Improve your business with the sales audit process in United States

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what's up audit fans and welcome to today's video this is part two where i'm going to start looking at tests of control activities over sales and also substantive tests over sales so if you haven't seen the first part where i go through sales processes i'll link to that video so you can go back and watch it and then come back and continue on to this one for everybody else you're ready get your pens out let's get into it what's up audit fans dr amanda white here and today we're looking at tests for control activities and substantive tests for the sales process for those people who are new to my channel welcome i teach undergraduate audit at a major australian university to all my regular subscribers hi and thanks for coming back now today we're building on a video about the sales process if you haven't seen that i'll link to it so that you can go back and watch it then come back here okay so if you've already seen part one of this video about sales then you know that in the process of analyzing cells i talked about a number of different control activities and i have most of these control activities here and we're going to design some tests now remember a test of a control is a test whether the control is working or not working i am not looking for substantive errors dollar value misstatements here i'm trying to find find out if the control which is supposed to open or close or do whatever it is has worked every single time over the entire financial period now of course i'm going to need to sample can't test every single control or i might be able to with some new data analytics tools but let's assume we're going to select a sample in all of these tests so while i might just have the test please assume here that i am going to be sampling and your sampling options might be random haphazard block or judgmental i will talk about which sampling method i might choose in each of these examples as well so let's get into my slides here now you can see in blue i've actually written the control activity and i'm going to write the test of the internal control underneath in a different color so that you can see it really clearly um hopefully this orange pen is clear enough i didn't want to use blue and green just in case there are some people who might be blue green color blind so the first one is that we have barcode scanning to bring up the price from a master price list this is a really common internal control you'll see it every time you go to the supermarket self-serve checkout bip that's that barcode scanning process so the idea here is that this way there are no errors in the um internal controls in that people don't can't just type in the price so we've got a couple of different options here but the one i'm going to try is actually a physical test so you could scan a haphazard sample of items and check the price charged matches the master price list now that's great for testing does the control work right now but that doesn't really help us to find out whether control was happening over the entire period or not so you might also select a sample of sales so this is test number one test number two select hap a sample of sales receipts and check the prices charged match the mpl for that date now the reason i say for that date is because the prices change over time think about supermarkets specials all the time so make sure that they charge the correct price on that specific date so that's a good example there for testing that barcode scanning now the second test control i have is that only the store manager can approve a price override or a discount so we've got a couple of different options here maybe i'll write this one in red so it's a little bit easier to see so you could first test would be to observe a cashier and ask them to attempt to override the price and it shouldn't work it shouldn't you just go i can't do it the second one would be to select a sample of sales with discounts and check whether a store manager code was entered okay so that would be a really great one there where you could pick a sample over the entire period look for some discounts or for sales and you could probably do this start doing this using some data analytics tools even something like excel dump all the sales in look at the prices of the items see if you can find any prices that are different and then see if you can find that store override that would be the same if you went to harvey norman or jb hi-fi or best buy or the good guys and you said okay well show me all the tv sales that had a 30 discount show me the store manager approve this sign this now the next one is that the point of sale automatically calculates the total for the transaction this one is really really easy again you pick a haphazard sample so let me do this one in orange only one test here select a haphazard sample of sales and recalculate the receipt and check it matches the system now you might say hang on amanda this looks like a procedure where i'm actually calculating whether a transaction has been recorded accurately right is this the accuracy assertion and there is where i say yes this is where it gets tricky with something that we call dual purpose tests now a dual purpose test is where i'm testing the control and i'm substantively testing at the same time and quite often in modern systems where there's electronic point of sale invoice titling barcode scanning discount calculating with coupons etc then when you test the internal control here you're actually getting substantive evidence at the same time so it's a super efficient test to use and that's a really good option to go down so if you're thinking that sounds like a substantive test well that's because it is both dual purpose as a dual purpose test all right next one when a journal entry is made adjourn or when a payment is made sorry when a payment is made a journal entry is recorded so what we need to do there is we can trace or we can vouch so we can trace a sample of sales check journal is dated or date time stamped at the same time as the receipt so i've started with the receipt and i moved forward to the journal entry and i made sure that those two transactions are recorded at the same time you could also vouch so you could start with the journal and match back to see that the sales receipt is date and time stamped at exactly the same time now that's assuming that they happen at the same time with a big supermarket or something like that they might do batches at the end of the day so rather than every single sale they might have a batch of at midday or at the end of the day when they close the store all of those sales get uploaded so make sure that you understand the process before you check the time stamps and the date stamps on these the next one is credit checks on wholesale customers so there we want to select a sample let's write this down select a sample of credit sales and confirm customers had a had oh that's not a had funds available on credit when the sale was made oops was ah terrible spelling and writing here was made okay so in this one