exists Overstatement of the amount Misstating the percentage of revenue earned completion of several projects by a construction company using the percentage-of- completion method of revenue recognition 2. Ineffective billing process in Recording sales based on the Recording unearned revenue which billing is not tied to receipt of orders from customers shipping information rather than the shipment of goods 3. Ineffective controls for testing Inaccurate billing and recording Recording unearned revenue invoices, or ineffective input of sales validation checks and computer reconciliations to ensure the accuracy of databases 4. Inadequate accounting Recording cash that represents Recording unearned revenue manual; incompetent a liability as revenue accounting personnel 5. Ineffective cutoff procedures in Recording sales in the wrong Early (late) recognition of the shipping department period based on incorrect revenue – Cutoff error shipping information 6. Aggressive attitude of Recording sales when the Recording revenue when management toward financial customer’s payment is significant uncertainties exists.  reporting; incompetent chief contingent upon the customer accounting officer receiving financing or selling the goods to another party Overestimating the percentage Overestimation of the amount of completion on project by a of revenue earned. construction company using the percentage-of-completion method of revenue recognition Test of Controls in an On-Line Accounting System Auditors generally may use test data to evaluate the effectiveness of controls. In an on-line accounting system, many of the controls are programmed. Hence, when testing controls auditors frequently examine exception reports. Existence or Occurrence: Recorded sales are for shipments actually made to customers ASSERTIONS & CONTROLS TESTS OF CONTROLS 1. The system allows the recording of sales only when Use Generalized Audit Software (GAS) to select supported by approved sales orders and approved sample of entries in the sales journal and to determine and executed shipping documents. that a sales invoice and bill of lading exists and that credit has been granted. Examine the bill of lading for appropriate signature. 2. The system allows only appropriate personnel to enter Observed individuals who are entering data. data. 3. A clerk independent of accounts receivable prepares Observe procedures and examines follow-up files and mails monthly statements for all trade accounts receivable to customers and follows up on any complaints. Completeness: all sales transactions that occurred are recorded ASSERTIONS & CONTROLS TESTS OF CONTROLS 4. The system produces a daily report on incomplete Inquire about procedures followed. transactions Examine a sample reports 5. Prenumbered shipping documents are accounted for Observe procedure. to determine that all items shipped are billed Use GAS to select a sample of shipping documents and to determine whether an invoice exists for the shipping documents 6. Prenumbered sales invoices are used and accounted Observe procedures for to determine that all sales are recorded Use GAS to determine whether out-of-sequence entries exist in the sales journal Rights and Obligations: sales recorded represent only sales transactions ASSERTIONS & CONTROLS TESTS OF CONTROLS 7. Terms are determined by the system based on Use GAS to search for non-routine terms in the sales quantity ordered and customer account number. file. Terms can be changed only by sales manager Valuation or Allocation: Sales are correctly billed and recorded ASSERTIONS & CONTROLS TESTS OF CONTROLS 8. For all goods shipped, goods are counted and Observe procedure descriptions and quantities are compared to quantities For a sample, examine signature on pull-tickets and descriptions on sales orders and shipping evidencing performance documents prior to shipping 9. Customer credit is approved by reference to a credit Use GAS to determine that credit was authorized limit or by a responsible official prior to merchandise for a sample of sales. shipment. Examine exception reports 10. Sales invoices are checked for Inquire about the updating and use of approved a. Proper pricing price lists. b. Mathematical accuracy Use an integrated test facility to test valuation by c. Terms entering transactions and determining that for these transactions proper pricing and terms are used and that the invoice is correctly computed. 11. The accounts receivable subsidiary ledger is balanced Use GAS to foot subsidiary ledger to the general ledger control account regularly. Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance with PAS/PFRS ASSERTIONS & CONTROLS TESTS OF CONTROLS 12. An independent review is made of account coding Observe procedure for recorded sales. Use GAS to select a sample of invoices Recheck account coding Substantive Tests of Sales Transactions In deciding on substantive tests of transactions, some procedures are commonly employed on every audit regardless of the circumstances whereas others are dependent on the adequacy of the controls and the results of the tests of controls. Substantive Audit Procedures for Sales Transactions Assertions Audit Objectives Audit Procedures I. Occurrence and Validity A. To determine that recorded 1. Review the sales journal, II. Rights and Obligations sales are authorized and are general ledger and accounts for shipments actually made receivable master file or trial to nonfictitious customers. balance for large or unusual items. 