Chapter 14 Flashcards by Anthony Tojek

The key activities that an organization must complete to execute and record business transactions for sales, cash receipts, sales returns and allowances, write-off of uncollectible accounts, and bad debt expense

Business functions for the Sales and Collection Cycle

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sales, cash receipts, sales returns and allowances, write-off of uncollectible accounts, and bad debt expense

Classes if Transactions in the Sales and Collection Cycle

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The audit procedures resulting from the auditor’s decision about the appropriate audit procedures for each audit objective. Used to prepare a performance format audit program

Design format audit program

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The starting point for testing the occurrence and completeness transaction-related audit objectives. Vouching from journals to source documents tests for occurrence and tracing from source documents to journals tests for completeness

Direction of Testing

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The postponement of entries for the collection of receivables to conceal an existing cash shortage

Lapping of Accounts Receivable

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The audit procedures for a class of transactions organized in the format in which they will be performed. Prepared from a design format audit program

Performance Format Audit Program

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An audit procedure to test whether all recorded cash receipts have been deposited in the bank account by reconciling the total cash receipts recorded in the cash receipts journal for a given period with the actual deposits made to the bank

Proof of Cash Receipts

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Involves the decisions and processes necessary for the transfer of the ownership of goods and services to customers after they are made available for sale; it begins with a request by a customer and ends with the conversion of material of material or service into accounts receivables and then into cash

Sales and Collections Cycle

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Accounts for sales class of transactions

Sales and Accounts Receivable

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Business functions for sales class of transactions

Processing customer orders, granting credit, shipping goods, and billing customers and recording sales

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Documents and Records for the sales class of transactions

Customer Order and Sales Order

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Accounts for the Cash Receipts class of transactions

Cash in bank and Accounts Receivable

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Business Functions for the Cash Receipts class of transactions

Processing and recording cash receipts

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Documents and Records for the Cash Receipts class of transactions

Remittance Advice and Prelisting of cash receipts

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Accounts for Sales Returns and Allowances class of transactions

Sales returns and allowances and accounts receivable

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Business functions for the Sales Returns and Allowances class of transactions

Processing and recording sales returns and allowances

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Documents and records for the sales returns and allowances class of transactions

Credit Memo and Sales returns and allowances journal

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Accounts for the Write-off of uncollectible accounts class of transactions

Accounts receivable and allowance for uncollectible accounts

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Business functions for the Write-off of uncollectible accounts class of transactions

Writing off uncollectible accounts receivable

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Documents and records for the Write-off of uncollectible accounts class of transactions

Uncollectible account authorization form and general journal

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Accounts for the Bad Debt Expense class of transactions

Bad debt expense and allowance for uncollectible accounts

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Business functions for the Bad Debt Expense class of transactions

Providing for bad debts

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Documents and records for the Bad Debt Expense class of transactions

General Journal

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The Most important aspects of billing are

All shipments made have been billed (completeness), No shipment has been billed more than once (occurrence), and Each one is billed for the proper amount (accuracy)

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How is a transaction file organized

By Chronological order

How is a journal or listing organized?

By general ledger accounts

How is a master filed organized?

By individual customers' accounts

Copy of a customer's portion of the accounts receivable master file that works as an internal control

Monthly statement

Four steps four understanding internal control to assess control risk

1) Use the 6 transaction related audit objectives as framework 2) Identify key controls and key deficiencies 3) Associate key controls and deficiencies with the objectives 4) Assess control risk for each objective by evaluating the controls and substantive tests

To prevent fraud, management should

deny cash access to anyone responsible for entering sales and cash receipts

The credit-granting function should be

separated from the sales function

Personnel responsible for doing internal comparisons should be

independent for those entering the original data

The auditor is concerned about authorization at three key points:

1) Credit must be properly authorized before a sale takes place 2) Goods should be shipped only after proper authorization 3) Prices, including basic terms, freight, and discounts, must be authorized

The first two authorizations are

meant to prevent the loss of company assets

Price authorization is meant to

ensure that the sale is billed at the price set by the company

Prenumbering is meant to prevent both

failure o bill or record sales and the occurrence of duplicate billings and records

