14-1
Chapter 14
Audit of the Sales and Collection Cycle:
Concept Checks
P. 452
1. a. The customer order is a request from the customer indicating the
quantity and the description of the merchandise ordered.
payments. The original is sent to the customer and one or more
copies are retained. The sales invoice is the document for recording
sales in the accounting records.
recorded and deposited at the correct amounts and on a timely
basis.
and the ending balance due. It is, in essence, a copy of the
customer’s portion of the accounts receivable master file.
2. A shipping document is prepared at the time of shipment indicating
the quantity and description of goods ordered. It is used to generate
P. 463
1. Credit is authorized before a sale takes place.
goods.
Concept Check, P. 463 (continued)
2. Goods are shipped only after proper authorization.
3. Prices, including payment terms, freight, and discounts, are
properly authorized.
2. The following are the transaction–related audit objectives for sales and
examples of internal controls that can reduce the likelihood of
misstatements.
TRANSACTION–RELATED
AUDIT OBJECTIVE
KEY INTERNAL CONTROLS
1. Recorded sales are for
shipments actually made
to existing customers
(occurrence).
Recording of sales is supported by authorized
shipping documents and approved customer
orders.
Credit is authorized before shipment takes
place.
Sales invoices are prenumbered and properly
accounted for.
Only customer numbers existing in the
computer data files are accepted when they
are entered.
Monthly statements are sent to customers;
complaints receive independent follow–up.
2. Existing sales
transactions are recorded
(completeness).
Shipping documents are prenumbered and
accounted for.
Sales invoices are prenumbered and
accounted for.
3. Recorded sales are for the
amount of goods shipped
and are correctly billed and
recorded (accuracy).
Determination of prices, terms, freight, and
discounts is properly authorized.
Internal verification of invoice preparation.
Approved unit selling prices are entered into
the computer and used for sales.
Batch totals are compared with computer
summary reports.
14-3
Concept Checks, P. 463 (continued)
TRANSACTION–RELATED
AUDIT OBJECTIVE
KEY INTERNAL CONTROLS
4. Sales transactions are
properly included in the
accounts receivable master
file and are correctly
summarized (posting and
summarization).
Regular monthly statements sent to
customers.
Internal verification of accounts receivable
master file contents.
Comparison of accounts receivable master file
or trial balance with general ledger balance.
5. Sales transactions are
properly classified
(classification).
Use of adequate chart of accounts.
Internal review and verification of the account
classifications.
6. Sales are recorded on the
correct dates (timing).
Procedures requiring billing and recording of
sales on a daily basis as close to the time of
occurrence as possible.
Internal verification of timely recording of
transactions.
P. 469
1. Auditors are generally more concerned with the completeness of cash
2. The theft of cash receipts from customer payments on account is
Review Questions
14–1 a. The bill of lading is a document prepared at the time of shipment of
goods to a customer indicating the description of the merchandise,
the quantity shipped, and other data. Formally, it is a written
sales invoice, but it reduces the customer’s accounts receivable
balance rather than increasing it.
14-4
14–1 (continued)
d. The accounts receivable trial balance is a report from the
accounts receivable master file that shows the amount receivable
from each customer at a point in time. An aged trial balance
includes the total balance outstanding and the number of days the
14–2 Proper credit approval for sales helps minimize the amount of bad debts
Adequate controls in the credit function enable the auditor to place
is reasonable.
14–3 The sales journal contains the record of each sales transaction that
includes the customer name, date, amount, and the account classification for
each transaction. The sales journal generally represents the record of each
maintain customer account balances. The master file is updated using data
from the sales journal, sales return journal, and cash receipts journal. The total
BestSellers.com could arrange with an online credit service bureau to run
credit checks on customers purchasing over a preset minimum amount.
14-5
14–5
Tests of controls:
contents containing unit selling prices.
3. Examine file of batch control totals for initials of data control clerk
who reconciled those totals; compare totals to summary reports.
Substantive tests of transactions:
1. Recompute information on sales invoices.
price lists, and customers’ orders.
