11 - 1 ©2003 prentice hall business publishing, essentials of auditing 1/e, arens/elder/beasley...
TRANSCRIPT
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11 - 1©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Audit of the Sales andCollection Cycle
Chapter 11
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11 - 2©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 1
Identify the accounts and the
classes of transactions in the
sales and collection cycle.
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11 - 3©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Accounts in the Salesand Collection Cycle
SalesCashsales
Sales onaccount
Cash in Bank
Cash DiscountsTaken
Sales Returnsand Allowances
Bad DebtExpense
Accounts ReceivableBeginning Cash receiptsbalance
Sales returnsSales on and allowancesaccount
Charge-off ofEnding uncollectiblebalance accounts
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11 - 4©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Accounts in the Salesand Collection Cycle
Accounts ReceivableBeginning Cash receiptsbalance
Sales returnsSales on and allowancesaccount
Charge-off ofEnding uncollectiblebalance accounts Bad Debt
Expense
Allowance for Uncollectible AccountsCharge-off of Beginninguncollectible balanceaccounts
Estimate of baddebt expense
Ending balance
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11 - 5©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 2
Identify the business functions
and the related documents and
records in the sales and
collection cycle.
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11 - 6©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Processing Customer Orders
Customer Order:A request for merchandise
by a customer
Sales Order: A document describing the
goods ordered by a customer
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11 - 7©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Sales Transaction
AccountsSalesAccounts receivable
BusinessFunctions
Processing customer orders,Granting credit, Shipping goods,Billing customers and recording sales
Documentsand Records
Sales invoice, Sales journal or listing, Salestransaction file, Accounts receivable masterfile and trial balance, Monthly statements
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11 - 8©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Cash Receipts Transaction
AccountsCash in bank (debits from cash receipts)Accounts receivable
BusinessFunctions
Processing and recording cash receipts
Documentsand Records
Remittance advise, Prelisting of cash receipts,Cash receipts transaction file,Cash receipts journal or listing
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11 - 9©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Sales Returns andAllowances Transaction
AccountsSales returns and allowancesAccounts receivable
BusinessFunctions
Processing and recordingsales returns and allowances
Documentsand Records
Credit memoSales returns and allowances journal
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11 - 10©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Charge-off of Uncollectible Accounts Transaction
AccountsAccounts receivableAllowance for uncollectible accounts
BusinessFunctions
Charging off uncollectibleaccounts receivable
Documentsand Records
Uncollectible account authorization formGeneral journal
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11 - 11©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Bad Debt ExpenseTransaction
AccountsBad debt expenseAllowance for uncollectible accounts
BusinessFunctions
Providing for bad debts
Documentsand Records
General journal
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11 - 12©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Shipping Goods
This is the first point in the cyclewhere company assets are given up.
Shippingdocument
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11 - 13©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 3
Understand how e-commerce
activities affect the
sales and collection cycle.
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11 - 14©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Effect of E-Commerce on theSales and Collection Cycle
The Internet
The Internet andother developing
technologies allowcompanies to developnew business models.
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11 - 15©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Effect of E-Commerce on theSales and Collection Cycle
Business-to-business (B2B)
Business-to-consumer (B2C)
Management’s assertions for sales andcollection activities remain the same.
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11 - 16©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Effect of E-Commerce on theSales and Collection Cycle
Auditors should obtain an understandingof the design and operation of key internal
controls over e-commerce revenues.
Evidence for e-commerce activitiesis likely to be in electronic form.
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11 - 17©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 4
Understand internal control
and design and perform tests
of controls and substantive
tests of transactions for sales.
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11 - 18©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Understanding InternalControl – Sales
Study the client’s flowcharts,prepare an internal controlquestionnaire, and performwalk-through tests of sales.
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11 - 19©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Methodology for Designing Controlsand Substantive Tests: Sales
Understand internalcontrol – sales
Audit proceduresSample size
Items to selectTiming
Assess plannedcontrol risk – sales
Evaluate cost-benefitof testing controls.
Design tests of controlsand substantive tests
of transactions for salesto meet transaction-
related audit objectives.
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11 - 20©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Assess PlannedControl Risk – Sales
Adequate separationof duties
Proper authorizationAdequate documentsand records Prenumbered
documents Monthly statements Internal verification
procedures
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11 - 21©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Internal Verification Procedures
Evaluate cost-benefitof testing controls.
Design tests ofcontrols for sales.
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11 - 22©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Transaction-Related AuditObjectives for Sales
Existence:Recorded sales are for shipments actually made.
Accuracy:Recorded sales are for the amount shipped.
Completeness:Existing sales transactions are recorded.
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11 - 23©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Design Substantive Testsof Transactions for Sales
Classification:Sales transactions are properly classified.
Timing:Sales are recorded on the correct dates.
Posting and summarization:Sales transactions are properly includedin the accounts receivable master file.
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11 - 24©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Direction of Tests for Sales
Salesjournal
Generalledger
Accountsreceivablemaster file
=
Customerorder
Shippingdocument
Duplicatesales invoice
Completeness Start
Existence Start
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11 - 25©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Summary of Methodologyfor Sales
Column 1: Transaction-related audit objectivesColumn 2: Key internal controlsColumn 3: Test of controlsColumn 4: WeaknessesColumn 5: Substantive tests of transactions
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11 - 26©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 5
Apply the methodology for
controls over sales transactions
to controls over sales
returns and allowances.
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11 - 27©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Sales Returnsand Allowances
The transaction-related audit objectivesand client’s methods of controlling
misstatements are essentially the samefor processing credit memos as those
described for sales.
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11 - 28©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Sales Returnsand Allowances
There are, however, two important differences.
MaterialityEmphasis on
objectives
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11 - 29©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 6
Understand internal control, and
design and perform tests of
controls and substantive tests
of transactions for cash receipts.
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11 - 30©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Tests of Controls and Substantive Testsof Transactions for Cash Receipts
Determine whether cash received was recorded Prepare proof of cash receipts Test to discover lapping of accounts receivable
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11 - 31©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Learning Objective 7
Apply the methodology for controls
over the sales and collection cycle
to write-offs of uncollectible
accounts receivable.
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11 - 32©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Audit Tests forUncollectible Accounts
Existence of recorded write-offs is the mostimportant transaction-related audit objective.
What is a major concern in testing accountscharged off as uncollectible?
– covering up a defalcation by charging offaccounts receivable that have been collected
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11 - 33©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Additional Internal ControlsOver Account Balances
Realizable value
Rights and obligations
Presentation and disclosure
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11 - 34©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Effect of Results of Controls andSubstantive Tests of Transactions
The parts of the audit most affected by thetests for the sales and collection cycle are:
Accountsreceivable
Cash
Bad debtexpense
Allowance fordoubtful accounts
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11 - 35©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
Role of all Audit Tests in theSales and Collection Cycle
Salestransactions
Cash receiptstransactions
Endingbalance
Endingbalance
TOC + STOT + AP + TDP= Sufficient competent evidence per GAAS
Audited byTOC, STOT, and AP
Audited by AP and TDP
Audited byTOC, STOT, and AP
SalesAccounts
ReceivableCash inBank
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11 - 36©2003 Prentice Hall Business Publishing, Essentials of Auditing 1/e, Arens/Elder/Beasley
End of Chapter 11