A424 Chapter 14
Sales and Collection Cycle
I. Introduction: Review of accounts and documents
A. Accounts (see Figure 14-1)
Preparation Questions:
1. Looking at Figure 14-1, what types of audit tests would be applied to the black
lines connecting the accounts?
2. Looking at Figure 14-1, what types of audit tests would be applied to the ending
account balances?
3. What document "details" the ending accounts receivable balance?
4. What document details the ending balance of the Allowance for Uncollectible
Accounts?
B. Classes of Transactions and Documents (see Table 14-1)
Pages 3 through 15 of this handout present the Sales and Cash Receipts classes of
transactions. This handout omits the following classes of transactions:
 Sales returns and allowances – properly authorized Credit Memo and Sales
Returns and Allowances Journal.
 Bad debt write-offs – need proper and documented authorization.
 Estimate of bad debt expense.
C. Key Recognition Points
Preparation questions: Fill in the table below by answering the following questions:
1. What event usually triggers the recording of a sale?
2. What event usually triggers the recording of a cash receipt?
3. When should a sale return and allowance be recognized?
4. At a minimum, when should a company estimate its bad debts?
5. When should a company write-off an uncollectible accounts receivable?
Event:
1. Sales
Recognition date:
2. Cash Receipts
3. Sales Returns and
Allowances
4. Estimate of Bad
Debts
5. Charge-off of
Uncollectibles
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A424 Chapter 14
II. Examine Internal Controls and Transactions - Satisfy TRAOs by looking for
control activities or performing other tests that assure:
Specific Objectives
TRAO
Sales
Collections
Occurrence
Recorded sales are for
Recorded cash receipts are
shipments actually made to for funds actually received
customers.
by the company.
Completeness
Existing sales transactions
Cash received is recorded
are recorded.
in the cash receipts journal.
Accuracy
Recorded sales are for the
Cash receipts are
amount of goods shipped
deposited and recorded at
and are correctly bill and
the amounts received.
recorded.
Classification
Sales transactions are
Cash receipts transactions
properly classified.
are properly classified.
Timing
Sales are recorded on the
Cash receipts are recorded
correct dates.
on the correct dates.
Posting and Summarization Sales transactions are
Cash receipts are properly
properly included in the
included in the accounts
accounts receivable master receivable master file and
file and are correctly
are correctly summarized.
summarized.
A. Occurrence – greatest concern is fictitious customers; for example, for TC look for
authorization of credit, valid customer number, shipping documents, sending of
monthly statements. For STofT add verification of monetary values, tracing to
perpetual inventory records.
B. Occurrence – greatest concern is the diversion of cash receipts – do STofT, such as
a proof of cash, tests for lapping of accounts receivable.
III. Types of Tests and Evidence
A. Tests of Controls (documentation, inquiries, reperformance, and observation)
B. Substantive Tests of Transactions (documentation, inquiries, recalculation)
IV. Audit Procedures
Many possibilities, some may satisfy more than one objective
V. Example
See documents of sales and collection system.
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A424 Chapter 14
Sales Processing System
Basic Accounting Document Flow Diagram
Customer
(Customer Order)
Financial
Statements
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A424 Chapter 14
Exhibit 1: Sample Sales Order
ABC Seller Corp.
1234 W. Main Street
Fort Wayne, IN 46802
CHARGE SALE ORDER
SOLD TO:
FIRM NAME __XYZ Buyer Co.__
ATTENTION OF _Bill Harden___
ADDRESS __4357 North Wells_
CITY _____Fort Wayne_______
STATE _IN_ ZIP __46805_____
INVOICE NUMBER __12-28602
INVOICE DATE
__9-12-12__
PREPARED BY
____KSP__
CREDIT AUTHORIZED __LH__
FOB ___Shipping Point_______
CREDIT TERMS __2/10, n/30__
CUSTOMER PURCHASE ORDER:
NUMBER __156443____
DATE ___Sept. 8, 2012____
SIGNED BY _Bill Harden___
QUANTITY
ORDERED
130
50
100
PRODUCT
NUMBER
XL2000
L2000
XL5000
DESCRIPTION
Acctg. Society T-shirt
Acctg. Society T-shirt
Acctg. Society sweat shirt
SHIPMENT DATE ____9/12/12_
SHIPPED VIA __NAVL_______
B.O.L. NO. __12-10279_______
QUANTITY
SHIPPED
130
5
100
UNIT
PRICE
5.00
5.00
12.50
TOTAL
650.00
25.00
1,250.00
TOTAL SALE
CUSTOMER ACCT. NO.
