Auditing Chapter 14

Front 1

What is the overall objective in the audit of the sales and collection cycle?

Back 1

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with GAAP.

Front 2

With the exception of cash sales, every transaction amount is ultimate included in how many balance sheet accounts? What are they?

Back 2

Included in one of two balance sheet accounts, either accounts receivable or allowance for uncollectible accounts.

Front 3

What are the five classes of transactions in the sales and collection cycle?

Back 3

1. Sales (cash and sales on acct)
2. Cash receipts
3. Sales returns and allowances
4. Write-off of uncollectible accounts
5. Estimate of bad debt expense

Front 4

Define the sales and collection cycle?

How does it begin and end?

Back 4

The sales and collection cycle involves the decisions and processes necessary for the transfer of the ownership of goods and services to customers after they are made available for sale. It begins with a request by a customer and ends with the conversion of material or service into an account receivable, and ultimate into cash.

Front 5

What are the business functions for the sales and collection cycle?

Which ones are for recording sales and which are for one business function?

Back 5

Sales:
1. Processing customer orders
2. Granting credit
3. Shipping Goods
4. Billing customers and recording sales

Cash Receipts:
5. Processing and recording cash receipts

Sales Returns and Allowances:

6. Processing and recording sales returns and allowances

Write-off uncollectible accounts:

7. Writing off uncollectible accounts receivable

Bad debt expense:

8. Providing for Bad Debts

Front 6

What are the typical documents for each business function for sales classes of transactions?

Back 6

Processing Customer orders:
1. Customer order
2. Sales order

Granting Credit:
1. Customer order or sales order.

Shipping Goods:
1. Shipping Document

Billing Customers/Recording sales:
1. Sales invoice
2. Sales transaction file
3. Sales journal or listing
4. A/R master file
5. A/R trial balance
6. Monthly statement

Front 7

What are the typical documents for each business function for Cash receipts classes of transactions?

Back 7

Processing and recording cash receipts:
1. Remittance advice
2. Prelisting of cash receipts
3. Cash receipts transaction file
4. Cash receipts journal or listing

Front 8

What are the typical documents for each business function for Sales returns and allowances classes of transactions?

Back 8

Processing/Recording Sales Returns and Allowance:

1. Credit memo
2. Sales returns and allowances journal

Front 9

What are the typical documents for each business function for Write-off of uncollectible accounts classes of transactions?

Back 9

Writing off Uncollectible Accounts Receivable:

1. Uncollectible account authorization form
2. General journal

Front 10

What are the typical documents for each business function for Bad debt expense classes of transactions?

Back 10

Providing for Bad Debts:

1. General Journal

Front 11

What must auditors understand before they can assess control risk and design tests of controls and substantive tests of transactions?

Back 11

They need to understand the business functions and documents and records in a business.

Front 12

What initiates the entire sales and collection cycle?

Back 12

A customer's request for goods.

Front 13

What does the receipt of a customer order often result in?

Back 13

The immediate creation of a sales order.

Front 14

Define A Customer Order And How It Can Be Received?

Back 14

A request for merchandise by a customer. It may be received by telephone, letter, printed form that has been sent to prospective and existing customers, through salespeople, electronic submission of the order through the internet, or other network linkage between supplier and customer.

Front 15

Define A Sales Order, When It Must Be Made, And What It Is Used For?

Back 15

It's a document for communication the description, quantity, and related information for goods ordered by a customer.

It must be made prior to shipment of goods.

It is often used to indicate credit approval and authorization for shipment.

Front 16

What Is A Shipping Document And What Is It Used For?

Who Gets The Original?

Back 16

A document prepared to initiate shipment of the goods, indicating the description of the merchandise, the quantity shipped, and other relevant data.

Used as a signal to bill the customer.

Original goes to customer and company retains one or more copies.

Front 17

How is the customer informed of the amount due for goods?

How must it be done?

Back 17

By Company billing the customer

Must be done correctly and on a timely basis.

Front 18

What Type Of Document Is A Bill of Lading, and What Is It?

Back 18

One type of shipping document which is a written contract between the carrier and seller of the receipt and shipment of goods. Often includes only number of boxes or pounds shipped rather than complete details fo quantity and description.

Front 19

*What Are The Most Important Aspects Of Billing And What Objectives Do They Satisfy?

Back 19

*All shipments made have been billed (completeness)

*No shipment has been billed more than once (occurrence)

*Each one is billed for the proper amount (accuracy)

Front 20

What Is A Sales Invoice And What Purpose Does It Serve?

Back 20

A document indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data.

It is the method of indicating to the customer the amount of a sale and the payment due date.

