Audit of the Sales and
Collection Cycle
Chapter 14
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13 - 1
Learning Objective 1
Identify the accounts and the
classes of transactions in the
sales and collection cycle.
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Accounts in the Sales
and Collection Cycle
Sales
Cash
sales
Sales on
account
Cash in Bank
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on
and allowances
account
Ending
balance
Cash Discounts
Taken
Sales Returns
and Allowances
Bad Debt
Expense
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Accounts in the Sales
and Collection Cycle
Accounts Receivable
Beginning Cash receipts
balance
Sales returns
Sales on
and allowances
account
Charge-off of
Ending
uncollectible
balance
accounts
Allowance for Uncollectible Accounts
Charge-off of
Beginning
uncollectible
balance
accounts
Estimate of bad
debt expense
Ending balance
Bad Debt
Expense
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Learning Objective 2
Describe the business functions
and the related documents and
records in the sales and
collection cycle.
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Processing Customer Orders
Customer/Purchase Order:
A request for merchandise
by a customer
Sales Order:
A document describing the
goods ordered by a customer
Credit check and
Authorization to ship
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Granting Credit
Before goods are shipped, a properly
authorized person (system) must approve credit
to the customer for sales on account.
Access controls
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Sales Transaction
Sales (credit)
Accounts
Accounts receivable (debit) esp. B2B/Big Ticket
Business
Functions
Processing customer orders,
Granting credit, Shipping goods,
Billing customers and recording sales (j/e)
PO,SO, Shipping Document, Sales invoice (bill),
Documents Sales journal or listing, Accounts receivable
and Records Master file/sub ledger (confirmation),
Monthly statements sent to customers
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Cash Receipts Transaction
Cash in bank (debit: form = check, EFT,
Accounts credit card, etc.); Accounts receivable (credit)
OR B2C: dr. cash, cr. sales
Business
Functions
Processing and recording cash receipts
Separation of duties key!
Remittance advise, Prelisting of cash receipts
Documents Separate
and Records Cash receipts journal or listing, Bank rec,
and A/R records
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Sales Returns and Allowances
Transaction
Accounts Sales returns and allowances (debit–contra sales)
Accounts receivable (credit)
Business
Functions
Processing and recording
sales returns and allowances
Credit memo – put inv. back and credit
Documents customer
and Records Separate
Sales returns and allowances journal, A/R files
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Bad Debt Expense
Transaction
Accounts
Business
Functions
Bad debt expense (debit-contra sales)
Allowance for uncollectible accounts
(cr. contra A/R) – Estimate! Matching Princ.
Providing for bad debts – Authorization and
review,
Separate from handling of cash!
Documents
General journal - Adjustment
and Records
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Charge-off of Uncollectible
Accounts Transaction
Accounts
Accounts receivable (credit)
Allowance for uncollectible accounts (debit)
No I/S effect – for known uncollectibles
Business
Functions
Charging off uncollectible
accounts receivable – Authorization, Doc.,
Separation from cash handling
Documents Uncollectible account authorization form
and Records A/R master files and G/L
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Learning Objective 3
Understand internal control,
and design and perform tests
of controls and substantive
tests of transactions for sales.
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Methodology for Designing Controls
and Substantive Tests: Sales
Understand internal
control – sales
Assess planned
control risk – sales
Evaluate cost-benefit
of testing controls.
Design tests of controls
and substantive tests
of transactions for sales
to meet transactionrelated audit objectives.
Audit procedures/Staffing
Sample size/Budget
Items to select
Timing
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Understanding Internal
Control – Sales
Study the client’s flowcharts,
prepare an internal control
questionnaire/matrix, and perform
walk-through of sales.
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Preliminarily Assess
Control Risk – Sales
Adequate separation
of duties
Adequate documents
and records (C2)
Proper authorization (C1)
Prenumbered
Documents (C5)
Monthly statements (C9)
Internal verification
procedures (C6)
See p. 452 (col 2) for
listing of controls!
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Control Risk below MAX?
Evaluate cost-benefit
of testing controls.
Design tests of
controls for sales.
See p. 452 (col 3)!
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Transaction-Related Audit
Objectives for Sales
Occurrence (let’s go over I/C and ToT):
Recorded sales are for shipments actually made.
Completeness:
Existing sales transactions are recorded.
Accuracy (let’s go over I/C and ToT): :
Recorded sales are for the amount shipped.
Why are we going over Occurrence and Accuracy?
IsHallthere
method
toandmy
madness?????????
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BusinessaPublishing,
Auditing
Assurance
Services 9/e, Arens/Elder/Beasley 13 - 18
Direction of Tests for Sales
Customer
order
Shipping
document
Duplicate
sales invoice
General
ledger
Accounts
receivable
master file
Completeness Start
Sales
journal
=
Occurrence Start
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Design Substantive Tests
of Transactions for Sales
Classification:
Sales transactions are properly classified.
Timing:
Sales are recorded on the correct dates.
Posting and summarization:
Sales transactions are properly included
in the accounts receivable master file.
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Summary of Methodology
for Sales
Table 14-2 p. 452:
Column 1: Transaction-related audit objectives
Column 2: Key internal controls (quest. and matrix)
Preliminary CR – test controls or CR at max?
Column 3: Test of controls – Final CR assessment
Column 4: Weaknesses – Material? Inc. CR? SOX
report? Remediate? Compensating control?
Column 5: Have DR, Substantive tests of transactions
If Prel. CR adjusted upwards for final CR– more ToT!!
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Learning Objective 5
Understand internal control and
design and perform tests of
controls and substantive tests
of transactions for cash receipts.
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Tests of Controls and Substantive Tests
of Transactions for Cash Receipts
Table 14-3 p. 461– same process as Sales!
Most important:
Determine whether cash received was recorded
(completeness) Sep. duties, send mthly statements,
Test to discover lapping of accounts receivable:
Pocket cash and cover A/R with next cash receipt, and
so on – separation, vacation, compare name, timing,
and amount on remittance to cash receipts and A/R j/e
• Prepare proof of cash receipts: trace from cash
receipts journal to bank deposits, bank rec (occurrence)

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Learning Objective 6
Apply the methodology for controls
over the sales and collection cycle
to write-offs of uncollectible
accounts receivable.
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Audit Tests for
Uncollectible Accounts-I/C and ToT
What is a major concern in testing accounts
charged off as uncollectible?
Occurrence – writing off A/R accounts that have been
“collected.” We will hammer completeness
and real. value in A/R testing (analysis of aging).
Covering up cash pocketed by writing off accounts
receivable that have been collected. I/Cs: Separation of
duties, proper documentation and authorization.
ToTs: compare write-offs to independent credit
reports, look at past payment history.
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Effect of Results of Controls and
Substantive Tests of Transactions
In summary, the parts of the audit most affected
by the tests (I/C and ToT) for the sales and
collection cycle are:
Bad debt
Sales – only AP?
Expense – bigger AP
Threshold?
Accounts
Allowance for
Receivable – less confirms?
doubtful accounts –
Cash – smaller sample
bigger AP
For Dep. In-transit?
threshold?
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Role of all Audit Tests in the
Sales and Collection Cycle
Accounts
Receivable
Sales
Cash in
Bank
Sales
transactions
Cash receipts
transactions
Audited by
TOC, STOT
Audited by
TOC, STOT
Ending
balance
Ending
balance
Audited by AP and TDB
Ending
balance
Audited by AP and TDB
TOC + STOT + AP + TDB
= Sufficient competent evidence per GAAS
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End of Chapter 14
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