2. Trace sales journal entries to copies of sales orders, sales invoices and shipping documents. 3. Trace shipping documents to entry of shipments perpetual  inventory records. 4. Compare prices on sales invoices with authorizes price lists or properly executed contracts. III. Completeness B. To determine that existing 5. Trace shipping documents to sales transactions are resultant sales invoices and recorded on a timely basis entry into sales journal and accounts receivable master file 6. Compare dates of recorded sales transactions with dates on shipping records or perform sales cutoff tests. IV. Valuation or Allocation C. To determine that recorded 7. Recompute information on sales are for the amount of sales invoice goods shipped and are 8. Trace entries in sales journal to correctly billed and recorded sales invoices 9. Trace details on sales invoices to shipping documents, price tests and customer’s orders V. Presentation D. To determine that sales 10. Examine document supporting transactions are properly sales transactions for proper classified classification Discussion 1 – 5: For sample on entries in the sales journal, compare sales invoice copy, customer order and shipping document o To test the existence of sales, some auditors examine the sales invoice, the customer’s order, the sales order bearing credit approval and the shipping document for a sample on entries in the sales journal. o If an entity has a procedure to accumulate these documents before recording a sale, their accumulation is an indication that the control was performed. o Other procedures may include: ▪ Trace from the entry removing the goods from inventory to the perpetual inventory record ▪ Examine the cash receipts in payment for the sale ▪ Confirm the existence of individual transactions with the customers. Discussion 6: For a sample of shipping documents, traces sales invoice and entry into sales journal and accounts receivable subsidiary ledger. Perform cutoff tests o The auditors may examine the sales invoice and determine that an entry was made in the sales journal and the accounts receivable subsidiary ledger. o When testing to determine that all transactions have been recorded, auditors start with a prenumbered document and trance it into the journals and ledgers. Discussion 6: for a sample of sales invoices, examine the customer order and shipping document to determine whether the transaction should have been recorded as a consignment transaction rather than as a sale. o To determine that the entity has a right to the receivable arising from the sales transactions recorded; the auditor examines a sample of sales transactions and be alert for indications of consigned shipments treated as sales. o Auditors should also investigate the procedure from recording movements of merchandise among the various units of the company. Discussion 7-9: For sample of entries in the sales journal, (a) examine sales invoice, shipping documents, and customer order for consistency of descriptions and quantities; (b) examine sales orders for credit approval; and (c) check orices and extensions. Foot sales journal and general ledger account. o The audit procedure for verification of sales transaction that has been selected for testing may begin with comparison of the customer’s purchase order, the client sales order, and the duplicate copy of sales invoice. ▪ The descriptions and quantities of items are compared on these three documents and traced to the duplicate copy of the related shipping document. o The credit manager’s signature denoting approval of the customer’s credit should appear on the sales order. o The extensions and footings on each invoice in the sample should be proved to be arithmetically correct. o After proving the accuracy of selected individual, the auditors next trace the invoices to the sales journal and to postings in the accounts receivable subsidiary ledger. o In addition, the date of each invoice should be compared with two other dates: ▪ The date on the related shipping document, and ▪ The date of entry in the accounts receivables subsidiary ledger. Discussion 10: For a sample of entries in the sales journal, verify the accuracy of account coding o Auditors may review entries in the sales journal and the supporting sales invoice to determine whether the sales invoice was coded correctly and whether it results in proper presentation and disclosure of the transaction in the financial statement. AUDIT OF SALES ADJUSTMENTS TRANSACTIONS Adjustments to sales may include: a) Granting cash discounts b) Granting sales allowanced or reductions in price c) Returns of merchandise d) Volume rebates e) Corrections of billing errors f) Uncollectible accounts Evaluation of Internal Control over Sales Adjustments Transactions A concern about these transactions is that a transaction may be recorded to cover a material misappropriation of cash receipts. Auditors generally pay little attention to these adjustments unless they are a material amo unt or individual adjustments are