AUDIT OF THE REVENUE AND COLLECTION CYCLE: TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS

REVENUE AND COLLECTION CYCLE

 Consists of activities relating to the exchange of goods and services with customers and the collection of the revenue in cash.
 Classes of Transactions for Trading Concern
A. Sales (cash and credit)
B. Sales Adjustments (discounts, returns and allowances and uncollectible accounts provisions and write-offs)
C. Cash Receipts (collections on accounts and cash sales)
 Typical Accounts Affected
1. Sales
2. Accounts and Notes Receivable
3. Sales Returns and Allowanced
4. Cash in Bank (debits from cash receipts)
5. Sales discounts
6. Allowance for uncollectible accounts
7. Uncollectible accounts expense
8. Inventories (merchandise, finished goods)

Documents Used in the Revenue and Collection Cycle

1. Customer’s Purchase Order
- May be received by telephone, letter, a printed form that has been sent to prospective and existing customers, though salespeople, or in
other ways.
- It provides evidence that a customer actually ordered the goods.
- Purchase order numbers are generally recorded on sales invoices so that auditor can determine the purchase order to which an invoice
relates.
2. Sales Order
- A prenumbered document for recording the description, quantity, and related information for goods ordered by a customer.
- Frequently used to show credit approval and authorization for shipment
- It contains the seller’s understanding of the sales terms.
- A seller should account for the numerical sequence to help ensure that shipments are made for sales orders and that all sales are billed.
3. Shipping Document or Bill of Lading
- A prenumbered document prepared to initiate shipment of the goods indicating the description of the merchandise, the quantity shipped and
other relevant data
- The signature of the carrier or the customer on the shipping document provides externally created evidence that goods have been shipped.
- Sellers should account for the numerical sequence to help ensure that all shipments are recorded as sales.
4. Sales Invoice
- A prenumbered document indicating the description and quantity of goods sold, the price including freight, insurance, terms and other
relevant data.
- It indicated credit terms, shipping terms, and price charged for merchandise.
- Sellers should account for the numerical sequence to help ensure that all sales are recorded.
5. Credit Memo
- Prenumbered document indicating a reduction in the amount due from a customer because of returned goods or an allowance granted/
- It often takes the same general form as a sales invoice, but it supports reductions in accounts receivable rather than increases
- It provides evidence that a seller has reduced the amount previously billed to a customer
- Sellers should account for the numerical sequence to help ensure that all credit memos are recorded
6. Remittance Advice
- A document that a customer attaches to a check in payment of an invoice.
- It may be a turnaround document, a part of a check, or a statement identifying the invoices being paid.
- It facilitates recording of cash receipts
- If a customer does not return a remittance advice, the employee opening the mail generally prepares one.
- It usually indicated the date and amount of payment and the invoiced paid.
- Sellers generally file remittance advices by date
7. Uncollectible Account Authorization Form
- A prenumbered document, indicating authority to write an account receivable off as uncollectible
- Sellers should account for the numerical sequence to ensure that all write-offs are recorded
8. Monthly Statement
- A document sent to each customer indicating the beginning balance of accounts receivable, the amount and date of each sale, cash payments
received, credit memos issued, and ending balance due
- A statement mailed to a customer reporting a beginning balance and transactions that occurred during the period.
- If the statement is inaccurate, many customers would contact the seller.

Accounting Records in the Revenue and Collection Cycle

1. Sales Journal
- A journal for recording sales transactions
- Usually indicates gross sales for different classifications, such as product lines, the entry to accounts receivable, and miscellaneous debits
and credits.
- It can also include sales returns and allowances transactions
2. Sales Returns and Allowances Journal
- A journal similar to the sales journal except the merchandisers use it to record returns of merchandised or adjustments to invoice prices.
3. Cash Receipts Journal
- A journal for recording cash receipts from collections, cash sales, and all other cash receipts
4. General Journal
- A journal in which are recorded all transactions for which a special journal has not been created
- Sales and collections cycles transactions frequently recorded in the general journal include entries to estimate uncollectible accounts
expense and entries to write – off accounts identified as uncollectible
5. Accounts Receivable Master File/Subsidiary Ledger
- A file for recording individual sales, cash receipts and sales returns and allowanced for each customer and maintaining customer account
balances.
6. Accounts Receivable Trial Balance
- A listing of the amount owed by each customer at a point in time.
- Prepared directly from the accounts receivable master file

