Professional Documents
Culture Documents
Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance
with PAS/PFRS
CONTROLS TESTS OF CONTROLS
11. Sales must be properly classified to generate The auditor can test this control by determining that
accurate segment reporting. Entities may require a the invoice copy contains the signature that
second person to independently review or check the indicated approval on account classifications used.
account coding on invoices
Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance
with PAS/PFRS
ASSERTIONS & CONTROLS TESTS OF CONTROLS
12. An independent review is made of account coding Observe procedure
for recorded sales. Use GAS to select a sample of invoices
Recheck account coding
Discussion 1 – 5: For sample on entries in the sales journal, compare sales invoice copy, customer order and shipping document
o To test the existence of sales, some auditors examine the sales invoice, the customer’s order, the sales order bearing
credit approval and the shipping document for a sample on entries in the sales journal.
o If an entity has a procedure to accumulate these documents before recording a sale, their accumulation is an
indication that the control was performed.
o Other procedures may include:
Trace from the entry removing the goods from inventory to the perpetual inventory record
Examine the cash receipts in payment for the sale
Confirm the existence of individual transactions with the customers.
Discussion 6: For a sample of shipping documents, traces sales invoice and entry into sales journal and accounts receivable
subsidiary ledger. Perform cutoff tests
o The auditors may examine the sales invoice and determine that an entry was made in the sales journal and the
accounts receivable subsidiary ledger.
o When testing to determine that all transactions have been recorded, auditors start with a prenumbered document and
trance it into the journals and ledgers.
Discussion 6: for a sample of sales invoices, examine the customer order and shipping document to determine whether the
transaction should have been recorded as a consignment transaction rather than as a sale.
o To determine that the entity has a right to the receivable arising from the sales transactions recorded; the auditor
examines a sample of sales transactions and be alert for indications of consigned shipments treated as sales.
o Auditors should also investigate the procedure from recording movements of merchandise among the various units of
the company.
Discussion 7-9: For sample of entries in the sales journal, (a) examine sales invoice, shipping documents, and customer order for
consistency of descriptions and quantities; (b) examine sales orders for credit approval; and (c) check orices and extensions. Foot
sales journal and general ledger account.
o The audit procedure for verification of sales transaction that has been selected for testing may begin with comparison of
the customer’s purchase order, the client sales order, and the duplicate copy of sales invoice.
The descriptions and quantities of items are compared on these three documents and traced to the duplicate
copy of the related shipping document.
o The credit manager’s signature denoting approval of the customer’s credit should appear on the sales order.
o The extensions and footings on each invoice in the sample should be proved to be arithmetically correct.
o After proving the accuracy of selected individual, the auditors next trace the invoices to the sales journal and to postings
in the accounts receivable subsidiary ledger.
o In addition, the date of each invoice should be compared with two other dates:
The date on the related shipping document, and
The date of entry in the accounts receivables subsidiary ledger.
Discussion 10: For a sample of entries in the sales journal, verify the accuracy of account coding
o Auditors may review entries in the sales journal and the supporting sales invoice to determine whether the sales invoice
was coded correctly and whether it results in proper presentation and disclosure of the transaction in the financial
statement.
AUDIT OF SALES ADJUSTMENTS TRANSACTIONS
Basic Considerations
- Cash receipts may result from revenue transactions, short and long-term borrowing, issuance of share capital and
sale of marketable securities, long-term investments and other assets.
- Executing cash receipts transactions generally involve:
a) Receiving mail receipts
b) Receiving over-the-counter receipts
c) Aggregating total cash received
d) Depositing cash in bank
Existence or Occurrence: Recorded receipts represent actual cash collections from customers
Controls Tests of Controls
1) A trustworthy employee prepares a prelisting of cash The auditor observes whether a prelisting is prepared
receipts before further processing. and inquiries of the preparer about the procedures he
follows.
2) A validated deposit slip is obtained for daily deposits The auditor obtain copies of the validated deposit
and compared to the cash receipts summary slips and comparing them to the cash receipts
summary
3) Duties of handling cash receipts are segregated from The auditor observes the separation of duties and
posting to accounts receivable. A person performing inquiring of client personnel about their responsibilities.
both functions could misappropriate cash and
conceal the shortage by making an entry directly to
the customer’s accounts.