large. Tests of Controls over Sales Adjustments Transactions Audit of Cash Discounts o Auditors audit this in connection with a test of cash receipts transactions and sales returns and allowances in connection with sales. o Oftentimes, auditors perform only substantive tests of account balances. Audit of Sales Returns, Allowances, Corrections o For sales returns and allowances, the primary emphasis in normally on testing the existence of recorded transactions as a means of uncovering any diversion of cash from the collection of accounts receivable that has been covered up by a fictitious sales returns and allowances. ▪ Although the emphasis is often on testing the existence of recorded transactions, the completeness objective cannot be ignored. ▪ Unrecorded sales returns and allowances can be material and can be used by a company’s management to overstate net income. o The other objectives, rights and obligations, valuation and proper classification should not of course be ignored. ▪ The same methodology for controls over sales transactions should be applied to controls over sales returns and allowances. Audit of Uncollectible Accounts o Existence of recorded write-offs in the most important transaction-related audit objective that the auditor should keep in mind in the verification of the write-off of individual uncollectible accounts. ▪ This is because of the possibility of the client covering up a defalcation by charging off accounts receivable that have already been collected. o The major control for preventing this type of misstatement is proper authorization of the write-off of uncollectible accounts by a designed level of management only after a thorough investigation of the reason the customer has not paid. Audit Program for Test on Controls: Sales Adjustments Transactions Audit Procedures: 1) Account for credit memoranda 2) Prove the footings on credit memorandum register 3) Trace the posting of credit memorandum to the general ledger 4) Review credit memoranda for approval 5) Check credit memoranda concerning returned goods for: (a) arithmetical accuracy; (b) quantities returned; and (c) unit prices 6) Inspect credit files in support of accounts written off as uncollectible Weaknesses and Possible Errors. Control Weakness Possible Errors 1. Lack of numeric control over credit memoranda Fictitious transactions recorded 2. Unauthorized write-off of accounts receivable Collectible account erroneously written off as uncollectible Customer account intentionally written off to conceal misappropriation of customer remittances 3. Unauthorized returns and allowances Credit memos issued for authorized returns as well as for goods not actually returned Credit memos written and recorded to conceal misappropriation of customer remittances Substantive Test for Sales Returns and Allowances The audit objectives are essentially the same for processing credit memos for returns and allowances as those describe for sa les, with two important difference: 1) The first relates to materiality. If the amount of sales returns and allowances are so immaterial, they can be ignored in the audit altogether 2) The second relates to “emphasis on objective”. For sales returns and allowances, the primary emphasis is normally testing the validity of recorded transactions as a means of uncovering any diversion of cash from collection of account receivable that has been covered by a fictitious sales returns or allowances. Normally, the auditor also gives due attention to the other objectives and should be able to arrive at suitable substantive t ests of transactions which are essentially the same as for sales to verity amounts. The audit procedures that may be used for substantive tests of controls for sales returns and allowanced transactions include: a) Review the use and authorization of credit memoranda - All allowanced to customers for returned or defective merchandise should be supported by serially numbered credit memoranda signed by an officer or responsible employee having no duties relating to handling cash or to the maintenance of customer’s ledger. b) Review credits for returned merchandise if supported by receiving report on the return shipment c) Verify prices, extensions and footings and trace postings from the sales returns journal or other accounting record to the customer’s accounts in the subsidiary receivable ledger. AUDIT OF CASH RECEIPTS TRANSACTIONS Basic Considerations - Cash receipts may result from revenue transactions, short and long-term borrowing, issuance of share capital and sale of marketable securities, long-term investments and other assets. - Executing cash receipts transactions generally involve: a) Receiving mail receipts b) Receiving over-the-counter receipts c) Aggregating total cash received d) Depositing cash in bank Tests of Controls over Cash Receipts Transactions General Specific 1) Existence or occurrence Recorded receipts represent actual collections of cash from customers 2) Completeness All receipts are processed and recorded 3) Rights and obligations All cash receipts are deposited intact in the account of the client 4) Valuation or allocation Debits to cash and credits to accounts receivable are valued at amounts received 5) Presentation and disclosure Cash receipts transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRS Existence or Occurrence: Recorded receipts represent actual cash collections from customers Controls Tests of Controls 1) A trustworthy employee prepares a prelisting of cash The auditor observes whether a prelisting is prepared receipts before further processing. and inquiries of the preparer about the procedures he follows. 