Chapter 14 Flashcards
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
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
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
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
The postponement of entries for the collection of receivables to conceal an existing cash shortage
Lapping of Accounts Receivable
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
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
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
Accounts for sales class of transactions
Sales and Accounts Receivable
Business functions for sales class of transactions
Processing customer orders, granting credit, shipping goods, and billing customers and recording sales
Documents and Records for the sales class of transactions
Customer Order and Sales Order
Accounts for the Cash Receipts class of transactions
Cash in bank and Accounts Receivable
Business Functions for the Cash Receipts class of transactions
Processing and recording cash receipts
Documents and Records for the Cash Receipts class of transactions
Remittance Advice and Prelisting of cash receipts
Accounts for Sales Returns and Allowances class of transactions
Sales returns and allowances and accounts receivable
Business functions for the Sales Returns and Allowances class of transactions
Processing and recording sales returns and allowances
Documents and records for the sales returns and allowances class of transactions
Credit Memo and Sales returns and allowances journal
Accounts for the Write-off of uncollectible accounts class of transactions
Accounts receivable and allowance for uncollectible accounts
Business functions for the Write-off of uncollectible accounts class of transactions
Writing off uncollectible accounts receivable
Documents and records for the Write-off of uncollectible accounts class of transactions
Uncollectible account authorization form and general journal
Accounts for the Bad Debt Expense class of transactions
Bad debt expense and allowance for uncollectible accounts
Business functions for the Bad Debt Expense class of transactions
Providing for bad debts
Documents and records for the Bad Debt Expense class of transactions
General Journal
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)
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