VERIFICATION
1,925.00
1037
George
sales department
enters customer order information.
credit department
enters credit terms.
warehouse department
fills-in quantity shipped.
shipping department
fills-in shipping date, shipped via, and bill of lading number.
billing department extends, prepares sales invoices.
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A424 Chapter 14
A Customer Order is a request (an offer) to buy merchandise from the client company.
There is no particular format for the information or mode of communication (e.g., written,
phone, e-mail, web, linked computer systems, sales representatives, or customer
purchase order).
A Sales Order (see Exhibit 1) has a set format (as company specified) and is prepared
from information on the customer order by the ___________________. The number of
copies produced varies depending on the client’s internal control system, in this
example the system requires ten (10) copies.
One Copy (Copy 1) initially goes to the __________________ for a credit check
and verified approval. The other nine copies are kept in a temporary file. After
approval by the Credit Department, copy 1, plus the other nine copies, simultaneously
go to:
Copy 1
customer open order file along with the customer order
Copy 2
warehouse
as a stock release
Copy 3
warehouse
as a file copy
Copy 4
billing
as an invoice
Copy 5
billing
as a ledger copy
Copy 6
billing
as a file copy
Copy 7
shipping
as a shipping notice
Copy 8
shipping
as a packing slip
Copy 9
shipping
as a file copy
After the goods are shipped and billed the Sales department receives the shipping
notice copy of the sales order. This triggers the paperwork to be moved from the open
file to a closed file. If any items are backordered the company should have a system to
finish filling the order.
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A424 Chapter 14
Exhibit 2: Sample Shipping Document (or Bill of Lading)
Uniform Bill of Lading – Domestic
Document No. 12-10279________
Shipper No. ______________
Carrier No. _______________
Date ___9/12/12____________
ABC Seller Corp.
1234 W. Main Street
Fort Wayne, IN 46802
(219) 444-1234
TO:
Consignee __XYZ Buyer Co._______
Street ___4357 North Wells________
City/State _Fort Wayne, IN__ Zip _46805_
Route:
Number of
Shipping Units
1
_____NAVL_____________
(Name of Carrier)
Vehicle
Kind of packaging, description of
articles, special marks and exceptions
corrugated 48 X 48 clothing
Weight
50#
Rate
.50
TOTAL
Charges
25.00
$ 25.00
The agreed or declared value of the property is
hereby specifically stated by the shipper to be
not exceeding:
IF WITHOUT RECOURSE:
the carrier shall not make delivery of this
shipment without payment of freight
________________________________
$ ____________ per __________________
(Signature of Consignor)
FREIGHT CHARGES
Signature below signifies that the goods
Check appropriate box:
described above are in apparent good order,
[ ] Freight prepaid
except as noted. Shipper hereby certifies that
[ X ] Collect
he is familiar with all the bill of lading terms and
[ ] Bill to shipper
agrees with them.
SHIPPER ABC Seller Corp.
CARRIER NAVL
PER Mike Shipping-Clerk
PER Dave Driver
DATE 9/12/12
(This bill of lading is to be signed by the shipper and agent of the carrier issuing same.) CONSIGNEE
Original document prepared by _____________________________________
when goods and stock release are received from the warehouse & reconciled with the
shipping notice.