AUDIT OF SALES TRANSACTIONS

Business Activities under Sales Transactions

1. Accepting sales order
2. Approving credit
3. Filling sales order
4. Shipping sales order
5. Billing customers

Evaluation of Internal Control over Sales Transactions

  Information concerning specific controls over sales transactions is obtained through:
o Inquiry
o Observation
o Review of documentation

Test of Controls over Sales and Receivables

 Assertions
1. Existence or Occurrence: Recorded sales are for shipments actually made to customers
2. Completeness: all sales transactions that occurred are recorded
3. Rights and Obligations: sales recorded represent only sales transactions
4. Valuation or Allocation: Sales are correctly billed and recorded
5. Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance with PAS/PFRS
 Existence or Occurrence: Recorded sales are for shipments actually made to customers
CONTROLS TESTS OF CONTROLS
1. Recording of sales is supported by customers’ orders, sales orders  The auditor examines approved customer order, sales order,
approved by credit department and approved and executed shipping document and copy of sales invoice for a sample entries
shipping documents. in the sales journal
 The documents should bear the required approval
 The description, quantity of goods shipped, name, address and
other details regarding the transactions should be consistent.
2. A clerk independent of accounts receivable prepares and mails  The auditor can observe whether a clerk independent of the
monthly statements to customers for all trade accounts receivable account receivable bookkeeper prepares and mails monthly
and follows up on any complaints. statements and follow ups any complaints.
 He can also examine files on complaints received for selected
months.

 Completeness: all sales transactions that occurred are recorded

CONTROLS TESTS OF CONTROLS
3. Prenumbered shipping documents are accounted for to determine  The auditor can observe the client performing the procedure or
that a sales invoice is prepared for all shipments select a sample of shipping orders and examine the invoice that
bills the sale,
 The presence of a sales invoice copy indicates that the shipment
was billed.
4. Prenumbered sales invoiced are accounted for to determine that  The auditor can observe the client recording sales if he is
all sales are recorded accounting for the numerical sequence of invoices and
determined why any missing invoices have not been processed.
 The auditor can also select a sample of sales invoice copies to
trace into the sales journal
5. Procedures to ensure timely recording of sales and proper cut-off  The auditor should inquire how procedures are followed, observe
are established procedures being followed and inspect report on the last
shipments that the shipping clerk sends to the billing clerk
 Proper cut-off also provides evidence about the existence of
transactions

 Rights and Obligations: sales recorded represent only sales transactions

CONTROLS TESTS OF CONTROLS
6. Clerk should check sales orders and sales invoices for terms to  The auditor should observe that the control is being performed
determine that transaction is a sale rather than a consignment.

 Valuation or Allocation: Sales are correctly billed and recorded

CONTROLS TESTS OF CONTROLS
7. For all goods shipped, good are counted and descriptions and  The auditor observed that the control is being performed and
quantities are compared to quantities and descriptions on sales examines a sample of shipping orders for the signature on the
orders and shipping documents prior to shipping. shipping documents that indicates that the counting and
comparison occurred
8. Customer credit is approved by a responsible official prior to  The auditor examines a sample of sales order for credit approval
merchandise shipment. Although approval of credit prior to prior to shipment
shipment does not guarantee absence of uncollectible accounts,
the procedure reduces the likelihood of the account becoming
uncollectible
9. Sales invoices are checked for:  The auditor performs the following:
a. Proper pricing a. Inquiry about the updating and use of price lists
b. Mathematical accuracy b. Examine a sample of invoice copies to determine that they
c. Terms contain a signature indicating that the price, mathematical
accuracy and terms have been checked
10. The accounts receivable subsidiary ledger is balanced to the  The auditor observes that it is being performed
general ledger control account regularly. The absence of this  The auditor may also fool the account receivable subsidiary
control results in the possibility of careless recordkeeping and ledger and compare the total with the balance appearing in the
omission of postings of sales or payments general ledger control account

 Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance with PAS/PFRS
CONTROLS TESTS OF CONTROLS
11. Sales must be properly classified to generate accurate segment  The auditor can test this control by determining that the invoice
reporting. Entities may require a second person to independently copy contains the signature that indicated approval on account
review or check the account coding on invoices classifications used.