14–6 The most important duties that should be segregated in the sales and
collection cycle are:
1. Receiving and approving orders for credit sales
2. Shipping goods
3. Billing customers and recording sales
Segregation of duties should be used extensively in the sales and
collection cycle for two reasons. First, cash receipts are subject to easy
If the asset–handling activities (shipping goods and processing cash
receipts) are combined with their respective accountability activities (maintaining
inventory, accounts receivable, and general accounting records), a serious
14-6
14–7 The use of prenumbered documents is meant to prevent the failure to
bill or record sales as well as to prevent duplicate billings and recordings. An
example of a useful control to provide reasonable assurance that all shipments
are billed is for the billing clerk to file a copy of all shipping documents in
sequential order after a shipment has been billed. Periodically, someone can
14–8 The purpose of footing and crossfooting the sales journal and tracing
the totals to the general ledger is to determine that sales transactions are
14–9 The verification of sales returns and allowances is quite different from
the verification of sales for three primary reasons:
1. Sales returns and allowances are normally an insignificant portion
2. The primary emphasis the auditor places on sales returns and
3. The completeness objective cannot be ignored because unrecorded
14–10 Cash is the most liquid asset that a company owns and thus it is the
most likely target of misappropriation. The emphasis the auditor places on the
possibility of misappropriation of cash is not inconsistent with his or her
responsibility, which is to determine the fairness of the presentation of the
14–11
TRANSACTION–RELATED
AUDIT OBJECTIVE
KEY INTERNAL CONTROLS
1. Recorded cash receipts are for
funds actually received by the
company (occurrence).
Separation of duties between
handling cash and record keeping.
Independent reconciliation of bank
accounts.
2. Cash received is recorded in the
cash receipts journal
(completeness).
Separation of duties between
handling cash and record keeping.
Use of remittance advices or a
prelisting of cash.
Immediate endorsement of incoming
checks.
Internal verification of the recording
of cash receipts.
Regular monthly statements to
customers.
3. Cash receipts are deposited and
recorded at the amounts received
(accuracy).
Same as 2 above.
Approval of cash discounts.
Regular reconciliation of bank
accounts.
Batch totals are compared with
computer summary reports.
4. Cash receipts are properly included
in the accounts receivable master
file and are correctly summarized
(posting and summarization).
Regular monthly statements to
customers.
Internal verification of accounts
receivable master file contents.
Comparison of accounts receivable
master file or trial balance totals with
general ledger balance.
5. Cash receipts transactions are
properly classified (classification).
Use of adequate chart of accounts.
Internal review and verification.
6. Cash receipts are recorded on the
correct dates (timing).
Procedure requiring recording of
cash receipts on a daily basis.
Internal verification.
14-8
Copyright © 2017 Pearson Education, Inc.
14–12 Audit procedures that the auditor can use to determine whether all cash
receipts were recorded are:
Discussion with personnel and observation of the separation of
duties between handling cash and record keeping.
Account for numerical sequence of remittance advices or examine
14–13 Proof of cash receipts is a procedure to test whether all recorded cash
deposits, unrecorded loans, bank loans deposited directly into the bank account,
and similar misstatements.
14–14 Lapping is the postponement of entries for the collection of receivables
the stolen money, or find another way to conceal the shortage.
This fraud can be detected by comparing the name, amount, and dates
shown on remittance advices to cash receipts journal entries and related duplicate
deposit slips. Since the procedure is relatively time–consuming, auditors
14–15 The audit procedures most likely to be used to verify accounts receivable
charged off as uncollectible and the purpose of each procedure are as follows:
Examine approvals by the appropriate persons of individual accounts
charged off. The purpose is to determine that charge–offs are
approved.
uncollectible.
14-9
14–15 (continued)
14–16 It is often acceptable to perform tests of controls and substantive tests
of transactions at an interim date. The auditor may decide it is necessary to test
circumstances:
The auditor believes that internal controls are effective.
The auditor does not anticipate significant changes in the internal
14–17 The primary objective of the tests of controls and substantive tests of
transactions for sales and cash receipts is to determine whether or not the auditor
may rely on internal controls to produce accurate information. If it is determined
through tests of controls and substantive tests of transactions that the system
14–18 Generally, successful tests of controls and substantive tests of
transactions allow for a reduction of tests of details of balance at year–end.
However, Diane Smith chose the month of March, which only represents one–
14–10
Multiple Choice Questions From CPA Examinations
14–19 a. (2) b. (1) c. (3)
14–20 a. (2) b. (3) c. (2)
14–21 a. (4) b. (2) c. (3)
14–22 a. (2) b. (1) c. (1)
Discussion Questions and Problems
(Occurrence).
b. Select a sample of sales recorded in the sales journal
and determine if the appropriate individuals approved the
corresponding customer order.
c. Sales may be overstated if customer is unable to pay for
the goods.
2. a. Existing sales transactions are recorded (Completeness) and
sales are recorded on the correct dates (Timing).
b. Inquire of shipping personnel about the process they use to
forward shipping documents to accounting and observe the
timeliness of when that occurs.
journal for a sample of shipments.
3. a. Recorded sales are for shipments actually made (Occurrence)
and all shipments are recorded as sales (Completeness).
b. Review the client’s documentation for the sequence of bills
of lading.
understate sales.