Front 21

What Is A Sales Transaction File And What Info Does It Include?

Back 21

It is a computer-generated file that includes all sales transactions processed by the accounting system for a period, which could be a day, week, or month.

Includes all info entered into the system and info for each transactions such as customer name, date, etc. May include returns and allowances

Front 22

What Is A Sales Journal or Listing and What Does It Identify?

Back 22

A listing or report generated from the sales transaction file that typically includes customer name, date, amount, and account classification, or classifications for each transaction such as division or product line.

Identifies whether the sale was for cash or accounts receivable.

Front 23

What Is The Accounts Receivable Master File?

Back 23

A computer file used to record individual sales, cash receipts, and sales returns and allowances for each customer and to maintain customer account balances. It's updated from the sales, sales returns and allowances, and cash receipts computer transaction files.

Shows by customer the beginning balance in A/R, each sales transaction, sales returns and allowances, cash receipts, and ending balance.

Front 24

What Does the Total of the Individual Account Balances In The Master File Equal?

Back 24

The total balance of accounts receivable in the General Ledger.

Front 25

What Is The Accounts Receivable Trial Balance? How Is It Prepared?

Back 25

A list or report showing the amount receivable from each customer at a point in time.

It is prepared directly from the A/R master file, and is usually an aged trial balance including total balance outstanding and number of days outstanding by category of days.

Front 26

What Is The Monthly Statement?

Back 26

In essence, a copy of the customer's portion of the A/R Master File.

Front 27

What Are The 8 Business Functions Used for?

Back 27

The four sales transaction functions are necessary for getting the goods into the hands of customers, correctly billing them, and reflecting the info in the accounting records.

The remaining four functions involve the collections and recording of cash, sales returns and allowances, write-off of uncollectible accounts, and providing for bad debt expense.

Front 28

What Does Processing and Recording Cash Receipts Involve, and Why Must Cash Receipts Be Deposited and Recorded On a Timely Basis?

Back 28

Includes receiving, depositing, and recording cash.

To Prevent Theft.

Front 29

What Is Remittance Advice?

Back 29

A document mailed to the customer and typically returned to the seller with cash payment. It's used as a record of cash received to permit the immediate deposit of cash and to improve control over the custody of assets.

Front 30

What Is Prelisting of Cash Receipts?

Back 30

A list prepared when cash is received by someone with no responsibility for recording sales, A/R, or cash, and has no access to accounting records. It verifies cash received in correct amounts in timely manner.

Front 31

What Is Cash Receipts Transaction File?

Back 31

Computer-generate file including all cash receipts transactions processed for a period.

Front 32

What Is A Cash Receipts Journal Or Listing?

Back 32

Listing or report from cash receipts transaction file including all transactions for a time period.

Front 33

What Is A Credit Memo?

Back 33

A document indicating a reduction in the amount due from a customer because of returned goods or an allowance. Supports reductions in A/R rather than increases.

Front 34

What Is A Sales Returns and Allowances Journal?

Back 34

Journal used to record sales returns and allowances for reconciling adjustments for uncollectible accounts.

Front 35

What Is An Uncollectible Account Authorization Form?

Back 35

A document used internally to indicate authority to write an account receivable off as uncollectible.

Front 36

What Does The Auditor Use Information Obtained In Understanding Internal Control For?

Back 36

To Assess Control Risk.

Front 37

What Are The Four Essential Steps The Auditor Uses To Assess Control Risk?

Back 37

1. Using The Six Transaction-related Audit Objectives as a Framework for Assessing Control Risk.
2. Auditor must identify the key internal controls and deficiencies for sales.
3. After ID controls and deficiencies, associate them with the objectives with C's and D's in appropriate columns.
4. Asses control risk for each objective by evaluating the controls and deficiencies for each objective. This is CRITICAL b/c it affects auditor's decisions about tests of controls and substantive tests.

Front 38

Show Methodology For Designing Tests of Controls and Substantive Tests of Transactions For Sales?

Back 38

Understand Internal Control--sales
|
|
------------------------------
Assess Planned C. Risk--sales
------------------------------
| |
| |
Determine |
Extent of |
Testing |
controls |
| |
| |
------------------------------
Design tests of --Audit
controls and subst Procedures
tests of txactions--Samp Size
for sales to meet --Items 2
txaction related Select
audit objectives. --Timing

Front 39

How Do Auditors Obtain An Understanding Of Internal Control?

Back 39

Study the client's flowcharts, prepare and internal control questionnaire, and perform walkthrough tests of sales.

Front 40

What Are Some Key Control Activities For Sales?

