CPA P1 Auditing
TOPIC 26: INTERNAL CONTROL: SALES CYCLE
To understand the need for controls, it is helpful to break down the sales
process into its component stages. Bear in mind that a purchase (see next
Session) is simply a sale viewed from the other party‘s perspective, and
hence much of the documentation (and many of the controls) is a mirror of
the sales process.
The table shows the various stages of the sales .cycle., together with:
What could go wrong
Control procedures to meet the control objectives (that things don‘t go wrong!)
It is essential that you understand the difference between:
OBJECTIVES – what the company wants to achieve (or avoid)
PROCEDURES – what the company does to address its objectives- i.e. Control Activity
put in place
Stage in Cycle Risks/Objectives Control Activity
Order Received 1. Order may be 1. All orders confirmed
forgotten in writing
2. Customer unlikely to 2. Carry out credit
pay checks for new
customers
3. Product not available
3. Warehouse checked
4. Goods are
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dispatched to poor before orders
credit risks accepted
4. Customer credit
limit is reviewed
prior to goods being
dispatched
Goods Despatched (or 1. Wrong items sent 1. Goods dispatch note
service performed) prepared from
2. Customer does not
Order form and all
receive delivery
dispatches checked
against GDN before
they leave the
warehouse.
2. A named person at
customer is required
to sign for goods,
confirming receipt
Invoice raised 1. Wrong items 1. Invoice checked
invoiced against GDN
2. Invoice does not add 2. Random invoices
up arithmetic checked
3. Delay in posting 3. Sequence checks on
invoices invoicing to ensure
complete posting
4. Errors in posting to
Receivables Control 4. Control Account
Account reconciled on a
regular basis to the
Receivables Listing
Payment Received or.. 1. Errors in posting 1. Control Account
payment to the reconciled on a
Receivables Control regular basis to the
Account Receivables Listing
2. Payment is stolen by 2. The post is opened
employees by 2 people, both
CPA P1 Auditing
3. Settlement discount independent of the
wrongly allowed Accounts dept. A
further non
4. Delay in Banking
Accounts employee
5. Customer does not banks money
pay/is slow to pay
3. All settlement
discounts to require
authorisation of
senior responsible
official
4. Regular Bank
reconciliations to
spot delays in
banking
5. Credit control
function to chase
customers
Credit Given (i.e. Sales 1. Wrong Amount 1. Credit notes
Returns) credited referenced back to
original invoice
2. Unauthorised credit
given 2. Goods to be
returned and
3. Sales returns
checked to ensure
mistakenly
credit deserved. All
accounted for as
credit notes to be
purchases
authorised by
manager
3. Booking system for
returns, with
separate holding
area
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NOTES
All documents should be pre-numbered in a sequence, so that completeness and
validity are easy to verify
All documents should be cross-referenced, so that it is easy to trace from the
original order through to the Accounts
COMMON FRAUDS
Money Received Is Stolen By Staff
Stolen money is hidden by false entries to the Receivables Ledger
Receipt of money (whether by post, or by bank transfers) should be
organised by different staff to those able to make entries to the Receivables Ledger
(segregation of Duties – Control Activity)
In Shops, Money Stolen By Staff
Cash, so more attractive/easy to steal (Cash & Inventory are very susceptible to
theft)
In McDonalds, staff have uniforms without pockets
Cash registers should need keys to open
These keys identify the member of staff
Cash registers require staff to enter PRODUCTS rather than amounts
– to stop overcharging (and then stealing the excess)
Price lists should be easily accessible to customers, to avoid overcharging
Reconcile till record to cash therein (over/unders list published daily –
Supermarkets!)
CPA P1 Auditing
INTERNAL CONTROL CHECKLISTS FOR THE SALES CYCLE.
As noted earlier , auditors need to establish what controls are in operation, document
the system (ICQ & ICEQ), and then test that controls are operating properly. We also
saw that one method of documenting controls was to use some form of internal control
questionnaire/checklist.
For sales, an Internal Control Questionnaire (ICQ) would be a checklist of
questions to establish which controls were in operation. For example:
ICQ – SALES ORDERS RECEIVED
Q1 Are all new customers credit-checked before goods are sent on credit?
Q2 Are all sales orders received in writing on standard, pre-numbered forms?
If the auditor is using an Internal Control Evaluation Questionnaire (ICEQ), the
layout would
be slightly different , with an emphasis on establishing whether specific errors/frauds
are possible, rather than establishing whether certain desirable controls are in
operation
ICEQ - SALES ORDER RECEIVED
Q1 Could the company send goods on credit to a customer who is unlikely to pay?
(important to auditors as it impacts on the need for a doubtful debt provision)
Answer – no, because of the following controls:
All new customers are credit checked using an external reference agency
Customer is then given a credit limit, which is reassessed every 3 months
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TESTS OF CONTROL OF SALES (for inclusion in a work
programme).
If you can come up with control procedures, then tests of control are easy –
simply ask yourself how you would find out if a particular control procedure
had taken place?
What evidence might exist?
With some controls, the easiest form of evidence may be to observe the
control in operation (one of the reasons auditors like to attend a client‘s
inventory count).
For those controls that have operated in the past, inspection of documents
showing that the control took place (e.g. a signature to evidence
authorisation) might be suitable.
CONTROL TEST
For a sample of customers, obtain the customer file and inspect written
reply from credit reference agency. This test proves customer that a control exists
over the screening of a potential customers credit worthiness so as to minimise the
risk of selling to poor credit risk customers
