Module 2 - Audit of the Sales and Collection Cycle Flashcards
What are the auditors responsibilities when it comes to internal controls testing for public and private companies?
Public company:
- Understand controls
- issue report on effectiveness of internal controls
Private company:
- Understand controls (no report required)
What accounts are associated with the sales and collection cycle?
- Separate the accounts between transaction accounts and balance accounts:
Transaction related:
- Sales
- Sales returns and allowances
- Bad Debt Expense
Balance related:
- Cash
- Accounts receivable
- Allowance for doubtful accounts
What are the 4 business functions related to Sales transaction account?
- Processing customer orders
- Granting Credit
- Shipping goods
- Billing customers and recording sales
What forms and documents would be used for this business function:
Processing customer orders
Customer order form
External document for request of merchandise by customer
Sales Order form
Internal document that describes information of goods ordered by costomer
What forms/documents would be used for this business function:
Shipping goods
Shipping document/Bill of Lading
- Prepared at time of shipment
- Describes merchandise
- Initiates billing upon shipment
What transaction related audit objectives must be satisfied when inspecting this business function:
Billing customers and recording sales
Completeness**: All shipments have been billed
Occurence: No double billing
Accuracy: Each bill is correct amount
** Occurence is most important: look for controls that ensure completeness
What documents would be associated with this business function:
Processing and recording cash receipts
Remittance Advice:
Document mailed to customer and returned to seller containing details of invoice amounts.(improves control of cash)
Prelisting of Cash Receipts:
List prepared when cash received by someone that has no access to accounting records (verifies cash was received/deposited at correct amounts)
What document would be associated with this business function:
Processing and recording sales returns and allowances
Credit memos
Indicates reduction in amount due from customer; supports reductions to A/R
What documents would be associated with this business function:
Writing off Uncollectible Accounts Receivable
Uncollectible account authroization form:
Internally generated by A/R department; allows authority to write off A/R
Methodology for designing tests of controls and substantive tests
What steps do auditors go through to obtain an understanding of internal controls and design tests?
- Understand internal control
- Assess planned control risk
- Determine extent of testing controls
- Design tests of controls and substantive tests of transactions
What steps can auditors perform to gain an understanding of internal controls?
- Study the client’s flowchart
- Perform internal control questionairre
- Perform walk-through (test of sales)
- Create audit documentation of assessed risks and controls in place
What is the purpose of a walk-through?
To better understand these components of the business:
- The flow of information
- Key documents produced
- who’s involved
- What risks are present
- What controls mitigate risk
What are control gaps?
Control risks found during the walk-through with no corrective internal controls in place to mitigate risk
When two things should auditors keep in mind when assessing the planned control risk?
- Do they have a control in place to mitigate assessed risk
- Do they have the right kind of controls?
What are some internal controls that can mitigate control risk in the sales and collection cycle?
- Proper separation of duties (S.O.D)
- Proper authorization of processes
- Adequate documentation
- Pre-numbered documents
- Monthly Statements
- Internal verification system
How do these internal controls help reduce risk for sales and collection cycle:
- Pre-numbered documents
- Monthly Statements
- Internal verification system
Pre-numbered documents:
prevents ommision/duplication of documents
Monthly Statements:
Timely check of A/R balances
Internal verification system:
system to prevent certain actions until certain conditions have been fulfilled
What emphasis do the PCAOB standards place on the sales cycle?
Auditors should have presumed risk of overstatement of sales due to fraud (high level of risk)
What are some things that auditors should keep in mind when determining the extent of testing for controls?
- Reliance on controls: the more a company relies on controls, the more testing required
- Frequency of control: more times the control is executed. the more testing
- Control risk has inverse relationship with evidence required
What should auditors keep in mind when designing tests of controls:
Tests should solve to meet the specific audit objective that is being tested.
Tracing vs. vouching
What are they?
What audit objective do these tests satisfy?
Tracing
From source documents to the journals
Completeness: tests for omitted transactions
Vouching
From journals to source documents
Occurence: Tests for nonexistent accounts
What 3 misstatements should the auditor be concerned with regarding whether recorded sales have occured (occurence)?
- Sales included in the journals for which no shipment was made
- Sales recorded more than once
- Shipments made to nonexistent customers