Original document (#1) goes to
shipping log or file
One Copy (#2) goes to
carrier
One Copy (#3) goes to
carrier for customer (with merchandise)
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A424 Chapter 14
Exhibit 3: Sample Sales Invoice
INVOICE NUMBER: 12-28602
INVOICE DATE: September 12, 2012
CUSTOMER NUMBER: 1037
ABC Seller Corp.
1234 W. Main Street
Fort Wayne, IN 46802
SOLD TO:
FIRM NAME __XYZ Buyer Co.__
ATTENTION OF _Bill Harden___
ADDRESS __4357 North Wells_
CITY _____Fort Wayne_______
STATE _IN_ ZIP __46805_____
Customer
Order No.
156443
QUANTITY
ORDERED
130
50
100
Our Sales
Order #
12-28602
PRODUCT
NUMBER
XL2000
L2000
XL5000
Date
Shipped
9/12/12
Shipped
Via
NAVL
DESCRIPTION
Acctg. Society T-shirt
Acctg. Society T-shirt
Acctg. Society sweat shirt
F. O. B.
Shipping
Point
Terms
2/10, n/30
QUANTITY
SHIPPED
130
5
100
UNIT
PRICE
5.00
5.00
12.50
Pay This Amount
Salesperson
Sam
TOTAL
650.00
25.00
1,250.00
$ 1,925.00
Thank You!
Document prepared by the ___________________________ when it (he/she)
receives stock release and shipping notice from shipping.
Original (#1) and one copy (#2) are sent to the customer. The copy is a remittance
advice and is marked Return with Payment.
One copy (#3) called the ledger copy goes to accounts receivable.
One copy (#4) called the file copy goes to file.
Stock release is sent to inventory control.
Shipping notice is sent to sales department.
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A424 Chapter 14
Exhibit 4: Sample Sales Journal
ABC Seller Corp.
Sales Journal
Date
2012
Sept. 1
2
3
3
3
3
4
etc.
12
12
etc.
Account Debited
Invoice No.
Ref.
S250
Accts. Rec.
Dr. Sales Cr.
Abbot Sisters
Babson Co.
Carson Bros.
Deli Co.
XYZ Buyer Co.
Hooper and Kids
Yahoo, Inc.
12-28576
12-28577
12-28578
12-28579
12-28580
12-28581
12-28582
10,600
11,350
7,800
9,300
2,450
5,400
3,414
Deli Co.
XYZ Buyer Co.
12-28601
12-28602
45,900
1,925
205,000
Total for September
Document prepared by _________________________.
Periodically total information is sent to the general ledger clerk.
Exhibit 5: Sample Accounts Receivable Subsidiary Ledger (or Master File)
Name: XYZ Buyer Co.
Address:
4357 North Wells
Fort Wayne, IN 46805
Date
Sept. 1, 2012
Sept. 3
Sept. 5
Sept. 12
Explanation
Beg. Balance
Invoice No.
Account Number: 1037
Sale (DR)
12-28580
2,450
12-28602
1,925
Payment
(CR)
8,000
Account
Balance
12,500
12,950
4,500
6,425
Document prepared by __________________________ after it (he/she) receives ledger
copy. Summary information (such as an accounts receivable aging) is periodically sent to
general ledger clerk for the purpose of reconciling the control account to the aging.
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Exhibit 6: Sample Monthly Statement
Monthly Statement
ABC Seller Corp.
1234 W. Main Street
Fort Wayne, IN 46802
Customer:
Invoice
Number
12-28327
12-28580
12-28602
XYZ Buyer Co.
4357 North Wells
Fort Wayne, IN 46805
Date
Aug. 5, 2012
Sep. 3, 2012
Sep. 12, 2012
Totals
No. 1037
Date: Sept. 30, 2012
Current
Past Due
1-30
2,050
Past Due
31-60
Past Due
Over 60
2,450
1,925
4,375
2,050
0
Total Amount Due
0
6,425
Exhibit 7: Sample Aging of Accounts Receivable
Customer
Invoice
Name &
Number
Number
Abbot Sisters
1257
12-28576
Date
9/1/12
ABC Seller Corp.
