AUDITING

CHAPTER 10
Sales & Cash Receipts
Transactions
By
David N. Ricchiute
TOPICS
Nature of revenue/receipt cycle
 Flow of information
Auditor’s assessment of control risk
 Audit of internal2 control for sales, cash
receipts
Computer auditing, sampling, tests of
controls
Assurance, consulting services

2 GBW 8th ed. Ch. 10

NATURE OF
REVENUE/RECEIPT CYCLE

Goods, services sold to customers in

exchange for future promises to pay
Cash collected from customers

3 GBW 8th ed. Ch. 10

REVENUE/RECEIPT CYCLE
Flow of Information
Customer order received
Sales order prepared
 Price, quantity, goods, terms
Shipping document
 Identifies goods shipped
 Contract between seller, carrier
Sales invoice (bill)
Customer remittance advice
 Returned with payment from customer

4 GBW 8th ed. Ch. 10

SELLER’S DOCUMENTS
Sales order
 Identifies goods ordered, price,
quantity, terms, etc.
Shipping document (bill of lading)
 Identifies good shipped
Contract between seller & carrier
Sales invoice
 Formal notice to customer of amount &
payment terms
Customer remittance advice
 Returned with payment
5 GBW 8th ed. Ch. 10
CONTROLS FOR CREDIT
SALES
Multicopy, prenumbered sales order prepared
Customer credit reviewed, approved
Authorized copy sales order accompanies goods
from Inventory Control to Shipping
Goods received in Shipping compared with sales
order; shipping document prepared
Common carrier provides receipt for goods
shipped
Shipping document, approved sales order sent to
billing for preparation of invoice, daily sales
summaries
Invoice copy sent to General Accounting for
6 recording GBW 8th ed. Ch. 10
CASH COLLECTION
Process
 Checks by mail listed, endorsed
 List copy to Accounts Receivable with remittance
for posting
 List copy with checks to Cash Receipts Dept. for
daily deposit
Sales returns separate from cash collection
Uncollected accounts
 Reviewed for credit limits, aged, written off as
necessary

7 GBW 8th ed. Ch. 10

INTERNAL CONTROL & RISK
Controls Risks
Authorization Credit risk, uncollectible
accounts
Prenumbered Shipment, billing not timely
shipping documents
Recording controls Items recorded in improper
amounts, accounts
Restricted access Theft

8 GBW 8th ed. Ch. 10

ASSESSING CONTROL RISK
Obtain Understanding
Review Sarbanes-Oxley Section 404
documentation for sales process
Document the client’s system
 Flowchart, questionnaire, narrative
Perform transaction walk-through
Identify control activities
Test controls to reduce control risk below
maximum
Assess control risk

9 GBW 8th ed. Ch. 10

TESTS OF CONTROLS
Sales, Collection
Provide a reasonable degree assurance that
employees comply with management’s
procedures
Sales
 Properly authorized, executed, recorded
Cash collections
 Cash receipts recorded, deposited promptly
Returns, uncollectible accounts
 Proper authorization, recording

10 GBW 8th ed. Ch. 10

CONTROL RISK
Shipping

Major risks
 Unauthorized shipment
 Fictitious or related parties
 Goods properly shipped, not billed,
recorded

11 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Shipping
Select random sample shipping documents
 Examine sample for authorized sales order &
agreement
Trace sample shipping documents to invoices
(completeness)
Trace invoices to sales journal, A/R ledgers
Trace invoices to inventory records

12 GBW 8th ed. Ch. 10

CONTROL RISK
Billing

Major risks
 Bills sent but goods not shipped
 Bills not properly prepared, recorded

13 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Billing
Select sample invoices from Billing
dept.
Verify unit prices & mathematical
accuracy
Trace invoices to shipping
documents (existence/occurrence)
Trace invoices to sales journal, A/R
ledgers
Trace invoices to inventory records

14 GBW 8th ed. Ch. 10

CONTROL RISK
Recording

Periodic summaries not prepared or not

prepared correctly

15 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Recording
Review evidence of procedures for
 Reconciliation daily sales summaries with sales
journal totals
 Periodic reconciliation A/R trial balance with
general ledger control
Scan sales journal for unusual transactions,
large amounts
Verify mathematical accuracy sales journal for
selected periods; trace postings to general
ledger

16 GBW 8th ed. Ch. 10

CONTROL RISK
Cash Collection, Deposit

Risk of embezzlement, deposit into

improper accounts

17 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Cash Collection & Deposit
Cash collection
 Surprise basis: take control bank deposits
 Compare total checks to total deposit slip
 Compare check details to cash receipt records
& A/R ledger
 Determine timeliness
Deposits
 Interim: compare deposits CRJ with bank
statements
 Trace CRJ to general ledger

18 GBW 8th ed. Ch. 10

CONTROL RISK
Sales Returns, Allowances

Risk that credit memoranda

 Not approved
 Not properly recorded

19 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Sales Returns & Allowances

Test details random sample credit

memoranda
 Receiving reports
 Perpetual inventory records
 Entries A/R ledger & general ledger
Review credit register for unusual items

20 GBW 8th ed. Ch. 10

CONTROL RISK
Uncollectible Accounts

Risk that account write-offs

 Properly authorized
 Properly recorded

21 GBW 8th ed. Ch. 10

TESTING CONTROLS:
Uncollectible Accounts

For written-off entries:

 Select sample
 Trace to authorization
 Trace to posting
Review write-offs for unusual entries

22 GBW 8th ed. Ch. 10

ASSESSING CONTROL
RISK
2 Questions
 Are controls effective?
 Can controls be relied upon?
If answer is yes to both
 Assess control risk below maximum
 Assess detection risk above minimum
 Restrict substantive tests of sales,
receivables, cash

23 GBW 8th ed. Ch. 10

PRELIMINARY OPINION ON
INTERNAL CONTROL

Required by Sarbanes-Oxley
 Auditor must form opinion on
management’s assessment of internal
control over financial reporting based on
 Reports of internal auditors
 Auditor’s tests of controls
 Substantive audit tests

24 GBW 8th ed. Ch. 10

TESTS OF CONTROLS
Deduction Management

3 Critical questions
 Does Accounts Receivable monitor
deductions?
 Does Account Operations approve
deduction inquiries
 Does senior management review decisions
made by Accounts Receivable, Account
Operations?

25 GBW 8th ed. Ch. 10

COMPUTER AUDITING &
SAMPLING
Understand the system
Tests of controls
 Input controls
 Code verification
 Data entry controls
 Processing controls
 Control totals
 Limit tests
Assess control risk
26 GBW 8th ed. Ch. 10
TESTS OF BILLING CONTROLS
An Example

Randomly select sample sales invoices

Verify unit prices, clerical accuracy
Trace details of invoices to shipping
documents
Trace sales invoices to inventory records

27 GBW 8th ed. Ch. 10

ASSURANCE, CONSULTING
SERVICES

Sarbanes-Oxley restricts
 Information systems consulting to non-
audit public clients, and any non-public
clients

28 GBW 8th ed. Ch. 10