Professional Documents
Culture Documents
Collection Cycle
Chapter 13
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 1
Learning Objective 1
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 2
Accounts in the Sales
and Collection Cycle
Sales Cash in Bank
Cash
sales
Accounts Receivable Cash Discounts
Sales on Beginning Cash receipts Taken
account balance
Sales returns Sales Returns
Sales on and allowances and Allowances
account
Charge-off of
Ending uncollectible Bad Debt
balance accounts Expense
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 3
Accounts in the Sales
and Collection Cycle
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 4
Learning Objective 2
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 5
Processing Customer Orders
Customer Order:
A request for merchandise
by a customer
Sales Order:
A document describing the
goods ordered by a customer
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 6
Granting Credit
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 7
Sales Transaction
Sales
Accounts
Accounts receivable
Business
Processing and recording cash receipts
Functions
Business
Providing for bad debts
Functions
Documents
General journal
and Records
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 12
Shipping Goods
Shipping
document
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 13
Billing Customers
and Recording Sales
Sales invoice
Sales transaction file
Sales journal or listing
Accounts receivable master file
Accounts receivable trial balance
Monthly statement
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 14
Processing and Recording
Cash Receipts
Remittance advise
Prelisting of cash receipts
Cash receipts transaction file
Cash receipts journal or listing
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 15
Lockbox Systems and
Electronic Funds Transfer
Bank
Order/Payment
Information
Customer
Customer
Company
Company
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 16
Processing and Recording
Sales Returns and Allowances
Credit memo
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 17
Charging Off Uncollectible
Accounts Receivable
Uncollectible Account
Authorization Form
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 18
Providing for Bad Debts
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 19
Learning Objective 3
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 20
Effect of E-Commerce on the
Sales and Collection Cycle
The Internet
The Internet and
other developing
technologies allow
companies to develop
new business models.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 21
Effect of E-Commerce on the
Sales and Collection Cycle
Business-to-business (B2B)
Business-to-consumer (B2C)
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 23
Learning Objective 4
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 24
Methodology for Designing Controls
and Substantive Tests: Sales
Design tests of controls
Understand internal
and substantive tests
control sales
of transactions for sales
to meet transaction-
Assess planned related audit objectives.
control risk sales Audit procedures
Sample size
Evaluate cost-benefit Items to select
of testing controls. Timing
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 25
Understanding Internal
Control Sales
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 26
Assess Planned
Control Risk Sales
Adequate separation
of duties
Proper authorization
Adequate documents
and records Prenumbered
documents
Monthly statements
Internal verification
procedures
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 27
Internal Verification
Procedures
Evaluate cost-benefit
of testing controls.
Design tests of
controls for sales.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 28
Transaction-Related Audit
Objectives for Sales
Existence:
Recorded sales are for shipments actually made.
Completeness:
Existing sales transactions are recorded.
Accuracy:
Recorded sales are for the amount shipped.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 29
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.
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 30
Direction of Tests for Sales
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 32
Learning Objective 5
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 33
Sales Returns
and Allowances
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 34
Sales Returns
and Allowances
Emphasis on
Materiality
objectives
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 35
Learning Objective 6
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 36
Tests of Controls and Substantive
Tests
of Transactions for Cash Receipts
Determine
Determine whether
whether cash
cash received
received was
was recorded
recorded
Prepare
Prepare proof
proof of
of cash
cash receipts
receipts
Test
Test to
to discover
discover lapping
lapping of
of accounts
accounts receivable
receivable
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 37
Learning Objective 7
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 38
Audit Tests for
Uncollectible Accounts
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 39
Additional Internal Controls
Over Account Balances
Realizable value
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 40
Effect of Results of Controls and
Substantive Tests of Transactions
Allowance for
Cash
doubtful accounts
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 41
Role of all Audit Tests in the
Sales and Collection Cycle
Accounts Cash in
Sales Receivable Bank
Sales Cash receipts
transactions transactions
Audited by Audited by
TOC, STOT, and AP TOC, STOT, and AP
Ending Ending
balance balance
Audited by AP and TDP
2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 13 - 43