chapter 14 ppts.pdf

8/18/2019 Chapter 14 PPTs.pdf

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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Chapter 14

Questions:14-21 to 14-25, 14-27 to 14-30

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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.14-2


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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.3


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1.Processing Customer Orders• Customer order A request for merchandise by a customer

• Sales order A sales order is a document for communicating the

description, quantity, and related information for goods ordered by acustomer

2.Granting Credits

• Before goods are shipped, a properly authorized person must

approve credit to the customer for sales on account.

• Weak practices in credit approval often result in excessive bad debtsand account receivable that may be uncollectible.

• An indication of credit approval often serves as the approval to ship

the goods

• Automatic approval of a credit sales on preapproved credit limit in

the customer master file• Computer allow the process of sales order ONLY if not exceeding

the preapproved credit limit.

3.Shipping Goods

• Shipping document (e.g., bill of lading)

• Serve as a signal to bill customer, remove inventory from

warehouse, update the perpetual system.


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4. Billing Customers and Recording Sale• Must be done correctly and on a timely basis.

• All shipments made have been billed (completeness)

• No shipment has been billed more than once (occurrence)• Each one is billed for the proper amounts (accuracy).

• Charging the customer for the quantity shipped at the authorized price, which

includes consideration for freight charges, insurances and terms of payment

(credit discount, advance payment, etc).

• Document includes

sales invoice (description and quantity of goods sold, the price, freight charges,insurance terms, destination of shipment, total amount an due date).

sales transaction files (all information related to each sales transaction,

including customer name, date, amount, account classification, sales person,

commission rate, and returns and allowances).

Sales journal/list (generated from sales transaction file, include customer

name, date, amount and account classification-cash vs. credit sales ) AR master file (by customer name, the beginning balance in AR, each sales

transaction, sales returns and allowances, cash receipts, and the ending bal.)

AR trial balance (AR from each customer at a point in time, directly from the

AR master file)

Aged trial balance: (with the information on outstanding period )

Monthly statement (customer portion of AR master file)


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Salestransaction

file

Sales journal

Accountsreceivable

file

Accountsreceivable

trial balance


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5. Processing and Recording Cash Receipts

• Including receiving, depositing and recording cash

• The most important concern is about theft occur before receipts are entered in the

records.

Remittance advice=a document mailed to the customer and typically returned to

the seller with the cash payment. It indicates the customer name, the sales invoice

number and the amount of the invoice.

Prelisting of cash receipts= a list prepared when cash is received by someone

who has no responsibility for recording sales, account receivable, or cash and who

has no access to accounting records. It is used to verify whether cash received was

recorded and deposited at the correct amounts and on a timely basis.

• Lockbox system

• Electronic fund transfer

Cash Receipts transaction filesInclude same info as in the sales transaction file, including customer name, date,

amount, account classification, sales person, commission rate, and returns and

allowances

Cash receipts journal / listing

Generated from cash receipt transaction file and includes similar info in AR

master file, including the customer name, date, amount


8/25Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.14-8

Prelisting ofCash receipts

Cash receiptsTransaction file



6. Processing and Recording Sales Returns and Allowance

• When a customer is dissatisfied with the goods, the seller often

accepts the return of the goods or grants a reduction in thechargers.

• The company prepares a receiving report for returned goods

and returns them to storage.

• Returns and allowances are recorded in the sales returns and

allowances transaction file, as well as AR master file. Credit memo indicates a reduction in the amount due from a

customer because of returned goods or an allowance. It often

takes the same general form as a sales invoice, but it supports

reductions in the AR rather than increases

Sales returns and allowances journal performs the same

function as sales journal. Some company just use sales journal

rather than in a separate journal (Dr sales)



7. Writing Off Uncollectible Accounts Receivable

• After concluding that an amount can not be collected, the companymust write it off. Typically, when a customer files a bankruptcy or the

amount is turned over to a collection agency.

• Uncollectable account authorization form an internal

document to write an A/R off as uncollectible.

8. Providing for Bad Debt

• Accounting principles requires them to record bad debt expensefor the amount they do not expect to collect.

• Most companies record this transaction at quarter/month end.

Dr. Allowance for Uncollectible Accounts

Cr. Account Receivable

Dr. Bad Debt Expense

Cr. Allowance for Uncollectible Accounts



Auditors study the clients flowcharts, make inquiries of the client using an internal

control questionnaire, and perform walk-through tests of sales.



Adequate separation of duties

• Proper separation of duties prevents various types of misstatements due

to both errors and fraud.• Management should deny cash access to anyone responsible for entering

sales and cash receipts transaction information into computer.

• Credit-granting function should be separate from the sales function

• Personnel responsible for doing internal comparisons should be

independent of those entering the original data

Proper authorization

• The auditor is concerned about authorization at three key points

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 beauthorized.

• The first two controls are meant to prevent the loss of company assets by

shipping to fictitious customers or those who will fail to pay for the goods.

• The third control, price authorization, is meant to ensure that the sale is

billed at the price set by company policy.



Adequate documents and records

Pre-numbered documents• To prevent both the failure to bill or record sales and the occurrence of duplicate

billings and recordings.

• To use this control effectively, a billing clerk will file a copy of all shipping

documents in sequential order after each shipment is billed, while someone

else will periodically account for all numbers and investigate the reason for any

missing documents.

Monthly statements• Be handled by persons who have no responsibility for hardly cash or recording

sales or AR to avoid the intentional failure to sent the statements.