Audit Program for Test of Controls: Sales

 To test for Existence or Occurrence, the auditor tests from accounting records back to underlying documents that indicate that the transaction occurred.
 To test whether transactions are recorded, an auditor compares prenumbered documents to entries in the accounting records.
 Audit Procedures
A. For a Sample of entries in the sales journal
i. Compare data in the sales journal to approved customer order, sales order, shipping document, and copy of sales invoice for:
a. Customer order number
b. Invoice number
c. Customer name
d. Date
e. Description of goods
f. Quantity
g. Price
h. Invoice amount
 i. Terms
ii. Determine credit approval
iii. Determine that signature are on invoices indicating independent checking for:
a. Proper pricing
b. Mathematical accuracy
c. Terms
iv. Examine signature evidencing recheck of account coding
B. For a sample of shipping documents,
 Examine signatures indicating that for goods shipped, goods are counted, quantities and descriptions of the goods shipped are compared to
quantities and descriptions on sales orders and shipping documents prior to shipping, and the transactions are recorded in the sales journal
C. Discuss the procedures followed with the person who mails to customers monthly statements for all trade accounts receivable and follows up on any
complaints. Review the client’s correspondence files reflecting resolution of these items.
D. Observe the procedures followed to ensure a proper cutoff of sales at year end.
E. Observe that the accounts receivable subsidiary ledger is balance to the general ledger control account regularly.
F. Examine evidence of accounting for the sequence of sales orders, shipping documents and sales invoices.
 The foregoing tests of controls over sales transactions may reveal the following weaknesses, possible errors and misstatements:
Internal Control Weaknesses / Factors that Increases the Examples of Fraud/Error Description of Possible Errors or Misstatements
Risk of the Misstatement
1. Ineffective board of directors, audit  Recording of fictitious sales without  Recording of unearned revenue
committee, or internal audit function; receiving a customer order or shipping
undue pressure to meet sales targets; the goods
top management action not conducive  Intentional over-shipment of goods
to ethical conduct.  Holding the sales journal open to  Early (late) recognition of revenue –
record next year’s sales as having Cutoff error
occurred in the current year
 Recording sales when the customer is
likely to return the goods  Recording revenue when significant
 Recording franchise revenue when the uncertainties exists
franchises are sold even though an
obligation to perform significant  Recording revenue when significant
services still exists serviced still must be performed by
 Misstating the percentage of seller
completion of several projects by a
construction company using the
percentage-of-completion method of  Overstatement of the amount revenue
revenue recognition earned
2. Ineffective billing process in which  Recording sales based on the receipt of  Recording unearned revenue
billing is not tied to shipping orders from customers rather than the
information shipment of goods
3. Ineffective controls for testing  Inaccurate billing and recording of  Recording unearned revenue
invoices, or ineffective input sales
validation checks and computer
reconciliations to ensure the accuracy
of databases
4. Inadequate accounting manual;  Recording cash that represents a  Recording unearned revenue
incompetent accounting personnel liability as revenue
5. Ineffective cutoff procedures in the  Recording sales in the wrong period  Early (late) recognition of revenue –
shipping department based on incorrect shipping Cutoff error
information
6. Aggressive attitude of management  Recording sales when the customer’s  Recording revenue when significant
toward financial reporting; payment is contingent upon the uncertainties exists.
incompetent chief accounting officer customer receiving financing or selling
the goods to another party
 Overestimating the percentage of
completion on project by a  Overestimation of the amount of
construction company using the revenue earned.
percentage-of-completion method of
revenue recognition

