Professional Documents
Culture Documents
PRESENTED BY
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INTRODUCTION
As part of the year-end audit of a company's financial statements, external
auditors test sales transactions and the internal controls over those
transactions to ensure that the company is not materially misstating its
revenues or accounts receivable.
The sales and collections cycle in a business refers to the set of processes
that begin when a customer makes a request for the purchase of goods or
services and ends when the company receives complete payment for the
purchase.
The overall objective in the audit of sales and collection cycle is to evaluate
whether the account balances affected by the cycle are fairly presented in
accordance with relevant accounting standards.
It should be noted that there are various accounts that are involved in the
sales and collection cycle of a business. The name given to the various types
of accounts in the sale and collection cycle vary from business to business.
For example, the name given to sales in a retail business will be SALES while
in an Insurance business it would be PREMIUM. Though the names differ, it
is important to note that the key concepts and principles are the same.
Debtors and Prepayments form significant part of the assets of most
companies. While sales figure is key to determining the overall result and
performance of a business. It is therefore important that the auditor carries
out appropriate audit procedures to verify the accounts in the financial
statements of a company being audited.
This paper covers the audit of Sales, Debtors and Prepayments. It is hoped
that at the end of the presentation members of staff will be able to identify
the processes involved in any sales cycle and carry out audit procedures to
verify the associated balances in the financial statements of our clients.
The topics covered in this paper are as follows:
Definition of terms
Understanding the clients Revenue System
Internal Controls over the Sales System
Audit of the Revenue/Sales System
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DOCUMENT
USED
ACCOUNTS
AFFECTED
CLASSES
OF
TRANSACTIONS
Processing
of Customer
Sales
and Sales
customer orders
Order/
Sales Accounts
Order
Receivable
Granting Credit
Customer
Order/Sales
order
Shipping
Goods/Rendering
Service
Shipping
Sales
and Sales
Documents/
Accounts
Waybills,
Receivable
Certificate
of
completion etc
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Sales
and Sales
Accounts
Receivable
Processing
recording
receipts
and Remittance
Cash in Bank Cash Receipts
cash Advice,
and
Accounts
Prelisting
of Receivable
Cash Receipts
Processing
recording
returns
allowances
and Credit
Memos,
sales Sales
Returns
and Journals
and
allowances
Journals
Sales
Returns Sales
Returns
and Allowances and Allowances
and
Accounts
Receivable
Accounts
Writing
uncollectable
accounts
receivable
off Uncollectible
Accounts
authorization
Journal, General
Journal Form
Accounts
Write
Off
of
Receivable and Uncollectible
Provision
for Accounts
Bad
Debt
Account
Bad
Expense
Provision
Bad
expense
account
Debt Bad
and expense
for accounts
Debt
Debt
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Sales Order
This is a document that is used for communicating the description, quantity
or related information for goods or and services ordered by a customer.
Sometimes the sales order also includes details relating to credit.
It is important to note that before services are rendered or goods are
shipped to customer, a properly authorized person must approve credit to
the customer for credit sales.
Shipping of Goods/ Rendering of Service
This is the most important function in the sales cycle. It is the point at which
risks and rewards of an asset are transferred to the customer. At this point,
most companies recognize income.
The document for this important stage is known as the shipping document.
It indicates the description of goods, the quantity shipped and other relevant
data. The name given to a shipping document could be waybill, bill of laden
or any other name depending on the nature of business.
Billing Customers
Billing customers is the means by which customer is informed of the amount
of goods shipped or services rendered. The most important aspects of billing
are:
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This file can also be varied to obtain what is known as the Sales Journal. The
Sales Journal is a listing or report which also includes the product line or
division.
NOTE
The transaction functions explained above are necessary for getting the
goods and services into the hands of the customers, correctly billing them
and reflecting the information in the accounting records.
The other four functions are concerned with collection and recording of cash,
sales returns and allowances, write off of uncollectible
accounts and
providing for bad debt expense.