• For maximum effectiveness, all disagreements about the account balance should

be directly to a designated person who has no responsibility for handling cash orrecording sales or AR.

Internal verification procedures• Examples include accounting for the numerical sequence of prenumbered

documents, checking the accuracy of document preparation, and reviewing

reports for unusual or incorrect items.



Controlrisk

Control

effectiveness

A lower assessed level of control risk will

• result in increased testing of controls to support the

lower control risk,

• have a corresponding increase in detection risk and

decrease in the amount of substantive tests.


16/25Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall.

Design tests of controls for sales (1/2)The nature of the control determines the nature of test of

controls.If the internal control is to initial customer orders after creditapproval then the test of control is to examine the customerorder for proper initial.

Test of controls for separation of duties are ordinarily restrictedto the auditor’s observations of activities and discussions with personnel.

Testing of controls using computer.Auditor can test whether credit is properly authorized by the computer by

attempting to initiate transactions that exceed a customer’s credit limit.

Auditor can test for likelihood of fictitious sales by attempting to input non-existent customer numbers, which should be rejected by the computer.

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TOC organized by transaction related objectives[occurrence] Sales are supported by authorized shipping documents and approvedcustomer orders

[TOC] is to examine sales invoice for supporting bill of lading and customerorder. The auditor should start with sales invoice and examine documents insupport of the sales invoice.

[completeness] Account for a sequence of various types of documents.

[TOC] to account for a sequence of various types of documents. For example,accounting for a sequence of shipping documents and tracing each one to theduplicate sales invoice and recording in the sales journal provide evidence ofcompleteness.

[TOC] for both occurrence and completeness simultaneously

Auditors check the sequence of sales invoices selected from the sales journaland watch for duplicate and omitted numbers or invoices outside the normalsequence. Assume the auditor selects sales invoices #18100 to #18199,

Completeness objective will be satisfied if all 100 invoices recorded.

Occurrence objective will be satisfied if there is no duplicate recording of any ofthe invoice numbers.

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Design tests of controls for sales (2/2)



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Occurrence: Recorded sales are for shipments actually made.

Unintentional overstatement sales can be easily discovered:

• monthly statement to customers.

• Year-end AR confirmation.

Three types of misstatements and tests of substantive transactions

1)Sales included in the journal for which no shipment was made (error/fraud)

• Auditors vouch selected entries in the sales journal to related copies of

shipping documents.

• Trace to perpetual inventory records to test whether inventory was reduced.

2)Sales recorded more than once(error/fraud)

• Review numerically sorted list of recorded sales transactions for duplicate

• Test for proper cancellation of shipping documents.

3)Shipment made to nonexistent customers and recorded as sales (always fraud,

“Sham Sales”)• Happen if the person who record sales also authorize shipments.

• Trace customer information on the sales invoice to the customer master file.

Another effective approach in detecting the three types of misstatements of

sales is to trace the credit in AR to its source



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Completeness: existing sales transactions are recorded

• Overstatement of sales is more likely than understatement of sales. In most audit, no

substantive test for completeness objective for sales transactions.

• Possible ICOFR weakness triggers concerns on completeness objective: lack ofindependent internal tracing from shipping documents to the sales journal.

• Auditors’ test for unbilled shipments, auditors can trace selected shipping documents

from a file in the shipping department to related duplicated sales invoice and the sales

journal.

Accuracy: Sales are accurately recorded• Accuracy concerns:

• Shipping the amount of goods ordered

• Accurately billing for the amount of goods shipped

• Accurately recording the amount billed in the accounting records

• Auditors commonly

• compare prices on duplicate sales invoices with an approved price list• recalculating extension and footings

• compare the details on the invoices with shipping records for description, quantity,

and customer ID.

• Computer generated invoice

• The auditor focus on whether the calculation is programmed accurately and the

price list master file is authorized and correct.



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Posting and summarization: Sales transactions are correctly included in the master

file and correctly summarized.

• Auditor perform some clerical accuracy tests, such as footing the journals and

tracing totals and details to G/S and the master files.• Posting and summarization differ from accuracy

• Accuracy If auditor compare an amount on sales invoice with sale journal

• Posting and summarization if an auditor trace an entry from sales journal to

sales master file.

Classification: sales transactions are correctly classified.• Should NOT

• Debit AR for cash sales

• Credit sales for a collection of AR

• Classify disposal of fixed assets (e.g., PPE) as sales.

Timing: sales are recorded on the correct dates• Sales should be billed and recorded as soon after shipment take place

• Auditors commonly compare the date on selected shipping documents with the date

on related duplicated sales invoices, the sales journal, and the account receivable

master file.

• Significant difference indicate potential cutoff problems in the tests of year-end

balance.



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Materiality

• In most cases, sales returns and allowance are soimmaterial that the auditor can ignore them.

Emphasis on the occurrence objective

• Auditor emphasize testing recorded transactions to uncoverany theft of cash from the collection of account receivable

that was cover up by a fictions sales returns or allowance.

Other objectives are also important

• For example, completeness of sales returns and allowance

is important for year-end audit to the concern of

overstatement of sales and receivables through

understatement of sales and returns.


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Determine whether cash received was recorded

Prepare proof of cash receipts

Test to discover lapping of accounts receivable

Lapping


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Occurrence transaction-related audit objective

Proper authorization of the write-off of uncollectible accounts

Verification of accounts written off


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