4) A bank reconciliation is prepared monthly by a person The auditor observes that bank reconciliation have
not involved in handling cash, accounts receivable, been prepared by an independent employee
or general ledger records. The reconciler should
receive the unopened bank statement and maintain
control over it until the reconciliation is completed,
Rights and Obligation: All cash receipts are deposited in the bank account of the client
Controls Tests of Controls
9) Cash receipts are deposited intact daily in the The auditor observes the procedure and compares
company’s bank account. This control reduces the the cash in the prelisting with the validated deposit
likelihood of misappropriation of cash slip.
Valuation or Allocation: Debits to cash and credit to accounts receivable are valued at amounts received
Controls Tests of Controls
10) Cash receipts should be recorded at the amount The auditor compares entries in the cash receipts
indicated on the remittance advice. A remittance journal to remittance advices
advice that has been processed by a third party
serves as strong evidence on the amount received
from the customer
Presentation and Disclosure: Cash receipts transactions are recorded to result in presentation and disclosure in accordance with
PAS/PFRS
Controls Tests of Controls
11) An accounting supervisor should approve The auditor determines that the supervisor’s signature
classifications made in journalizing. This control of approval is recorded
reduces the likelihood of payments being posted to
the wrong accounts, resulting in credit balances in
accounts receivables
Audit Program for Test of Controls: Cash Receipts Transactions
Audit Procedures
1. Compare remittances or other details of cash receipts with the entries in the receipts book.
2. Compare the recorded receipts with individual deposits as shown by bank statements
3. Compare the composition of authenticated duplicate deposit slips with the recorded receipts.
4. Compare the recorded receipts with an independent record prepared before receipts are transmitted to the cashier.
5. Test of cash discounts and other allowances or credits
6. Test postings to the general ledger to the customer’s ledger, and to other subsidiary ledger
7. Review cash receipts for unusual items.
Possible errors that may result because of control weakness over cash receipts transactions:
Internal Control Weaknesses / Factors that Examples of Fraud/Error Description of Possible Errors or
Increases the Risk of the Misstatement Misstatements
1. Lack of segregation of duties of Cash receipts are overstated Fictitious cash receipts are
cash handling and on the books by transferring recorded; processing errors
recordkeeping; bank accounts cash between accounts (intentional or unintentional) are
not reviewed or properly without appropriate recording not discovered on a timely basis
reconciled. of the transfer to cover up an
embezzlement of cash.
2. Inadequate controls for Cashier fails to ring up and Failure to record receipts from
reconciling cash register tapes record cash sales and cash sales
and accounting records; embezzles cash.
inadequate controls for Bookkeeper omits the recording Unrecorded cash receipts are
reconciling bank accounts. of the receipts from one cash not deposited in the bank or
register for the day recorded cash receipts are not
deposited in the bank.
3. Sales not coded on cash Sale of product A recorded as Credits to wrong sales account
register tapes a sale of product B are committed.
4. Lack of segregation of duties Cashier abstracts or embezzles Failure to record cash from
between personnel who have cash payments by customers collections of accounts
access to cash receipts and on receivables without receivable
those who make entries into the recording collections from
accounts receivable records. customers.
Cashier embezzles cash
collected from customers and
writes-off the related
receivables
5. Inadequate reconciliations of Bookkeeper accidentally fails to Failure to record cash from
subsidiary records on accounts record a payment in a collection of accounts
receivable with the general receivable receivables.
ledger account
6. Accounting manuals not used Collection of rent income Miscellaneous cash receipts
to assist in properly recording recorded as sale of credited to incorrect accounts.
miscellaneous cash receipts. merchandise
7. Ineffective board of directors, Keeping the cash receipts Erroneous presentation of more
audit committee, or internal journal open to record next liquid position.
audit function; undue pressure year’s cash receipts as
to show improved financial collections in the current year
position; top management
actuations not conducive to
ethical conduct
8. Failure to list and deposit cash Recording cash receipts based Cutoff error (early or late
receipts on a timely basis on erroneous information about recognition of cast receipts) is
date of receipt committed.