Cycle sale for communications & media

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We’re going to revisit the sales cycle flow chart introduced in the lecture. Let’s start by meeting Jill and Jimmy. Jill is a purchasing manager for Quick Clothing. Jimmy works for our client in sales. Hi, my name is Jill Jango. I would like to purchase 300 shirts, item number 3152, in size medium. My name is Jimmy and I am happy to help you. Let’s write up your sales order. How will you be paying? I would like to buy them on account. My company is Quick Clothing. Okay, no problem. I’m going to write your sales order. I will then send your sales order to our credit department for approval. If there are any problems, they will contact you. Can you please review and sign this sales order? Sure. Thank you for your business. Note that the sales order should be serially numbered for part of the completeness and existence assertions. Next, Jimmy visits Denise, the client’s credit manager. Hi, Denise. Can you please review this sales order from Quick Clothing? They’re paying on account. Sure thing, I will let you know if there are any issues. Quick Clothing has been a customer for over two years and always pays its balance within the 30 day payment period. Its credit is good. Based on her review, Denise stamps the sales order approved. She’ll now create 3 copies, 1 for shipping, 1 for billing, and 1 for accounting. Notice that this credit check process prior to shipping is an excellent control and helps to bolster the valuation assertion. Next, we’ll pay a visit to the warehouse floor. Tom Smith, a member of the inventory staff, will pull the inventory based on the approved order. Hey, Megan, this box is ready to be shipped. Megan is the warehouse manager. I will get this ready for our daily 3 p.m. pickup by fast shipping. Now, she prepares the bill of lading. Three good controls in place here. First, the approved sales order was required for Tom to release the goods from the warehouse. Second, the separation of duties between the authorization function from credit and sales and the custody of the inventory in the shipping department. Finally, the bill of lading you see here is sequentially numbered, again, helping with the completeness and existence assertions. Looks like this is a valid sale. It’s an approved sale order for 300 medium shirts of item number 3152. And it looks like that was shipped on 5/15/Year 2. I’m going to create and print the invoice, so that I can mail the invoice to Quick Clothing. In addition, I’m going to update the accounts receivable sales journal by creating journal entry, debit accounts receivable, Quick Clothing for $1,350, credit sales for $1,350. Again, a number of good controls in place here. First off, the matching performed by Analise to confirm the shipping documents and sales order. Second, the use of sequential numbering on the sales invoice, and finally good segregation of duties between the record keeping, custody, and authority functions. Last, Polly, the company controller, reviews all documentation and says, "Everything agrees. I’m going to post these items from the journal to the general ledger." Two more good controls in place here. First, the posting to the general ledger only occurs after verification, and we’d expect to see independent reconciliation of the AR and GL at various points by independent parties. Second, periodic reconciliation from the receivables master file to the general ledger by an independent party within the company. Now note, let’s say the auditor was trying to test the existence of sales. We’d go from the financial statements and then drill down to the details. From the financial statements, to the general ledger, to the subsidiary ledger, and finally, to the sales detail. Now, let’s say from the detail the auditor selected this sale transaction that we just discussed May 15, Year 2 to Quick Clothing for the amount of $1,350. We’d expect the auditor to ask Creative CPA to pull the evidence, which would include the bill of lading invoice and sales order you’ve just seen. The auditor would then match all these documents to confirm quantity, price, and total amount. Now admittedly, the auditor could also use this as a dual-purpose test and test controls as well. For example, testing that shipped items have to have an approved sales order.