Audit of the sales and collection cycle:

Tests of Controls &

Substantive Tests of Transactions
Outline

❖ Accounts in sales & collection cycle

❖ Business functions, documents and records in the cycle
❖ Sales
❖ Sales returns & allowance
❖ Cash receipts
❖ Writing off uncollectible
1.
Classes of transactions
 Accounts in
the sales and
collection
cycle
2.
Methodology
Methodology for
designing
controls
and substantive
tests of
transactions for
sales
 Understanding internal control - sales

1.Study the client’s flowcharts

2.Prepare an internal control questionnaire
3.Perform walk-through tests of sales
 Assess planned control risk- sales

1. Framework for assessing control risk (6 transaction-related

audit objectives)
2. Identify key internal controls and deficiencies
3. Associate controls and deficiencies with the objectives
4. Assess control risk for each objective
 Occurrence Recorded sales are for shipments
actually made to existing customers

Completeness Existing sales transactions are

recorded
Transaction- Accuracy Recorded sales are for the amount
shipped
related audit and are correctly billed and recorded
objectives -
Sales Classification Sales transactions are properly
classified
Timing Sales are recorded on the correct
dates
Posting and Sales transactions are properly
summarisation recorded in the accounts receivable
master file and are correctly
summarised
 Assess key controls & deficiencies

Adequate Adequate
Proper Pre-numbered Internal Monthly
separation of document and
authorisation documents verification statement
duties records
Direction of tests for sales
 Transaction-related audit
objectives
Key internal controls
Summary of
methodology Test of controls
for sales Deficiencies

Substantive tests of transactions

3.
Other Classes of transactions
 Objectives and
methodology are essentially
the same as sales
Sales
returns and
allowances Two differences

• Materiality
• Emphasis on occurrence
 Determine key internal controls for each audit
Determine
objective

TOC and
STOT for Design
Design tests of control for each control used
to support a reduced control risk
cash
receipts
Design substantive tests of transactions to
Design
test for monetary misstatements for
 Occurrence Recorded cash receipts
are for funds actually received

Transaction- Completeness Cash received is recorded in the cash

receipts journal
related audit
objectives – Accuracy Cash receipts are deposited and
recorded at the amounts received
Cash receipts
Classification Cash receipts transactions are
correctly classified
Timing Cash receipts are recorded on the
correct dates
Posting and summarisation Cash receipts are correctly included
in the accounts receivable master
file and are correctly summarized
 Audit procedures for discovery of fraud
Determine whether cash received was recorded

Prepare proof of cash receipts*

Test to discover lapping of accounts receivable*

* Only performed when fraud is suspected

 Occurrence transaction-related
Audit tests audit objective

for Proper authorization of the write-

uncollectible off of uncollectible accounts

accounts Verification of accounts written

off
Audit tests for sales & collection cycle
Practice
Exercise 14 -24 (a)
 The end!
Exercise 14 -24, 14-25, 14-26
Reference: C110