2) A validated deposit slip is obtained for daily deposits The auditor obtain copies of the validated deposit and compared to the cash receipts summary slips and comparing them to the cash receipts summary 3) Duties of handling cash receipts are segregated from The auditor observes the separation of duties and posting to accounts receivable. A person performing inquiring of client personnel about their responsibilities. both functions could misappropriate cash and conceal the shortage by making an entry directly to the customer’s accounts. 4) A bank reconciliation is prepared monthly by a person The auditor observes that bank reconciliation have not involved in handling cash, accounts receivable, been prepared by an independent employee or general ledger records. The reconciler should receive the unopened bank statement and maintain control over it until the reconciliation is completed, Completeness: All receipts are processed and recorded Controls Tests of Controls 5) Prelisting and cash register procedures should be Auditors observe the monitoring of these procedures monitored 6) Checks should be restrictively endorsed as soon as Auditor observes the procedures in effect they are received. This control prevents an unauthorized employee from gaining access to a check and cashing it. 7) A daily cash summary is prepared and reconciled to Auditors can inquire of employees who carry out the total of prelisting and over-the-counter receipts. The procedure about the regularity and consistency of its summary total is compared to the total in the cash performance receipts journal and the total on the validated deposit ticket. This control ensures that all cash receipts are deposited and recorded 8) The cash receipts journal total is independently The auditor observes the procedures and makes reconciled to the total posted to account receivable. inquiry of personnel performing the procedure. This control ensures postings to accounts receivable Rights and Obligation: All cash receipts are deposited in the bank account of the client Controls Tests of Controls 9) Cash receipts are deposited intact daily in the The auditor observes the procedure and compares company’s bank account. This control reduces the the cash in the prelisting with the validated deposit likelihood of misappropriation of cash slip. Valuation or Allocation: Debits to cash and credit to accounts receivable are valued at amounts received Controls Tests of Controls 10) Cash receipts should be recorded at the amount The auditor compares entries in the cash receipts indicated on the remittance advice. A remittance journal to remittance advices advice that has been processed by a third party serves as strong evidence on the amount received from the customer Presentation and Disclosure: Cash receipts transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRS Controls Tests of Controls 11) An accounting supervisor should approve The auditor determines that the supervisor’s signature classifications made in journalizing. This control of approval is recorded reduces the likelihood of payments being posted to the wrong accounts, resulting in credit balances in accounts receivables Audit Program for Test of Controls: Cash Receipts Transactions Audit Procedures 1. Compare remittances or other details of cash receipts with the entries in the receipts book. 2. Compare the recorded receipts with individual deposits as shown by bank statements 3. Compare the composition of authenticated duplicate deposit slips with the recorded receipts. 4. Compare the recorded receipts with an independent record prepared before receipts are transmitted to the cashier. 5. Test of cash discounts and other allowances or credits 6. Test postings to the general ledger to the customer’s ledger, and to other subsidiary ledger 7. Review cash receipts for unusual items. Possible errors that may result because of control weakness over cash receipts transactions: Internal Control Weaknesses / Factors that Examples of Fraud/Error Description of Possible Errors or Increases the Risk of the Misstatement Misstatements 1. Lack of segregation of duties of Cash receipts are overstated Fictitious cash receipts are cash handling and on the books by transferring recorded; processing errors recordkeeping; bank accounts cash between accounts (intentional or unintentional) are not reviewed or properly without appropriate recording not discovered on a timely basis reconciled. of the transfer to cover up an embezzlement of cash. 2. Inadequate controls for Cashier fails to ring up and Failure to record receipts from reconciling cash register tapes record cash sales and cash sales and accounting records; embezzles cash. inadequate controls for Bookkeeper omits the recording Unrecorded cash receipts are reconciling bank accounts. of the receipts from one cash not deposited in the bank or register for the day recorded cash receipts are not deposited in the bank. 3. Sales not coded on cash Sale of product A recorded as Credits to wrong sales account register tapes a sale of product B are committed. 