Sales & Collection Cycle - Updated PDF

c t i c e t P r a I I d i e s Au cedurtion Cycle Pro ec & Sale C ol l s &  Sales & Collection Cycle Involve the decisions and processes necessary for the transfer of the ownership of goods and...

c t i c e t P r a I I d i e s Au cedurtion Cycle Pro ec & Sale C ol l s &  Sales & Collection Cycle Involve the decisions and processes necessary for the transfer of the ownership of goods and services to customers after they are made available for sale. https://www.scribd.com  Sales & Collection Cycle The Process It begins with a request by a customer and ends with the conversion of material/service into an account receivable and ultimately into cash. https://www.scribd.com  Sales & Collection Cycle Classes of Transaction The categories of transactions for the sales and collection cycle in the organization. https://www.scribd.com  Sales & Collection Cycle Classes of Transaction Sales Cash receipts Sales returns and allowances Charge/Write off of uncollectible account Bad debt expense https://www.scribd.com  Sales & Collection Cycle Key Areas Accounts Involved Business Functions Documents & Records https://www.scribd.com  Sales & Collection Cycle Accounts Involved Accounts Involved: Sales Accounts Receivable Cash in Bank Sales Return and Allowances Allowance for Uncollectable Accounts Bad Debt Expense Arens et al.  Sales & Collection Cycle Accounts Involved Accounts Involved Arens et al.  Sales & Collection Cycle The Business functions The key activities that an organization must complete to execute and record business transactions. https://www.scribd.com  Sales & Collection Cycle The Business functions (8) 1. Processing customer orders 2. Granting credit 3. Shipping goods 4. Billing customers and recording sales 5. Processing and recording cash receipts 6. Processing and recording sales return and allowances 7. Charging off of uncollectible accounts receivable 8. Providing for bad debt https://www.scribd.com  Sales & Collection Cycle The Business functions (8) Processing Customer Orders When a customer order is received, this prompts the immediate creation of a sales order. https://www.scribd.com  Sales & Collection Cycle The Business functions (8) Billing Customers & Recording Sales All shipments made have been billed (completeness) No shipment has been billed more than once (occurrence) Each one is billed for the proper amount (accuracy)  Sales & Collection Cycle The Business functions (8) 1. Processing customer orders 2. Granting credit 3. Shipping goods 4. Billing customers and recording sales 5. Processing and recording cash receipts 6. Processing and recording sales return and allowances 7. Charging off of uncollectible accounts receivable 8. Providing for bad debt https://www.scribd.com  Sales & Collection Cycle Documents & Records Documents & Records (Sales)  Customer order  Sales order  Customer order or sales order  Shipping document  Sales invoice  Sales & Collection Cycle Documents & Records Documents & Records (Sales)  Sales transaction file  Sales journal or listing  Accounts receivable master file  Accounts receivable trial balance  Monthly statement  Sales & Collection Cycle Documents & Records Documents & Records (Cash Receipts)  Remittance advice  Prelisting of cash receipts  Cash receipts transaction file  Cash receipts journal or listing  Sales & Collection Cycle Documents & Records Documents & Records (Sales Returns & Allowances)  Credit memo  Sales returns and allowances journal  Sales & Collection Cycle Documents & Records Documents & Records (Write off of Uncollectable Account)  Uncollectible account authorization form  General Journal  Sales & Collection Cycle Documents & Records Documents & Records (Bad Debt Expense)  General Journal  Sales & Collection Cycle METHODOLOGY FOR DESIGNING TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS Understand internal control Assess planned control risk Determine extent of testing controls Design tests of controls and substantive tests of transactions for sales to meet transaction -related audit objectives.  Sales & Collection Cycle METHODOLOGY FOR DESIGNING TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS Understand internal control Client’s flowcharts Internal control questionnaire Perform walk-through tests of sales  Sales & Collection Cycle METHODOLOGY FOR DESIGNING TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS Assess planned control risk (4 steps) 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  Sales & Collection Cycle METHODOLOGY FOR DESIGNING TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS Assess planned control risk (Illustration) 1. Proper Authorization (Adequate Separation of Duties) 2. Pre-numbered Documents (Adequate Documents & Records) 3. Internal Verification Procedures (Monthly Statements)  Sales & Collection Cycle Auditing the write-off of uncollectible accounts receivable: What would be the main concern of an auditor in auditing the write-off of uncollectible accounts receivable?  AUDIT OF THE PAYROLL AND PERSONNEL CYCLE Payroll - Analytical procedures: Analytical Procedures Possible Misstatements Compare payroll expense Misstatement of payroll expense account balance with previous accounts year Compare direct labour as Misstatement of direct labour and percentage of sales with inventory previous year Compare commission expense Misstatement of commission as a percentage of sale with expense and commission liability previous year Compare accrued payroll tax Misstatement of accrued payroll accounts with previous year taxes and payroll tax expense  AUDIT OF THE PAYROLL AND PERSONNEL CYCLE The Payroll Function; Significant risk affecting payroll: Complex compensation arrangements, including bonus and stock option plans. Renegotiation of union contracts Discrimination claims  AUDIT OF THE PAYROLL AND PERSONNEL CYCLE The Payroll Function; 6 steps methodology for designing test of details of balances for payroll liabilities: Identify client business risks affecting payroll liability accounts. Set tolerable misstatement and assess inherent risk for payroll liability accounts. Assess control risk for the payroll and  AUDIT OF THE PAYROLL AND PERSONNEL CYCLE The Payroll Function; Significant risk affecting payroll: Design and perform tests of controls and substantive test of transactions for payroll and personnel cycle. Design and perform analytical procedures for payroll liability accounts.  AUDIT OF THE PAYROLL AND PERSONNEL CYCLE The Payroll Function; Significant risk affecting payroll: Design test of details of payroll liability accounts to satisfy balance related audit objectives.  Other Areas Receipt of Cut off Bank Statement and test of the bank reconciliation: What is a cutoff bank statement? A partial-period bank statement and the related copies of cancelled checks, duplicate deposit slips, and other documents included in bank statements.  Other Areas Receipt of Cut off Bank Statement and test of the bank reconciliation: Cutoff bank statement – Purpose: The purpose of the cutoff bank statement is to verify the reconciling items on the client’s year-end bank reconciliation with evidence that is not accessible to the  Other Areas Receipt of Cut off Bank Statement and test of the bank reconciliation: Cutoff bank statement – Process: The auditor requests the client to have the bank send the statement for 7 to 10 days subsequent to the balance sheet date directly to the auditor.  Other Areas Receipt of Cut off Bank Statement and test of the bank reconciliation: Test of the bank reconciliation – Purpose: To determine whether client personnel have carefully prepared the bank reconciliation and to verify whether the client’s recorded bank balance is the same amount as the actual cash in the THE END