Streamline the sales audit process for education

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chapter 14 we're going to talk about the sales and collection cycle and auditing that cycle so there's different types of transactions that are included in sales so we've got accounts receivable in sales obviously when the when the product ships out and we Bill our customers we set up a receivable so that process can be a separate group of transactions then we have the cash receipts so the customers then receive the bills and then they pay the the company um and then how is that process handled then the separate process can be sales returns so um if the company sets up a sales returns and allowance account um when those when those products get returned to them for whatever reason and then they credit the accounts receivable transaction um that could be a whole process that of course needs to be audited because sales returns can indicate some different things to the audits such as like fictitious sales or stuffing like sending out all your product to the customer and then allowing returns to come back in the next year or the you know to kind of push sales from one period to the other period so the Auditors always look at that process uncollectible accounts is another thing the Auditors are going to look at to see um what have we estimated our bad debt expense to be what have we set up in our allowance for uncollectible accounts um how how do we how do we write them off when do we write them off what are the processes for that um and then of course the just that that's kind of goes hand in hand with that next one the actual bad debt to say how do we know at what point how do we collect on those accounts receivables and then at what point do we say okay let's write it off because we're not going to collect so the different documents that the Auditors are going to want to test through and have an understanding of is the customer orders so how does that process go um you know does the customer log in and create an order do they send in a purchase order do they call um then then there's is there a sales order then that's issued which would be an internal document outlining what was what goods were ordered and indicating that it's been approved to go out and that customer has been approved do they have the proper credit with the company and and the shipment gets authorized so the um you know that sales order might be how the um you know how to process that through the through the system to get it so that it gets to that next step so say it's a brand new customer and we've got that sales order then we're going to need to go through the whole credit approval process so again that could be the next step if it's a new customer if it's an existing customer it's going to go from sales order right down to the shipping document or the bill of lading so then that's going to list out all the parts that are that are pulled from inventory and that are being shipped to fulfill this order and then once the goods are shipped then we create an actual sales invoice that goes out to the customer which would include the parts that they purchased the price the terms the amount due the due date all of that stuff so all of these documents um would go kind of sequentially in order and the auditor would want to trace a transaction through from that customer order all the way down to that sales invoice um then once it gets posted into our it system then that is what these next transactions so then you could trace it into the sales transaction file where it's actually entered into whatever system they're using then you could trace that individual sale into the sales Journal which would have all of the sales for the period then you could trace that invoice into the accounts receivable trial balance for that one customer to say okay yeah there it is it's outstanding at the end of the year and then maybe if monthly statements are sent out not all companies do monthly statements so that's not required but sometimes they do especially if there's multiple invoices by one customer that would show these are your invoices outstanding and the amounts and the due dates so other processes relating to the sales function we have again um collecting those cash receipts so when the customer pays us what comes back with the cash receipt so maybe they've got um you know some sort of uh it could just even be the top of the check it could be some sort of a you know piece of paper that gets included in there but something that probably is going to show what they paid like invoice numbers that type of thing um then those cash receipts come in and then maybe like the mail room Personnel provides a listing of all the cash receipts that came in that day and then it gets taken to the bank for deposit um so that you could look from the remittance advice of the check that came in tie that check into the pre-listing of the cash receipts and then eventually that would actually go into the cash account um sales returns are there credit memos issued to the customer that shows this is what you've returned and this is the amount that we've applied to your accounts receivable balance again that would be the proper flow of paper trail and then our uncollectible accounts normally bad debt is estimated at the end of the period to say okay we estimate like three percent of our accounts receivable could be uncollectible so we're going to record that to better debt expense and then set up an allowance for uncollectible accounts then as we go through the year we look at specific accounts to say okay I don't think this customer is going to pay us we heard that this customer declared bankruptcy you know kind of whatever the case may be and then we would get that approved and that account would be written off so the accounts receivable would be written off to the allowance for doubtful accounts so the audit tests of that sales cycle so when we're understanding the internal controls and assessing the control risk of the sales cycle we want to first look at those key control activities so is there adequate separation of Duties so again thinking back you know to to those internal control procedures that would say that a person who actually handles the cash is not the same person who does the recording of the cash so like I said the mail room lady possibly gets all the cash oh sorry all the checks that come in she prepares that cash listing and takes it to the bank but then there's somebody in accounting who actually records the receipt of all those cat all those checks that come in so again the person handling it doesn't record it um looking at is there proper authorization of credit before making a shipment so has that customer been approved have we done a credit check of them and and do we know are they up to their limits um on the credit that we have offered them prior to making a shipment to them again that would help in monitoring bad debts and things like that if you have a customer who hasn't been paying maybe then you put a hold on their account so you