Back 40

1. Adequate separation of duty
2. Proper Authorization
3. Adequate documents/records
4. Prenumbered documents
5. Monthly Statements
6. Internal verification procedures

Front 41

How Does Adequate Separation of Duties Function As A Key Control?

Back 41

Proper separation of duties helps prevent various types of misstatements due to both errors and fraud.

Front 42

Proper Authorization Concerns An Auditor At What Three Key Points?

Back 42

1. Credit must be properly authorized before a sale takes place.
2. Goods should be shipped only after proper authorization.
3. Prices, including basic terms, freight, and discounts, must be authorized.

The first two controls prevent loss of company assets by shipping to fictitious customers or those who will fail to pay for the goods.

Front 43

Price Authorizations Is Meant To Ensure What?

Back 43

The sale is billed at the price set by company policy.

Front 44

Adequate Record-Keeping Procedures Must Exist Before_____?

Back 44

Most of the transaction related audit objectives can be met.

Front 45

Prenumbered Documents Serve What Purpose?

Back 45

Prevents both the failure to bill or record sales and the occurrence of duplicate billings and recordings.

Front 46

Monthly Statements Are Useful Because?

Back 46

They encourage customers to respond if the balance is incorrectly stated. They should be handled by a person who has no responsibility for handling cash or recording sales or A/R.

Front 47

Internal Verification Procedures Serve What Purpose?

Back 47

Check that processing and recording of sales transactions fulfill each of the six transaction-related audit objectives.

Front 48

What Are Some Examples Of Internal Verification Procedures?

Back 48

Accounting for the numerical sequence of prenumbered documents, checking the accuracy of document preparation, and reviewing reports for unusual or incorrect items.

Front 49

What Does A Lower Assessed Level Of Control Risk Result In?

Back 49

Increased testing of controls to support the lower control risk, with a corresponding increase in detection risk and decrease in the amount of substantive tests.

Front 50

What Is The Auditor Concerned With In Satisfying The Recorded Sales Occurred Objective?

Back 50

The Possibility of the following three types of misstatements:

1. Sales included in the journals for which no shipment was made.(can be error or fraud)
2. Sales recorded more than once. (can be error or fraud)
3. Shipments made to nonexistent customers and recorded as sales.
(ALWAYS FRAUD)

Front 51

How To Test For Recorded Sale With No Shipment?

Back 51

Vouch selected entries in sales journal to related copies of shipping and other supporting documents to make sure they occurred.

Front 52

How To Test For Sale Recorded More Than Once?

Back 52

Duplicate sales can be determined by reviewing numerically sorted list of recorded sales transactions for duplicate numbers.

Front 53

How To Test For Shipment Made To Nonexistent Customer?

Back 53

Trace customer info on sales invoice to customer master file.

Front 54

Difference Between Tracing From Source Documents To Journals And Vouching From Journals Back To Source documents?

Back 54

Former tests for omitted transactions (completeness objective); the latter tests for nonexistent transactions (occurrence objective).

Front 55

How Do You Ensure Existing Sales Transactions Are Recorded?

Back 55

To test for unbilled shipments, auditors trace selected shipping documents from a file in the shipping department to related duplicate sales invoices and journal.

Front 56

What Does Converting From A Design Format Audit Program to A Performance Format Audit Program Accomplish?

Back 56

*Procedures Are Combined Which Achieves The Following:

1. Eliminates duplicate procedures.
2. Ensures when given document is examined, all procedures to be performed on that document are done at that time.
3. Enables the auditor to do the procedures in the most effective order.

Front 57

Differences Between transaction-related audit objectives and client's methods of controlling misstatements?

Back 57

1. Materiality
2. Emphasis on occurrence objective.

Front 58

What Is The Process For Designing Tests Of Controls And Substantive Tests Of Transactions For Cash Receipts Given the Transaction-Related Audit Objectives?

Back 58

1. Determine key internal controls for each audit objective.
2. Design tests of control for each control used to support a reduced control risk.
3. Design substantive tests of transactions to test for monetary misstatements for each objective.

Front 59

How Is Proof Of Cash Receipts Useful?

Back 59

To test whether all recorded cash receipts have been deposited in the bank account.

Front 60

What Is Lapping Of Accounts Receivable?

Back 60

The postponement of entries for the collection of receivables to conceal an existing cash shortage. (defer recording cash receipt from one customer and cover shortages with receipt of another, and in turn covered by receipt of third customer a few days later, resulting in continued lapping.)

Front 61

Additional Controls to Reduce Likelihood of Uncollectible Accounts Are?

Back 61

1. The preparation of a periodic aged accounts receivable trial balance for review and follow-up by appropriate management personnel.
2. A policy of writing off uncollectible accounts when they are no longer likely to be collected.