Test of Controls in an On-Line Accounting System

 Auditors generally may use test data to evaluate the effectiveness of controls.
 In an on-line accounting system, many of the controls are programmed. Hence, when testing controls auditors frequently examine exception reports.
 Existence or Occurrence: Recorded sales are for shipments actually made to customers
ASSERTIONS & CONTROLS TESTS OF CONTROLS
1. The system allows the recording of sales only when supported by  Use Generalized Audit Software (GAS) to select sample of
approved sales orders and approved and executed shipping entries in the sales journal and to determine that a sales invoice
documents. and bill of lading exists and that credit has been granted.
 Examine the bill of lading for appropriate signature.
2. The system allows only appropriate personnel to enter data.  Observed individuals who are entering data.
3. A clerk independent of accounts receivable prepares and mails  Observe procedures and examines follow-up files
monthly statements for all trade accounts receivable to customers
and follows up on any complaints.

 Completeness: all sales transactions that occurred are recorded

ASSERTIONS & CONTROLS TESTS OF CONTROLS
4. The system produces a daily report on incomplete transactions  Inquire about procedures followed.
 Examine a sample reports
5. Prenumbered shipping documents are accounted for to determine  Observe procedure.
that all items shipped are billed  Use GAS to select a sample of shipping documents and to
determine whether an invoice exists for the shipping documents
6. Prenumbered sales invoices are used and accounted for to  Observe procedures
determine that all sales are recorded  Use GAS to determine whether out-of-sequence entries exist in
the sales journal

 Rights and Obligations: sales recorded represent only sales transactions

ASSERTIONS & CONTROLS TESTS OF CONTROLS
7. Terms are determined by the system based on quantity ordered  Use GAS to search for non-routine terms in the sales file.
and customer account number. Terms can be changed only by
sales manager

 Valuation or Allocation: Sales are correctly billed and recorded

 ASSERTIONS & CONTROLS TESTS OF CONTROLS
8. For all goods shipped, goods are counted and descriptions and  Observe procedure
quantities are compared to quantities and descriptions on sales  For a sample, examine signature on pull-tickets evidencing
orders and shipping documents prior to shipping performance
9. Customer credit is approved by reference to a credit limit or by a  Use GAS to determine that credit was authorized for a sample
responsible official prior to merchandise shipment. of sales.
 Examine exception reports
10. Sales invoices are checked for  Inquire about the updating and use of approved price lists.
a. Proper pricing  Use an integrated test facility to test valuation by entering
b. Mathematical accuracy transactions and determining that for these transactions proper
c. Terms pricing and terms are used and that the invoice is correctly
computed.
11. The accounts receivable subsidiary ledger is balanced to the general  Use GAS to foot subsidiary ledger
ledger control account regularly.

 Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance with PAS/PFRS
ASSERTIONS & CONTROLS TESTS OF CONTROLS
12. An independent review is made of account coding for recorded  Observe procedure
sales.  Use GAS to select a sample of invoices
 Recheck account coding

Substantive Tests of Sales Transactions

 In deciding on substantive tests of transactions, some procedures are commonly employed on every audit regardless of the circumstances whereas others are
dependent on the adequacy of the controls and the results of the tests of controls.
 Substantive Audit Procedures for Sales Transactions
Assertions Audit Objectives Audit Procedures
I. Occurrence and Validity A. To determine that recorded sales are 1. Review the sales journal, general
II. Rights and Obligations authorized and are for shipments ledger and accounts receivable master
actually made to nonfictitious file or trial balance for large or
customers. unusual items.
2. Trace sales journal entries to copies of
sales orders, sales invoices and
shipping documents.
3. Trace shipping documents to entry of
shipments perpetual inventory records.
4. Compare prices on sales invoices with
authorizes price lists or properly
executed contracts.
III. Completeness B. To determine that existing sales 5. Trace shipping documents to resultant
transactions are recorded on a timely sales invoices and entry into sales
basis journal and accounts receivable master
file
6. Compare dates of recorded sales
transactions with dates on shipping
records or perform sales cutoff tests.
IV. Valuation or Allocation C. To determine that recorded sales are 7. Recompute information on sales
for the amount of goods shipped and invoice
are correctly billed and recorded 8. Trace entries in sales journal to sales
invoices
9. Trace details on sales invoices to
shipping documents, price tests and
customer’s orders
V. Presentation D. To determine that sales transactions 10. Examine document supporting sales
are properly classified transactions for proper classification

