How to do Audit of Sales of a company

The sales and collections cycle in a business refers to the set of processes that begin when a
customer purchases goods or services and ends when your business receives payment in full. As
part of the year-end audit of your financial statements, external accountants test sales
transactions and the internal controls over those transactions to ensure your company is not
materially misstating its revenues or accounts receivable conducts a check to ensure there is no
fraud within the company.

Test of Controls

An auditor tests the controls you have set up for the sales cycle to determine how strong and
reliable they are. If they are strong, the auditor can reduce the amount of transaction testing he
must do. Common internal controls over the sales cycle include numbered sales invoices,
purchase order authorization over a certain limit and authorization over receivables write-offs.

The auditor selects a random sample of transactions and examines the related purchase orders,
invoices and customer statements. If the control being tested is numbered sales invoices, for
example, the auditor ensures that all numbers in a section are accounted for and that none are
missing. If the control is that all purchase orders are approved by management, the auditor
checks for a manager's signature on each document. If control errors are found, the auditor
increases the amount of transactional testing that will be conducted in the audit.

Testing of Individual Transactions

An auditor determines if the financial statement amounts of sales and accounts receivable are
correct by verifying individual transactions. Accounts receivable balances are tested by sending
confirmation letters to customers to obtain objective assurance that the balance is correct. The
auditor also chooses sales transactions from the sales ledger and verifies that there are legitimate
sales receipts to back up the transaction. To test the accuracy of the sales figure, the auditor
reviews sales transactions in the ledger close to the financial statement date to ensure that the
company only included sales prior to that date.
Within the Company Checking for Fraud

The purpose of an external financial statement audit is to provide assurance on the numbers and
not to uncover employee or owner fraud. However, many of the sales cycle audit procedures can
lead to the discovery of fraud.

A common employee scheme is to steal customer payments and write them off in the accounting
system so that the receivable no longer shows. If an employee has access to both the accounting
system and the incoming mail, the auditor spends more time reviewing receivable write-offs to
ensure that they were authorized and legitimate. A review of purchase orders often can uncover
another common fraud where an employee creates sales to fictitious companies and steals the
product.

Internal Auditing to Maintain Financial Security

You can also audit your own procedures and transactions to ensure ​y​ controls are strong and
effective. An internal audit is more likely to focus on employee fraud, and internal auditors
design controls over processes that thwart the opportunity for it. Sales cycle examples include
separating job duties that otherwise would allow theft and cover-up and implementing a
mandatory vacation policy so fraud schemes cannot be maintained on a daily basis.