you know they you would not make any more shipments until they pay is there adequate documentation so we should have pre-numbered shipping documentations um pre-number shipping documents that then Trace into invoices we may possibly then Trace those into customer orders so again is there a nice paper trail and is everything pre-numbered in any numbers that are missing you know accounted for as either being void or or whatever our monthly statements mailed out to the customers um again that's not a requirement not all companies do that but if they do do that we would want to understand that process and maybe test some of those and then is there an internal verification where an independent person reconciles the accounts receivable again that would help limit the ability availability the ability of people to commit fraud because again if you could if you could take a cash receipt and steal it and then cover Your Tracks by by giving them a credit memo or um you know putting it into a different accounts receivable account or put it into a miscellaneous customer account or just something that kind of covers the fraud um again so if there was someone independent who's reconciling that that would help limit the ability the Avail of availability of a person to commit fraud so um then we get into tests of those controls so kind of what are some of the things that the Auditors are looking for so they're looking for a fictitious sale because normally if we're going to commit like accounting fraud so we're not stealing but we're we're wanting to kind of you know make the numbers more look more attractive than they really are we would want to have more sales so if we would record fictitious sales that would bump our sales up make our financial statements look better our net income look better so a way that the Auditors can test is that they can go from the sales Journal back to the shipping document so you don't start with a shipping document but start where it's in in the actual Ledger making up the total sales and then make sure those all take Trace back to valid shipping documents um is there unrecorded sales so that shipments have occurred but we have not recorded that sale so again that's not necessarily fraud maybe that's just not the best internal control procedures that we might ship something out without actually sending an invoice to the customer not getting paid so it's not good operating procedure but that's the completeness part of the audit objective so then in that case we're going to go from the shipping document to the sales journal to make sure that everything that got shipped had an invoice created and that invoice posted into the sales look for duplicate sales just Review You Know download all the sales Journal look for um all the the numbered invoices to make sure that there's no duplicates in there you know like there could be an A and A B or just something that could trigger them to look more closely into those those invoices um shipment to non-existing customers so again like a it's all it's kind of a little bit of that same fictitious sale to say if we're going to ship product so that we can record the sale but not to a customer that's on our file so Trace that customer information from the invoice to the master file to make sure that their approved customers and they have credit and that they're valid and we're not just kind of you know we have a friend that owns a company and we're going to ship them product just to get our sales up and then they can turn around and send it back to us accuracy to determine that all the sales are recorded correctly that we're using the correct unit prices that all of our computer processes where you take your quantity times your price all those mathematically work out correctly um and that everything is properly classified and recorded in the proper period so some specific issues in the selling function would be sales returns and allowances again because that's a way that um you can you can kind of like stuff sails into one period and then allow them to return the next so you're bumping up your sales at the end of December giving them an open window to return everything in January so Auditors do look at sales returns and allowances um for materiality and for occurrence and then it also could be people could could use sales returns and allowances to cover their their tracks of um stealing cash so again a customer pays you divert the cash into your own account and then you issue them a credit memo so that they so that the customer never sees it on their statement they believe everything is fine but really use the the the person who is handling that accounts receivable stole the cash um cash receipts obviously again because cash is something that couldn't can be stolen so the auditor needs to look at those internal controls to make sure everything's working as it should so that pre-listing of cash receipts by again an independent person is a good control then that gets deposited and then the the record of it is the recording of it into the general ledger is by you know somebody else a different person there's a segregation of Duties and then it's nice to have that independent verification to then have like an accounting manager or an assistant controller or an internal auditor somebody else actually reconcile the cash account so then they can take it you know all the way from that pre-listing of cash receipts into the cash reset into the cash account into the into the actual bank account um so then there can be lapping where again this would be fraud for somebody who works in the accounts receivable department where they steal money and then they use the next cash receipt to cover that cash shortage so they're so they're constantly kind of covering their frog fraud with the next check um but again you'd have to keep that going for it to work or eventually the customer is going to catch on that that their their cash but they paid to the company wasn't properly applied um uncollectible accounts is again another another area where you could cover fraud right write things off as uncollectible when really they did pay and and somebody stole the money um so so Gap requires us to estimate those bad debts and to charge them in the in the period that the seal was generated so again it's always an estimate so then the Auditors are going to come in and and kind of look through that whole process and and definitely look at everything that was written off to see was it properly approved do they show evidence that the the it was uncollectible they tried to collect it couldn't do it they maybe um did the company declare bankruptcy and you can prove that and the whole point is to get um our accounts receivable to their net realizable value that's on the balance sheet so that would be your accounts receivable last year allowance run collectible accounts is going to give you that realizable value of accounts receivable so that is kind of auditing the sales and the accounts receivable process um just as a you know more of a general overview of that whole process