 Discussion 1 – 5: For sample on entries in the sales journal, compare sales invoice copy, customer order and shipping document
o To test the existence of sales, some auditors examine the sales invoice, the customer’s order, the sales order bearing credit approval and the
shipping document for a sample on entries in the sales journal.
o If an entity has a procedure to accumulate these documents before recording a sale, their accumulation is an indication that the control was
performed.
o Other procedures may include:
 Trace from the entry removing the goods from inventory to the perpetual inventory record
 Examine the cash receipts in payment for the sale
 Confirm the existence of individual transactions with the customers.
 Discussion 6: For a sample of shipping documents, traces sales invoice and entry into sales journal and accounts receivable subsidiary ledger.
Perform cutoff tests
o The auditors may examine the sales invoice and determine that an entry was made in the sales journal and the accounts receivable subsidiary
ledger.
o When testing to determine that all transactions have been recorded, auditors start with a prenumbered document and trance it into the journals and
ledgers.
 Discussion 6: for a sample of sales invoices, examine the customer order and shipping document to determine whether the transaction should have
been recorded as a consignment transaction rather than as a sale.
o To determine that the entity has a right to the receivable arising from the sales transactions recorded; the auditor examines a sample of sales
transactions and be alert for indications of consigned shipments treated as sales.
o Auditors should also investigate the procedure from recording movements of merchandise among the various units of the company.
 Discussion 7-9: For sample of entries in the sales journal, (a) examine sales invoice, shipping documents, and customer order for consistency of
descriptions and quantities; (b) examine sales orders for credit approval; and (c) check orices and extensions. Foot sales journal and general ledger
account.
o The audit procedure for verification of sales transaction that has been selected for testing may begin with comparison of the customer’s purchase
order, the client sales order, and the duplicate copy of sales invoice.
 The descriptions and quantities of items are compared on these three documents and traced to the duplicate copy of the related
shipping document.
o The credit manager’s signature denoting approval of the customer’s credit should appear on the sales order.
o The extensions and footings on each invoice in the sample should be proved to be arithmetically correct.
o After proving the accuracy of selected individual, the auditors next trace the invoices to the sales journal and to postings in the accounts
receivable subsidiary ledger.
o In addition, the date of each invoice should be compared with two other dates:
 The date on the related shipping document, and
 The date of entry in the accounts receivables subsidiary ledger.
 Discussion 10: For a sample of entries in the sales journal, verify the accuracy of account coding
 o Auditors may review entries in the sales journal and the supporting sales invoice to determine whether the sales invoice was coded correctly and
whether it results in proper presentation and disclosure of the transaction in the financial statement.

AUDIT OF SALES ADJUSTMENTS

TRANSACTIONS

Adjustments to sales may include:

a) Granting cash discounts
b) Granting sales allowanced or reductions in price
c) Returns of merchandise
d) Volume rebates
e) Corrections of billing errors
f) Uncollectible accounts

Evaluation of Internal Control over Sales Adjustments Transactions

 A concern about these transactions is that a transaction may be recorded to cover a material misappropriation of cash receipts.
 Auditors generally pay little attention to these adjustments unless they are a material amount or individual adjustments are large.

Tests of Controls over Sales Adjustments Transactions

 Audit of Cash Discounts
o Auditors audit this in connection with a test of cash receipts transactions and sales returns and allowances in connection with sales.
o Oftentimes, auditors perform only substantive tests of account balances.
 Audit of Sales Returns, Allowances, Corrections
o For sales returns and allowances, the primary emphasis in normally on testing the existence of recorded transactions as a means of uncovering
any diversion of cash from the collection of accounts receivable that has been covered up by a fictitious sales returns and allowances.
 Although the emphasis is often on testing the existence of recorded transactions, the completeness objective cannot be ignored.
 Unrecorded sales returns and allowances can be material and can be used by a company’s management to overstate net income.
o The other objectives, rights and obligations, valuation and proper classification should not of course be ignored.
 The same methodology for controls over sales transactions should be applied to controls over sales returns and allowances.
 Audit of Uncollectible Accounts
o Existence of recorded write-offs in the most important transaction-related audit objective that the auditor should keep in mind in the verification
of the write-off of individual uncollectible accounts.
 This is because of the possibility of the client covering up a defalcation by charging off accounts receivable that have already been
collected.
o The major control for preventing this type of misstatement is proper authorization of the write-off of uncollectible accounts by a designed level of
management only after a thorough investigation of the reason the customer has not paid.