we want to make sure that when the customer ordered their items somebody did a credit check okay now that might be were there funds available we might also check for the uh if there was any signature or was there some sort of stamp or some sort of notation in the system all right so it might be that the order comes online somebody has to check in the system yep they've got credit tick a box enter their initials um it could be happening automatically so the system could be programmed to actually do that check so you might need to check double check the programming that at that time yep there was actually those funds available just in case there was a problem with the automated system that might be needed there now the next one any customer who applies for credit must provide financial statements so there we could easily select a sample of customers and make sure that they had provided that financial information and it had been evaluated so we'd look for um for a sample of customers awarded credit check docs were received and analysis of credit limit oop conducted and approved right normally somebody has to approve credit limits so we're checking to make sure that there's been that credit limit check uh the next one contents of orders must be checked before being shipped to the customer typically we'll see tick tick tick on the packing slip so we could review a sample of pick or pack depending on whether they call it a pick or a pack dock for evidence of item checking all right and you might notice this if you've received an online delivery you've had multiple things and you'll say tick tick tick and then maybe some sort of stamp of approval we don't need to check that they're the right items at this point we just need to make sure that those controls were in place and then the last one check that when delivery is made to a customer the journal entry occurs and again we could do something similar to the previous one where we take a sample of journal entries find the delivery information check the delivery or the tracking system to make sure that that journal entry is after the date that the goods were actually delivered to the customer and not before to make sure that they're not trying to overstate sales um perhaps to make themselves look more attractive so that is all of our processes or examples of how we might test internal controls let's get on to the substantive tests here and i'm not going to write the substantive test because i realize that's probably going to take a long time but let's look at the assertions here so we've got occurrence accuracy completeness classification and cut off now if i'm ranking these generally in terms of which assertions i would say were most at risk to least at risk of material misstatements and say we're generally worried about occurrence accuracy um as those first two issues then cut off then classification and then completeness and that's because businesses are really unlikely to try and understate their revenues they're usually trying to overstate their revenues so let's talk about how we might test the occurrence now i will write some notes but i won't actually write the whole procedure down it's just going to take too long but if i'm testing occurrence i want to vout i want to make sure i start at the end of the transaction the journal entry match it back to the original supporting documentation proof of delivery to the customer shipping documents invoices the original customer order so i want to vouch to prove that the journal entry really is a real transaction when it comes to accuracy i'm going to need to probably when i'm vouching do a whole lot of recalculating of the total of that sale and also comparing that to master price lists and proof of uh the goods that were shipped okay now of course if they just take the cut the good away then and there that's not such a big deal but looking at the prices did we charge them the right price did they get sent the right items so recalculating the line item on the invoice so quantity times price equals the line item and then adding all of those price those totals up to give you the invoice total now completeness with completeness we want to trace we always want to start at the beginning and work forward so we're going to do things like select a sample of customer orders and trace those through the order to the packing document to the shipping confirmation to the invoicing to the journal entries so starting from the beginning because you want to make sure if you ordered 50 you were sent we sent the customer 50 and that um we're charging them for 50 there that's completeness so we want to make sure nothing is missing we also might want to check whether any sales were made but no goods were actually delivered let's make sure that there are no journal entries in that instance now with classification classification is making sure that all the debits and credits are correct so when it comes to classification we might do things like again this is the tracing of the transaction through to the journal but we also want to check that it matches the chart of accounts okay the chart of accounts is a big document that has every single account that we debit and credit within the financial statements so we want to make sure that for this sales transaction we're debiting and crediting correctly now some of these tests can be done together so for example if you're testing occurrence or completeness at the same time with those transactions recalculate them for accuracy with the completeness test you could actually combine the completeness test and the classification test together when you're doing that tracing the same when you're doing cut off so let me just highlight this in a different color here when you're doing this vouching up here for occurrence then what you also do is check the journal is on the correct date okay so that idea of when i'm vouching and i'm starting at the end and i'm going backwards i can make sure that the journal entry and that shipping date match up so that transactions are in the correct period so while it might look like a lot five assertions five procedures um it actually isn't because you are able to double up now in an exam situation for a student i would always recommend writing one procedure per assertion just because it makes it easier to mark it's easier for us to reward marks to you if we can see that you've laid out every single assertion and you've got one procedure even if you say for example with the completeness one here's my completeness test and then for classification i'm going to use the sample from my completeness test and i'm going to do these additional procedures that's always the best way of doing it so that's it it's really a process of understanding the client understanding the controls understanding the business knowing the assertions to be able to design your tests so i hope this video was useful of course there's plenty more in this series to come today we've looked at sales but there's going to be videos on cash accounts receivable purchasing long-term liabilities inventory so stay tuned make sure that you're subscribed of course and i will see you next time