AUDITING

CHAPTER 10
Sales & Cash Receipts
Transactions
By
David N. Ricchiute
TOPICS
Nature of revenue/receipt cycle
Flow of information
Auditors assessment of control risk
Audit of internal2 control for sales,
cash receipts
Computer auditing, sampling, tests
of controls
Assurance, consulting services

2 GBW 8th ed. Ch. 10

NATURE OF
REVENUE/RECEIPT CYCLE

Goods, services sold to customers

in exchange for future promises to
pay
Cash collected from customers

3 GBW 8th ed. Ch. 10

REVENUE/RECEIPT CYCLE
Flow of Information
Customer order received
Sales order prepared
Price, quantity, goods, terms
Shipping document
Identifies goods shipped
Contract between seller, carrier
Sales invoice (bill)
Customer remittance advice
Returned with payment from customer

4 GBW 8th ed. Ch. 10

SELLERS DOCUMENTS
Sales order
Identifies goods ordered, price, quantity,
terms, etc.
Shipping document (bill of lading)
Identifies good shipped
Contract between seller & carrier
Sales invoice
Formal notice to customer of amount &
payment terms
Customer remittance advice
Returned with payment

5 GBW 8th ed. Ch. 10

CONTROLS FOR CREDIT
SALES
Multicopy, prenumbered sales order prepared
Customer credit reviewed, approved
Authorized copy sales order accompanies goods
from Inventory Control to Shipping
Goods received in Shipping compared with sales
order; shipping document prepared
Common carrier provides receipt for goods
shipped
Shipping document, approved sales order sent to
billing for preparation of invoice, daily sales
summaries
Invoice copy sent to General Accounting for
recording
6 GBW 8th ed. Ch. 10
CASH COLLECTION
Process
Checks by mail listed, endorsed
List copy to Accounts Receivable with
remittance for posting
List copy with checks to Cash Receipts Dept. for
daily deposit
Sales returns separate from cash collection
Uncollected accounts
Reviewed for credit limits, aged, written off as
necessary

7 GBW 8th ed. Ch. 10

INTERNAL CONTROL &
RISK
Controls Risks
Authorization Credit risk, uncollectible
accounts
Prenumbered Shipment, billing not
shipping timely
documents
Recording Items recorded in
controls improper amounts,
accounts
Restricted access Theft
8 GBW 8th ed. Ch. 10
ASSESSING CONTROL
RISK
Obtain Understanding
Review Sarbanes-Oxley Section 404
documentation for sales process
Document the clients system
Flowchart, questionnaire, narrative
Perform transaction walk-through
Identify control activities
Test controls to reduce control risk
below maximum
Assess control risk
9 GBW 8th ed. Ch. 10
TESTS OF CONTROLS
Sales, Collection
Provide a reasonable degree assurance
that employees comply with
managements procedures
Sales
Properly authorized, executed, recorded
Cash collections
Cash receipts recorded, deposited promptly
Returns, uncollectible accounts
Proper authorization, recording

10 GBW 8th ed. Ch. 10

CONTROL RISK
Shipping
Major risks
Unauthorized shipment
Fictitious or related parties
Goods properly shipped, not billed,
recorded

11 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Shipping
Select random sample shipping
documents
Examine sample for authorized sales order &
agreement
Trace sample shipping documents to
invoices (completeness)
Trace invoices to sales journal, A/R
ledgers
Trace invoices to inventory records
12 GBW 8th ed. Ch. 10
CONTROL RISK
Billing

Major risks
Bills sent but goods not shipped
Bills not properly prepared, recorded

13 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Billing
Select sample invoices from
Billing dept.
Verify unit prices & mathematical
accuracy
Trace invoices to shipping
documents (existence/occurrence)
Trace invoices to sales journal, A/R
ledgers
Trace invoices to inventory
records

14 GBW 8th ed. Ch. 10

CONTROL RISK
Recording
Periodic summaries not prepared
or not prepared correctly

15 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Recording
Review evidence of procedures for
Reconciliation daily sales summaries with
sales journal totals
Periodic reconciliation A/R trial balance with
general ledger control
Scan sales journal for unusual
transactions, large amounts
Verify mathematical accuracy sales
journal for selected periods; trace
postings to general ledger
16 GBW 8th ed. Ch. 10
CONTROL RISK
Cash Collection, Deposit
Risk of embezzlement, deposit into
improper accounts

17 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Cash Collection & Deposit
Cash collection
Surprise basis: take control bank deposits
Compare total checks to total deposit slip
Compare check details to cash receipt
records & A/R ledger
Determine timeliness
Deposits
Interim: compare deposits CRJ with bank
statements
Trace CRJ to general ledger

18 GBW 8th ed. Ch. 10

CONTROL RISK
Sales Returns, Allowances
Risk that credit memoranda
Not approved
Not properly recorded

19 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Sales Returns &
Allowances
Test details random sample credit
memoranda
Receiving reports
Perpetual inventory records
Entries A/R ledger & general ledger
Review credit register for unusual
items

20 GBW 8th ed. Ch. 10

CONTROL RISK
Uncollectible Accounts
Risk that account write-offs
Properly authorized
Properly recorded

21 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Uncollectible Accounts
For written-off entries:
Select sample
Trace to authorization
Trace to posting
Review write-offs for unusual
entries

22 GBW 8th ed. Ch. 10

ASSESSING CONTROL
RISK
2 Questions
Are controls effective?
Can controls be relied upon?
If answer is yes to both
Assess control risk below maximum
Assess detection risk above minimum
Restrict substantive tests of sales,
receivables, cash

23 GBW 8th ed. Ch. 10

PRELIMINARY OPINION ON
INTERNAL CONTROL
Required by Sarbanes-Oxley
Auditor must form opinion on
managements assessment of internal
control over financial reporting based
on
Reports of internal auditors
Auditors tests of controls
Substantive audit tests

24 GBW 8th ed. Ch. 10

TESTS OF CONTROLS
Deduction Management
3 Critical questions
Does Accounts Receivable monitor
deductions?
Does Account Operations approve
deduction inquiries
Does senior management review
decisions made by Accounts
Receivable, Account Operations?

25 GBW 8th ed. Ch. 10

COMPUTER AUDITING &
SAMPLING
Understand the system
Tests of controls
Input controls
Code verification
Data entry controls
Processing controls
Control totals
Limit tests
Assess control risk
26 GBW 8th ed. Ch. 10
TESTS OF BILLING
CONTROLS
An Example
Randomly select sample sales
invoices
Verify unit prices, clerical accuracy
Trace details of invoices to
shipping documents
Trace sales invoices to inventory
records

27 GBW 8th ed. Ch. 10

ASSURANCE, CONSULTING
SERVICES
Sarbanes-Oxley restricts
Information systems consulting to
non-audit public clients, and any non-
public clients

28 GBW 8th ed. Ch. 10