Audit Program for Test on Controls: Sales Adjustments Transactions

 Audit Procedures:
1) Account for credit memoranda
2) Prove the footings on credit memorandum register
3) Trace the posting of credit memorandum to the general ledger
4) Review credit memoranda for approval
5) Check credit memoranda concerning returned goods for: (a) arithmetical accuracy; (b) quantities returned; and (c) unit prices
6) Inspect credit files in support of accounts written off as uncollectible
 Weaknesses and Possible Errors.
Control Weakness Possible Errors
1. Lack of numeric control over credit memoranda  Fictitious transactions recorded
2. Unauthorized write-off of accounts receivable  Collectible account erroneously written off as uncollectible
 Customer account intentionally written off to conceal
misappropriation of customer remittances
3. Unauthorized returns and allowances  Credit memos issued for authorized returns as well as for goods
not actually returned
 Credit memos written and recorded to conceal misappropriation
of customer remittances

Substantive Test for Sales Returns and Allowances

 The audit objectives are essentially the same for processing credit memos for returns and allowances as those describe for sales, with two important
difference:
1) The first relates to materiality. If the amount of sales returns and allowances are so immaterial, they can be ignored in the audit altogether
2) The second relates to “emphasis on objective”. For sales returns and allowances, the primary emphasis is normally testing the validity of recorded
transactions as a means of uncovering any diversion of cash from collection of account receivable that has been covered by a fictitious sales
returns or allowances.
 Normally, the auditor also gives due attention to the other objectives and should be able to arrive at suitable substantive tests of transactions which are
essentially the same as for sales to verity amounts.
 The audit procedures that may be used for substantive tests of controls for sales returns and allowanced transactions include:
a) Review the use and authorization of credit memoranda
- All allowanced to customers for returned or defective merchandise should be supported by serially numbered credit memoranda signed by
an officer or responsible employee having no duties relating to handling cash or to the maintenance of customer’s ledger.
 b) Review credits for returned merchandise if supported by receiving report on the return shipment
c) Verify prices, extensions and footings and trace postings from the sales returns journal or other accounting record to the customer’s accounts in
the subsidiary receivable ledger.

AUDIT OF CASH RECEIPTS

TRANSACTIONS

Basic Considerations
- Cash receipts may result from revenue transactions, short and long-term borrowing, issuance of share capital and sale of marketable
securities, long-term investments and other assets.
- Executing cash receipts transactions generally involve:
a) Receiving mail receipts
b) Receiving over-the-counter receipts
c) Aggregating total cash received
d) Depositing cash in bank

Tests of Controls over Cash Receipts Transactions

General Specific
1) Existence or occurrence  Recorded receipts represent actual collections of cash from
customers
2) Completeness  All receipts are processed and recorded
3) Rights and obligations  All cash receipts are deposited intact in the account of the client
4) Valuation or allocation  Debits to cash and credits to accounts receivable are valued at
amounts received
5) Presentation and disclosure  Cash receipts transactions are recorded to result in presentation
and disclosure in accordance with PAS/PFRS

 Existence or Occurrence: Recorded receipts represent actual cash collections from customers
Controls
1) A trustworthy employee prepares a prelisting of cash receipts
before further processing.
2) A validated deposit slip is obtained for daily deposits and
compared to the cash receipts summary
3) Duties of handling cash receipts are segregated from posting to
accounts receivable. A person performing both functions could
misappropriate cash and conceal the shortage by making an entry
directly to the customer’s accounts.
4) A bank reconciliation is prepared monthly by a person not
involved in handling cash, accounts receivable, or general ledger
records. The reconciler should receive the unopened bank
statement and maintain control over it until the reconciliation is
completed,
Tests of Controls
 The auditor observes whether a prelisting is prepared and
inquiries of the preparer about the procedures he follows.
 The auditor obtain copies of the validated deposit slips and
comparing them to the cash receipts summary
 The auditor observes the separation of duties and inquiring of
client personnel about their responsibilities.
 The auditor observes that bank reconciliation have been prepared
by an independent employee

