Chapter 10: Auditing Sales and Recievables

Question 1

What are the two key issues with AR and sales?

Answer 1

• Receivables do actually exist, and are collectible, and adequate allowances have been made for receivables that are doubtful in terms of their collectability.
• Sales are genuine and are neither overstated nor understated.

Question 2

What is the process for credit sales transactions?

Answer 2

1) Accepting customer orders.
2) Approving credit.
3) Filling and shipping orders.
4) Invoicing customers.
5) Recording the sales.

Question 3

Customer Orders

Answer 3

involves receiving a sales order and checking it for authenticity, acceptability of terms and conditions, and the availability of inventory.

Question 4

Credit Approval

Answer 4

to obtain credit, typically the customer completes a credit application, and a credit report is obtained.

• Once approved by the credit manager, an appropriate credit limit is set, and the customer is entered into the accounts receivable master file.

Question 5

Shipping Orders

Answer 5

filling and shipping sales orders happens once a completed copy of the approved sales order form is sent to the warehouse.

Question 6

What are the typical control procedures of invoicing customers?

Answer 6

• Segregation of the invoicing function from shipping-related functions.
• Checking the shipping document and matching it against the approved sales order before an invoice is prepared.
• Using an authorized price list in the preparation of the invoice.
• Independently invoice checks focusing on prices used and mathematical accuracy.

Question 7

What are the key control activities under recording sales?

Answer 7

Check to ensure the total of the invoices entered into the sales journal matches total sales invoices posted to the AR ledger.
- Sequential invoice numbers need to be checked for missing numbers.

Question 8

WIR (Weakness, Implication & Recommendation)

Answer 8

used to evaluate control weaknesses.

• Weakness: exactly what is it?
• Implication: why is it a weakness? What could go wrong?
• Recommendation: What do you recommend? What would address this issue/improve the control?

Question 9

Strategy

Answer 9

refers to the mix of tests of control and substantive tests to be applied; depends on inherent and control risks.

Question 10

Inherent Risk

Answer 10

pressure on management to overstate revenue, cash, and receivables and understate bad debts