AUDITING

SALES
Prof. Dr Safdar A. Butt

Scope of Trading Activities

Purchases

Purchases Returns, or Returns Outwards

Sales

Trade creditors

Trade debtors

Sales Returns, or Returns Inwards

Sales:
Internal Control Objectives

All orders are promptly acted upon.

Credit sales are made only to approved
customers.
Prompt and correct issue of invoices:

Correct prices / agreed discount rates

Claims for delivery, pricing or discount

errors are investigated /attended to.
Prompt collection of receivables

Due provisions for bad debts where needed

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Internal Control Measures:

Receipt of orders & Dispatches

Register for orders received.

Credit Control Procedure:

List of approved customers with discount and

credit limits.
Upto date record of receivables
Approval of orders before being passed on to
stores for delivery.

Regular review of outstanding orders.

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Internal Control Measures:

Sales Invoicing

Approved price list

Approved discount list

Prompt issue of invoices:

By product, area or clients

With computers, goods delivery note and
invoice can be issued simultaneously.

Pre-printed and pre-numbered invoices.

Where possible, one person prepares and
another checks invoice before issue.
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Internal Control Measures:

Accounting for Sales

Sales Day Book

Debtors Ledger
Where possible, on line up-dating should
be done; otherwise daily postings
If sales ledger is not up-to-date, credit
control cannot work.
Regular Issue of monthly statements.
Responsibility for follow up on collection.
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Internal Control Measures:

Other Sales Related Issues

Formal procedure for all activities relating

to sales and sales returns.
Goods received back from customers

Inspection
Issue of Goods Returns Note / Claim
Proper authorization for issue of Credit Note

Segregation of duties / internal check

Credit Control

Who should be given credit?

How much? (limits)
On what conditions or security?
Follow up process:

Sending statements
Stopping further supplies
Legal action
Responsibility for each action

Writing off bad debts

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Internal Control Questionnaires

Receipt of orders
Dispatch of goods
Invoices
Return of goods by clients
Accounting for sales

Auditing Sales 1

Vouching invoices on test check basis:

Arithmetical accuracy
Cross reference to price list, discount list,
customers order, delivery note, etc
Authority for supply and credit
Cross reference to sales day book, stores
records.
Trace entries in sales day book to sales ledger

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Auditing Sales 2

Check the arithmetical accuracy of sales

day book, sales ledger.
Verify that goods were actually shipped
out in respect of invoices issued towards
the end of the year.
Verify numerical sequence of invoices and
good dispatch notes, etc., investigating
any missing numbers.
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Auditing Sales Returns 1

Vouch credit notes on test check basis:

Arithmetical accuracy
Cross reference to original invoice, price list, good
returned/received note, stores records, etc
Authority / approval for issue
Verify that the same prices and discount rates have
been applied to credit note as were to the invoice.
Cross reference to sales return book, stores records.
Trace entries in sales return book to sales ledger

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Auditing Sales Returns 2

Check the arithmetical accuracy of sales

return book.
Verify that all goods returned in the last
few days of the year are covered by credit
notes.
Verify numerical sequence of credit notes
and good returned notes, investigating
any missing numbers.
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Auditing Trade Debtors 1

Get a schedule of trade debtors and

Check its arithmetical accuracy

Verify individual balances from ledger

Audit in depth selected debtors accounts.

Trace entries to all related records

Direct confirmation of balance through
circularization

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Circularization of Debtors

Auditor asks the client to write a letter to all or

selected debtors.
Auditor posts the letter himself.
Replies to the auditor: pre-paid postage reply
envelopes to be provided.
Positive Confirmation (must reply)
Negative Confirmation (reply only if disagree)

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Auditing Trade Debtors 2

Check the list of customers with approved

credit terms and prices.
Check the Aging Schedule of Debtors and
inquire about long outstanding debtors.
Verify the basis of computing provisions
for bad debts.
Re-compute provisions for bad debts.

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Provision for Bad Debts

Write Off (not provisioning)

Specific Provisioning based on age of
outstanding amounts.
General Provisioning based on experience
as a % of all debtors.
Combination of the two bases.

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Thank you
Dr Safdar A Butt

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