 Completeness: All receipts are processed and recorded

Controls Tests of Controls
5) Prelisting and cash register procedures should be monitored  Auditors observe the monitoring of these procedures
6) Checks should be restrictively endorsed as soon as they are  Auditor observes the procedures in effect
received. This control prevents an unauthorized employee from
gaining access to a check and cashing it.
7) A daily cash summary is prepared and reconciled to total of  Auditors can inquire of employees who carry out the procedure
prelisting and over-the-counter receipts. The summary total is about the regularity and consistency of its performance
compared to the total in the cash receipts journal and the total on
the validated deposit ticket. This control ensures that all cash
receipts are deposited and recorded
8) The cash receipts journal total is independently reconciled to the  The auditor observes the procedures and makes inquiry of
total posted to account receivable. This control ensures postings personnel performing the procedure.
to accounts receivable

 Rights and Obligation: All cash receipts are deposited in the bank account of the client
Controls Tests of Controls
9) Cash receipts are deposited intact daily in the company’s bank  The auditor observes the procedure and compares the cash in the
account. This control reduces the likelihood of misappropriation prelisting with the validated deposit slip.
of cash

 Valuation or Allocation: Debits to cash and credit to accounts receivable are valued at amounts received
Controls Tests of Controls
10) Cash receipts should be recorded at the amount indicated on the  The auditor compares entries in the cash receipts journal to
remittance advice. A remittance advice that has been processed remittance advices
by a third party serves as strong evidence on the amount received
from the customer

 Presentation and Disclosure: Cash receipts transactions are recorded to result in presentation and disclosure in accordance with PAS/PFRS
Controls Tests of Controls
11) An accounting supervisor should approve classifications made in  The auditor determines that the supervisor’s signature of
journalizing. This control reduces the likelihood of payments approval is recorded
being posted to the wrong accounts, resulting in credit balances
in accounts receivables

Audit Program for Test of Controls: Cash Receipts Transactions

 Audit Procedures
1. Compare remittances or other details of cash receipts with the entries in the receipts book.
 2. Compare the recorded receipts with individual deposits as shown by bank statements
3. Compare the composition of authenticated duplicate deposit slips with the recorded receipts.
4. Compare the recorded receipts with an independent record prepared before receipts are transmitted to the cashier.
5. Test of cash discounts and other allowances or credits
6. Test postings to the general ledger to the customer’s ledger, and to other subsidiary ledger
7. Review cash receipts for unusual items.
 Possible errors that may result because of control weakness over cash receipts transactions:
Internal Control Weaknesses / Factors that Increases the Examples of Fraud/Error Description of Possible Errors or Misstatements
Risk of the Misstatement
1. Lack of segregation of duties of cash  Cash receipts are overstated on the  Fictitious cash receipts are recorded;
handling and recordkeeping; bank books by transferring cash between processing errors (intentional or
accounts not reviewed or properly accounts without appropriate unintentional) are not discovered on a
reconciled. recording of the transfer to cover up timely basis
an embezzlement of cash.
2. Inadequate controls for reconciling  Cashier fails to ring up and record  Failure to record receipts from cash
cash register tapes and accounting cash sales and embezzles cash. sales
records; inadequate controls for  Bookkeeper omits the recording of the
reconciling bank accounts. receipts from one cash register for the  Unrecorded cash receipts are not
day deposited in the bank or recorded cash
receipts are not deposited in the bank.
3. Sales not coded on cash register tapes  Sale of product A recorded as a sale of  Credits to wrong sales account are
product B committed.
4. Lack of segregation of duties between  Cashier abstracts or embezzles cash  Failure to record cash from collections
personnel who have access to cash payments by customers on receivables of accounts receivable
receipts and those who make entries without recording collections from
into the accounts receivable records. customers.
 Cashier embezzles cash collected
from customers and writes-off the
related receivables
5. Inadequate reconciliations of  Bookkeeper accidentally fails to  Failure to record cash from collection
subsidiary records on accounts record a payment in a receivable of accounts receivables.
receivable with the general ledger
account
6. Accounting manuals not used to assist  Collection of rent income recorded as  Miscellaneous cash receipts credited to
in properly recording miscellaneous sale of merchandise incorrect accounts.
cash receipts.
7. Ineffective board of directors, audit  Keeping the cash receipts journal open  Erroneous presentation of more liquid
committee, or internal audit function; to record next year’s cash receipts as position.
undue pressure to show improved collections in the current year
financial position; top management
actuations not conducive to ethical
conduct
8. Failure to list and deposit cash  Recording cash receipts based on  Cutoff error (early or late recognition
receipts on a timely basis erroneous information about date of of cast receipts) is committed.
receipt