Transaction related audit objectives for sales

Occurrence, completeness, accuracy, posting and summarization, classification, and timing

Key existing controls for occurrence for sales

Statements are sent to customers each month

Test of controls for occurrence for sales

Observe whether monthly statements are sent

Deficiencies for occurrence for sales

Lack of internal verification for the possibility of sales invoices being recorded more than once

Substantive tests of transactions for occurrence for sales

Account for a sequences of sales invoices

Key existing controls for completeness for sales

Shipping documents are prenumbered and accounted for weekly

Tests of controls for completeness for sales

Account for sequence of shipping documents

Substantive Tests of transaction for completeness for sales

Trace selected shipping documents to the sales journal to be sure that each one is included

Key existing controls for accuracy for sales

Statements are sent to customers each month

Test of Controls for accuracy for sales

Observe whether monthly statements are sent

Substantive tests of transactions for accuracy for sales

Trace entries in sales journal to sales invoices

Key existing controls for posting and summarization for sales

Statements are sent to customers each month

Test of Controls for posting and summarization for sales

Observe whether monthly statements are sent

Substantive tests of transactions for posting and summarization for sales

Use audit software to foot and cross-foot the sales journal and trace totals to the general ledger

Key existing controls for classification for sales

Account classifications are internally verified

Test of Controls for classification for sales

Examine document package for internal verification

Substantive tests of transactions for classification for sales

Examine duplicate sales invoice for proper account classification

Key existing controls for timing for sales

Shipping documents are prenumbered and accounted for weekly by the accountant

Test of Controls for timing for sales

Account for a sequence of shipping documents

Deficiencies for timing for sales

There is a lack of control to test for timely recording

Substantive test of transactions for timing for sales

Compare date of recording of sale in sales journal with duplicate sales invoice and bill of lading

Auditor concerns for occurrence objective

1) Sales included in the journals for which no shipment was made 2) Sales recorded more than once 3) Shipments made to nonexistent customers and recorded as sales

Tracing tests for

Omitted transactions (completeness objective)

Vouching tests for

Nonexistent transactions (occurrence objective)

Auditor concerns for accuracy objective

Shipping the amount of goods ordered, accurately billing the amount of goods shipped, and accurately recording the amount billed in the accounting records

The most difficult type of cash embezzlement to detect is when

it occurs before the cash is recorded in the cash receipts journal or other cash listings

Key existing controls for occurrence for Cash receipts

Accountant independently reconciles bank account

Test of controls for occurrence for Cash receipts

Observe whether accountant reconciles bank account

Substantive tests of transactions for occurrence for Cash receipts

Prepare proof of cash receipts

Key existing controls for completeness for Cash receipts

Prelisting of cash receipts is prepared

Test of controls for completeness for Cash receipts

Observe prelisting of cash receipts

Deficiencies for completeness for Cash receipts

Prelisting of cash is not used to verify recorded cash receipts

Substantive tests of transactions for completeness for Cash receipts

Compare the prelisting with the duplicate deposit slip

Key existing controls for accuracy for Cash receipts

Accountant independently reconciles bank account

Test of controls for accuracy for Cash receipts

Observe whether accountant reconciles bank account

Substantive tests of transactions for accuracy for Cash receipts

Prepare proof of cash receipts

Key existing controls for posting and summerarization for Cash receipts

Statements sent to customers each month

Test of controls for posting and summerarization for Cash receipts

Observe whether monthly statements are sent

Substantive tests of transactions for posting and summarization for Cash receipts

Use audit software to foot and cross-foot the sales journal and trace totals to the general journal

Key existing controls for classification for Cash receipts

Cash receipts transactions are internally verified

Test of controls for classification for Cash receipts

Examine evidence of internal verification

Substantive tests of transactions for classification for Cash receipts

Examine prelisting for proper account classification

Key existing controls for timing for Cash receipts

Procedures require recording of cash on a daily basis

Test of controls for timing for Cash receipts

Observe unrecorded cash at a point in time

Substantive tests of transactions for timing for Cash receipts

Compare date of deposit per bank statement to the dates in the cash receipts journal and prelisting of cash receipts