4. Lack of segregation of duties Cashier abstracts or embezzles Failure to record cash from between personnel who have cash payments by customers collections of accounts access to cash receipts and on receivables without receivable those who make entries into the recording collections from accounts receivable records. customers. Cashier embezzles cash collected from customers and writes-off the related receivables 5. Inadequate reconciliations of Bookkeeper accidentally fails to Failure to record cash from subsidiary records on accounts record a payment in a collection of accounts receivable with the general receivable receivables. ledger account 6. Accounting manuals not used Collection of rent income Miscellaneous cash receipts to assist in properly recording recorded as sale of credited to incorrect accounts. miscellaneous cash receipts. merchandise 7. Ineffective board of directors, Keeping the cash receipts Erroneous presentation of more audit committee, or internal journal open to record next liquid position. audit function; undue pressure year’s cash receipts as to show improved financial collections in the current year position; top management actuations not conducive to ethical conduct 8. Failure to list and deposit cash Recording cash receipts based Cutoff error (early or late receipts on a timely basis on erroneous information about recognition of cast receipts) is date of receipt committed. Substantive Tests of Cash Receipts Transactions Assertions Audit Objectives Audit Procedures I. Existence or Occurrence A. To determine that recorded 1. For a sample of entries in cash receipts represent actual receipts journal, trace to the collections of cash from prelisting of cash receipts and customers. to remittance advice. For a sample of entries, reconcile daily deposit to validated deposit ticket. II. Completeness B. To determine that all receipts 2. For a sample of days, verify that of cash and checks are all cash receipts are recorded recorded. by reconciling daily listings of cash receipts and validated deposit ticket to cash receipt journal. III. Valuation or Allocation C. To determine that debits to 3. For a sample of entries in cash cash and credits to accounts receipts journal, examine receivable are valued at remittance advice and verify amounts received. that discount taken was appropriate. Foot accounts receivable subsidiary ledger and reconcile to the general ledger account. IV. Presentation D. To determine that cash 4. Review account coding for a receipts transactions are sample of entries in the cash recorded to result in receipts journal. presentation and disclosure in accordance with PAS/PFRS. Discussions – 1. For a sample of entries in cash receipts journal, trace to the prelisting of cash receipts and to remittance advice. For a sample of entries, reconcile daily deposit to validated deposit ticket. o To test the credits to accounts receivable, an auditor can trace from the entry in the accounts receivable ledg er to a cash receipts listing to a deposit ticket listing the payment and to the customer’s remittance advice. ▪ These documents provide evidence that a collection was made.  Discussions – 2. For a sample of days, verify that all cash receipts are recorded by reconciling daily listings of cash receipts and validated deposit ticket to cash receipt journal. o To test whether all cash receipts are recorded, the auditor compares the names and amounts included in the prelisting for selected days with the entries in the cash receipts journal. ▪ Any discrepancies may suggest that lapping is occurring. o To test for lapping, an auditor identifies a period of several consecutive day and trace the names and amounts from the prelisting of cash receipts to the validated deposit ticket to the cash receipts journal, and to the posting in the accounts receivable subsidiary ledger. ▪ All dates, names and amounts should be consistent. If the details are consistent, lapping did not occur during the time period examined. o Auditors also test the mathematical accuracy of the recording of cash collections by footing the cash receipts journal, and by footing the accounts receivable subsidiary ledger and reconciling it to the control account. Discussions – 3. For a sample of entries in cash receipts journal, examine remittance advice and verify that discount taken was appropriate. Foot accounts receivable subsidiary ledger and reconcile to the general ledger account. o To determine whether the credit to accounts receivable is proper, the auditor selects transactions from the cash receipts journal and recomputes the cash discounts allowed to customer who have made payments. o Auditors may also verify its approval by reperforming the procedure that should have been performed when credit was approved. Discussions – 4. Review account coding for a sample of entries in the cash receipts journal. o To determine that the transaction was coded correctly and will result in proper presentation and disclosure, the auditors compare entries in the cash receipts journal with the remittance advices.