Substantive Tests of Cash Receipts Transactions

Assertions Audit Objectives Audit Procedures
I. Existence or Occurrence A. To determine that recorded receipts 1. For a sample of entries in cash
represent actual collections of cash receipts journal, trace to the prelisting
from customers. of cash receipts and to remittance
advice. For a sample of entries,
reconcile daily deposit to validated
deposit ticket.
II. Completeness B. To determine that all receipts of cash 2. For a sample of days, verify that all
and checks are recorded. cash receipts are recorded by
reconciling daily listings of cash
receipts and validated deposit ticket to
cash receipt journal.
III. Valuation or Allocation C. To determine that debits to cash and 3. For a sample of entries in cash
credits to accounts receivable are receipts journal, examine remittance
valued at amounts received. advice and verify that discount taken
was appropriate. Foot accounts
receivable subsidiary ledger and
reconcile to the general ledger
account.
IV. Presentation D. To determine that cash receipts 4.
Review account coding for a sample
transactions are recorded to result in of entries in the cash receipts journal.
presentation and disclosure in
accordance with PAS/PFRS.
 Discussions – 1. For a sample of entries in cash receipts journal, trace to the prelisting of cash receipts and to remittance advice. For a sample of
entries, reconcile daily deposit to validated deposit ticket.
o To test the credits to accounts receivable, an auditor can trace from the entry in the accounts receivable ledger to a cash receipts listing to a
deposit ticket listing the payment and to the customer’s remittance advice.
 These documents provide evidence that a collection was made.
 Discussions – 2. For a sample of days, verify that all cash receipts are recorded by reconciling daily listings of cash receipts and validated deposit
ticket to cash receipt journal.
o To test whether all cash receipts are recorded, the auditor compares the names and amounts included in the prelisting for selected days with the
entries in the cash receipts journal.
 Any discrepancies may suggest that lapping is occurring.
o To test for lapping, an auditor identifies a period of several consecutive day and trace the names and amounts from the prelisting of cash receipts
to the validated deposit ticket to the cash receipts journal, and to the posting in the accounts receivable subsidiary ledger.
 All dates, names and amounts should be consistent. If the details are consistent, lapping did not occur during the time period
examined.
o Auditors also test the mathematical accuracy of the recording of cash collections by footing the cash receipts journal, and by footing the accounts
receivable subsidiary ledger and reconciling it to the control account.
 Discussions – 3. For a sample of entries in cash receipts journal, examine remittance advice and verify that discount taken was appropriate. Foot
accounts receivable subsidiary ledger and reconcile to the general ledger account.
o To determine whether the credit to accounts receivable is proper, the auditor selects transactions from the cash receipts journal and recomputes
the cash discounts allowed to customer who have made payments.
o Auditors may also verify its approval by reperforming the procedure that should have been performed when credit was approved.
 Discussions – 4. Review account coding for a sample of entries in the cash receipts journal.
o To determine that the transaction was coded correctly and will result in proper presentation and disclosure, the auditors compare entries in the
cash receipts journal with the remittance advices.