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Becker Auditing – 2008 Edition

Chapter 4
1
AUDITING & ATTESTATION – 4
TIP PIE ACDO = Evidence
Review:
Strong Internal Control

P – Pre-numbered Documents

A – Authorization of Transactions

I – Independent Checks

D – Documentation

T – Timely and Appropriate Performance Reviews

I – Information Processing Controls

P – Physical Controls

S – Segregation of Duties
Management Assertions:

C – Completeness

P – Proper period cut-off

A – Accuracy

C – Classification

O – Occurrence

C – Completeness

A – Allocation and Valuation

R – Rights and Obligations

E – Existence
About

C – Completeness

U – Understandability and Classification

R – Rights, Obligations, and Occurrence

V – Valuation and accuracy

ed assertions
Substantive Testing:

N – Nature

E – Extent

T – Timing
Transaction Cycles:

Cycle: Description

1. Revenue: includes sales revenues, receivables, and cash receipts

2. Expenditure: Includes purchases, payables, and cash disbursements

3. Payroll and Personnel: Includes payroll (salaried and hourly) and personnel functions

4. Inventory and Production: Includes perpetual inventory, physical counts, and manufacturing costs
5. Property, Plant, and Equipment: includes acquisitions and disposals and related depreciation expense

6. Investments: includes investments, related interest and dividend payments, proceeds from issuance and from

payments of principal,
and payments for treasury stock
7. Other Liabilities: includes accrued liabilities, warranty costs, deferred income taxes, and lease
obligations
Revenue Cycle: includes sales revenues, receivables, and cash receipts
Vouch downBiggest concern is overstatement of revenue.
Sales
 Preparation of the Sales Order:Paid Tips (Pre-numbered)
1) Receipt of a customer purchase order by the sales department
2) A serially numbered sales order is prepared and sent to the credit department for approval
 Credit Approval: Valuation assertion and Authority
1) Decides if the customer may receive goods on open account = Authority
2) If approved, copy of approved sales order is sent to shipping department, billing department, and the
accounting department
 Shipment: Custody

Becker Auditing – 2008 Edition

Chapter 4
2
1) Serially numbered bill of lading is prepared and copy is sent to customer
2) Goods are shipped and receivable arises
 Billing: Recordkeeping
1) Prepares serially numbered sales invoice
2) Shipping documents, sales orders, and invoices are compared to assure that all shipments were based
on valid customer
orders and properly billed

3) Prices and discounts are applied to the invoice, and extensions and footings are computed

4) Invoice is sent to customer and accounts receivable department

 Accounting: Recordkeeping
1) Sale is entered into sales journal, and receivable is recorded
Accounts Receivable
 Sa les1) Receivable is recorded in the A/R control account in the general ledger and in A/R
subsidiary ledger
2) Periodically, an independent person should reconcile these two records
 Collection of Cash Receipts
1) When payment is received from customer, receivable is eliminated
 Uncollectible Receivables
1) Aging schedule is prepared and sent to credit department for use in carrying out its collection program

2) At some point, uncollectible receivables should be written off

3) Controls for writing off include proper authorization by treasurer and recordkeeping

4) The auditorob ser ves the preparation of the aging schedule as part of the study of internal control
 Sales Returns
1) Returned goods examined to ensure they correspond with the reason for return before credit is given

2) Serially numbered receiving report may be used as a sales return slip

3) Once return is approved, the related receivable is eliminated

 Sales discounts
1) Discount procedures and records should be reviewed to ensure that discounts are properly given and
recorded
Cash Receipts
1. Collection of Cash Receipts

1) Incoming mail must be opened by a person who does not have access to the accounts receivable ledger

2) The receipts should be listed in detail with one copy and the actual receipts sent to cashier for bank deposit

3) Another copy sent to accounts receivable department for entry in the accounts receivable subsidiary records

4) Third copy sent to accounting department for entry in general ledger accounts receivable control account

5) Accounts receivable department should match bank deposit ticket with remittance advices

6) Cash registers or lock boxes should be used as safeguards

***Treasury makes deposit if no cashier!

Order &Credit Department Authority

Warehouse & Shipping Department Custody

Billing/Accounts Receivable Department Record Keeping

Accounting Department Record Keeping

Mailroom DepartmentCustody

Cashier / Treasurer Department Custody

Accounts Receivable Department Record Keeping

Accounting Department Record Keeping

Must review pages A4-7 to A4-9

Audit Procedures Related to the Revenue Cycle

Sales:

1. Verify that recorded sales are based on approved sales orders and shipping documents

2. Determine that sales are recorded at appropriate amount and in proper period

3. Books and Records

Becker Auditing – 2008 Edition

Chapter 4
3

 match sales invoices with supporting shipping documents

 compare sales journal with subsidiary ledgers

 test mathematical accuracy of trial balance

 compare the total in subsidiary ledgers with general ledger

4. Cut-off
 Examine sales invoice before and after year-end
 Analyze sales returns after year-end
Accounts Receivable:
o

Review accounts receivable schedule for accuracy and collectability

o

Confirmation
 Follow up on error reports (Rights and Obligations)
 Confirm receivables
o

Adequacy of Uncollectible Accounts

 Subjective judgment = “Risk”

 Calculate the adequacy of allowance for uncollectible accounts

 Aging schedule of accounts receivable should be constructed

 Tests of adequacy of allowance relate to the FS assertion of Valuation and Allocation

 Test credit approval

Audit Procedures regarding Cash Receipts: see below
Expenditure: Includes purchases, payables, and cash disbursements
Trace upBiggest concern is understatement of expenses and liabilities
Purchases:
 Purchase Requisition
1) Starting of purchasing cycle
2) Department in need of asset or services sends a properly approved, serially numbered requisition to
purchasing dept
 Purchase Orders
1) Consider the relevance of the time and quantity of the request

2) Obtain competitive bids from various suppliers to make sure that the best price is obtained

3) Issue order after proper approval

4) It is best if the purchase orders are pre-numbered

5) Multiple copies sent to the requisitioning dept, the vendor, the receiving department, and accounting department

6) If order is cancelled, all copies should be recalled and filed

 Receipt of Goods or Services
1) They received their copy from the purchasing department, preferably it should be a blind copy

2) If blind copy, then receiving dept is forced to count the goods upon arrival

3) A receiving report is prepared and forwarded to the accounting department

4) Goods are forwarded to the requisitioning department

Accounts Payable:
 Has three functions: record the payable, approve the invoice for payment, and record the
payment after it is paid by treasurer
 Recording the payable
o

A/P = approval of bill

o

They received their copy from the purchasing department

o

Receiving report is compared with the purchase order and vendor`s invoice as to quantity
o

Comparison is made to prevent payment of charges for goods in excess of those ordered/received
o

Records the goods received in inventory and records a payable

 Approving Invoice for Payment and Recording Payment
o

Indicate the debit and credit

o

Accounting department approves invoice by matching the invoice, purchase order, receiving report, and
requisition
o

Confirm invoice amount is correct and reflects any purchase discounts before approving it for payment
Cash Disbursements:

 Best if invoices paid by check

 The functions of approving the payment and signing the checks should be segregated

 Approved voucher (invoice, purchase order, receiving report, and requisition) prepared by A/P

are received by treasurer

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