Aging of Accounts Receivable
September 30, 2012
Past
Past
Current
Due
Due
1-30
31-60
10,600
10,600
0
Past
Due
Over 60
Total
0
0
10,600
etc., etc.
XYZ Buyer Co.
1037
12-28327
12-28580
12-28602
Grand Totals
8/5/12
9/3/12
9/12/12
2,050
2,450
1,925
4,375
2,050
0
0
6,425
127,890
45,687
13,098
4,660
191,335
Original documents (exhibit 6 and 7) prepared by Accounts Receivable.
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A424 Chapter 14
Cash Collections Processing System
Basic Accounting Document Flow Diagram
Incoming Mail:
Customer checks and
Remittance advices
Financial Statements
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A424 Chapter 14
A remittance advice is a turnaround document. Imagine paying your utility and phone
bills. The top portion of the bill is removed and returned with your check to the utility or
phone company. The top portion of the bill is a remittance advice. In this situation, the
_____________ of the sales invoices sent to XYZ Buyer Co. serve as remittance
advices. The company receiving payment could also use the bottom half of the check
received from the customer as a remittance advice (see check below).
Exhibit 8: Sample Customer Check
20-5/740
715023451876
Check No. 56,793
Date: September 3, 2012
XYZ Buyer Co.
4357 North Wells
Fort Wayne, IN 46805
Pay to the Order of ________ABC Seller Corp.__________ $ 8,000.00
Eight thousand dollars and no cents__________________________________
Big National Bank
Indiana Central Region
Indianapolis, Indiana 46266
____Bill Harden___________
074000052 715023451876
XYZ Buyer Company
For invoice number 12-27301
12-27445
September 3, 2012
$3,500.00
$4,500.00
Document prepared by the ____________________.
Cash receipt entry should be dated: ______________.
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A424 Chapter 14
Exhibit 9: Sample Remittance Advices
INVOICE NUMBER: 12-28267
INVOICE DATE: August 3, 2012
CUSTOMER NUMBER: 1037
ABC Seller Corp.
1234 W. Main Street
Fort Wayne, IN 46802
SOLD TO:
FIRM NAME __XYZ Buyer Co.__
ATTENTION OF _Bill Harden___
ADDRESS __4357 North Wells_
CITY _____Fort Wayne_______
ZIP __46805_____
STATE _IN_
Customer
Order No.
156297
QUANTITY
ORDERED
250
250
350
Our Sales
Order #
12-14341
PRODUCT
NUMBER
XL1543
XL1809
XL3897
Date Shipped
Aug. 3, 2012
Shipped Via
Rutgers
DESCRIPTION
Plain T-shirt – blue
Plain T-shirt – red
ND T-shirt – the best
F. O. B.
Shipping point
QUANTITY
SHIPPED
250
250
300
Terms
2/10, net/30
Salesperson
Sam
UNIT PRICE
4.00
4.00
5.00
Pay This Amount
TOTAL
1,000.00
1,000.00
1,500.00
3,500.00
Thank You!
Copy 2 – return with payment
INVOICE NUMBER: 12-28444
INVOICE DATE: August 23, 2012
CUSTOMER NUMBER: 1037
ABC Seller Corp.
1234 W. Main Street
Fort Wayne, IN 46802
SOLD TO:
FIRM NAME __XYZ Buyer Co.__
ATTENTION OF _Bill Harden___
ADDRESS __4357 North Wells_
CITY _____Fort Wayne_______
ZIP __46805_____
STATE _IN_
Customer
Order No.
QUANTITY
ORDERED
500
250
350
Our Sales
Order #
07-15677
PRODUCT
NUMBER
XL1700
XL1600
XL3899
Date Shipped
Aug. 22, 2012
Shipped Via
NAVL
DESCRIPTION
Plain T-shirt – green
Plain T-shirt – yellow
IU T-shirt
F. O. B.
Shipping point
QUANTITY
SHIPPED
500
250
300
Terms
2/10,net/30
Salesperson
Sam
UNIT PRICE
4.00
4.00
5.00
Pay This Amount
TOTAL
2,000.00
1,000.00
1,500.00
4,500.00
Thank You!