PROCESSING AND RECORDING CASH RECEIPTS
Processing and recording cash receipt involve receiving, depositing and
recording cash. Kindly note that cash includes currency, cheques and
electronic funds transfer. The auditors concern here is the possibility of theft
and misappropriation of the asset.
Sometimes customers will include a remittance advice when making
payments, such advice helps the seller to keep track of what has been paid
for in order to pass the accounting entries. In the case of electronic funds
transfer or purchase of goods by credit cards, the bank provides information
to the company to prepare the accounting entries.
Most computer system can also generate a cash receipt transaction file that
will indicate the name of the customer and invoice details.
PROCESSING AND RECORDING OF SALES RETURNS AND ALLOWANCES
When a customer is dissatisfied with the goods or services, the seller often
accepts the return of goods and grants a reduction in the charges. The
company prepares a receiving report for returned goods and returns them
for storage. These are recorded in the sales returns transaction file.
Credit memos or credit notes are raised to indicate a reduction in the
amount due from a customer.
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A sales return journal is used to record sales returns and allowances, though
some companies might use the sales journal to also record sales returns.
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ACCOUNTING
1. All invoices and credit notes are properly recorded in the books of
accounts
2. All receipts from customers are properly recorded
3. All payments are for goods and services which have been supplied
4. All credit notes given have been properly recorded in the books and
records of the business
5. All entries to the receivable ledger are in the correct customer
accounts
6. Potential or actual bad debts are identified
7. Cut off procedures are applied
Based on the objectives mentioned above, an entitys sales control system
will be designed to achieve the set objectives.
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In addition to the set objectives, the sales control system would be designed
to minimize the possibility of fraud.
ELEMENTS OF CONTROL PROCEDURES
When reviewing the Internal Control Procedures put in place by management
to achieve the sales system objectives, the relevant aspects to examine are:
Organizational Controls
Segregation of duties
Physical Controls
Authorization
Arithmetic and Accounting Controls
Organizational controls
Segregation of duties
Physical Controls
Authorization
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Organizational controls
Segregation of duties
Physical Controls
Authorization
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ACCOUNTING
1
Organizational controls
There
should
be
written
procedures
accounting for sales and receivables
There should be written procedures for write
off of bad debts
Segregation of duties
Physical Controls
Sales
invoices
should
be
numbered
consecutively
There should be control over unused invoices
There should be control over the computer
system used for creating invoices
Restriction of access to unauthorized persons
Authorization
PRACTICAL APPLICATION
Most of the issues raised in the above tables can be ascertained and
documented by administering a standard Internal Control Questionnaire on
the Sales process to a client.
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COMPLETED BY:
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REVIEWED BY
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QUESTIONS
ANSWERS
N/
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REMARKS
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issued?
Does the billng process involve automatic validation check on
price
(per standard tarif or contract terms and quantity (as per stores
records and service request/operational records)
Is there an authorized price list/ tariff
if yes who is authorized to change it
Is there a restriction of access to invoicing software to only
authorized personnel
If yes how is it done
GENERAL
Do sales to related parties have the same process as third party
sales
If no kindly describe the system for processing Intercompany
sales
Are Customers given Month end statements
If yes who is responsible for this function
Does the computer automatically post transactions to account
receivable master file and General Ledger
Is the account receivable master file reconcile with the General
Ledger on a Monthly basis?
Is there a memorandum Invoice Account?
If yes is there a reconcilition of the Invoice listing to the Chart of
accounts
Who performs this function
How often are Journal entries into the Sales Ledger reviewed?
Describe the procedure for authorizing, controlling and recording
sales to Employees, sale of scrap and cash on delivery/cash
sales
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Trade Debtors
2.
3.
Sundry Debtors
4.
Staff Accounts
5.
Deposits
6.
Prepayments
7.
Others
2.
(i)
(a)
(b)
(c)
(d)
(e)
(f)
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(1)
Replies Received
(2)
Replies Agreeing
(3)
Replies Disagreeing
(ii)
(iii)
3.
4.
5.
6.
7.
8.
9.
10.
11.
(b)
(c)
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