Copy 2 – return with payment
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A424 Chapter 14
Incoming mail is opened by the __________________. The _______________
compares the checks and remittance advices, then three (3) copies of a prelisting are
prepared. One copy (#1) goes to Accounts Receivable Clerk, along with the
remittance advices. One copy (#2) goes to cashier, along with the checks. One
copy (#3) goes to the controller, who will at a later point in time, compare the
prelisting to the validated copy of the deposit slip from the bank and the batch totals for
both accounts receivable and cash receipts for the same date.
Exhibit 10: Sample Prelisting
September 5, 2012
1154
15,687.00
1289
3,000.00
1037
8,000.00
2055
2,543.00
3478
5,634.00
*****
34,864.00
Ima Goodstudent
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A424 Chapter 14
Exhibit 11: Sample Cash Receipts Journal
ABC Seller Corp.
Cash Receipts Journal
Date
2012
Sept. 5
5
5
5
5
Account Credited
Ref
Abbot Sisters
Carson Bros.
Deli Co.
XYZ Buyer Co.
Hooper and Kids
Total for Sept. 5, 2012
Total for September
Cash Dr.
Disc
Dr.
Misc.
Cr.
CR300
Accts. Rec.
Cr.
15,687.00
5,634.00
2,543.00
8,000.00
3,000.00
34,864.00
15,687.00
5,634.00
2,543.00
8,000.00
3,000.00
34,864.00
354,000.00
354,000.00
Exhibit 12: Sample Deposit Slip
Date: September 5, 2012_
Account number: _707011123889__
Name: _ABC Seller Corp._____
Address: 1234 W. Main Street___
Fort Wayne, IN 46802_
Description
Cash
Coin
XYZ Buyer Co.
Abbot Sisters
Carson Bros.
Hooper and Kids
Deli Co.
Total deposit



Amount
8,000.00
15,687.00
5,634.00
3,000.00
2,543.00
34,864.00
Cash Receipts records entry in the Cash Receipts Journal, prepares 3 copies of
deposit slip and sends journal voucher to General Ledger clerk. Copy of prelist
and copy 3 of deposit list filed. Cashier takes deposit to bank
Accounts Receivable clerk updates Accounts Receivable subsidiary ledger
and sends account summary information to General Ledger clerk. File prelist and
remit advices.
G/L clerk reconciles information and updates General Ledger periodically.
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Exhibit 13: General Ledger
100 Cash
Date
Jan. 1, 2012
January 2012
February 2012
March 2012
April 2012
May 2012
June 2012
July 2012
August 2012
Sept. 2012
Reference
CR50
CD56
CR75
CD63
CR105
CD78
CR167
CD96
CR199
CD100
CR205
CD150
CR245
CD200
CR276
CD257
CR300
CD302
Debit
Credit
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
100,000
354,000
100,000
Balance
103,000
203,000
103,000
203,000
103,000
203,000
103,000
203,000
103,000
203,000
103,000
203,000
103,000
203,000
103,000
203,000
103,000
457,000
357,000
Oct. 2012, etc.
110 Accounts Receivable
Date
Reference
Jan. 1, 2012
January 2012
S100
CR150
February 2012
S120
CR170
March 2012
S140
CR194
April 2012
S180
CR203
May 2012
S200
CR215
June 2012
S210
CR231
July 2012
S220
CR245
August 2012
S230
CR276
Sept. 2012
S250
CR300
Debit
Credit
204,000
200,000
201,000
205,000
185,000
184,000
176,000
177,000
189,000
188,000
256,000
175,000
247,000
235,000
234,000
236,000
205,000
354,000
Balance
103,000
307,000
107,000
308,000
103,000
193,000
104,000
280,000
103,000
192,000
104,000
360,000
185,000
432,000
197,000
431,000
340,335
545,335
191,335
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