AUD - Notes Chapter 4

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Transaction Cycles (4B-3)
TIP PIE ACDO – whole chapter 4
Revenue cycle – includes sales revenues, receivables and cash receipts
Sales (serially number documents are PAID TIP)
1. Preparation of sales order – a serially numbered sales order is prepared and sent to the
credit department
for approval
2.Credit approval – valuation assertion, credit department determines (ARC)
3.Shipment – Shipping department prepares a serially numbered bill of lading (ARC)
4.Billing – Billing dept. prepares serially numbered sales invoice. Shipping documents, sales
orders, and
invoices are compared to ensure that all shipments were based on customer orders and
properly billed.
The invoice is then sent to the customer and A/R dept. (ARC)
5.Accounting – the sale is entered into the sales journal and a receivable is recorded (ARC)
Accounts receivable
1. Sales
2. Collection of cash receipts
3. Uncollectible receivables – an aging schedule is prepared and sent to the credit department
for use in
carrying out its collection program. Auditor observes the preparation of aging schedule to
support
assessing control risk below maximum
4. Sales returns – a serially numbered receiving report may be used as a sales return slip.
Once the return
is approved, the related receivable is eliminated
Cash receipts
1. Collection – incoming mail must be opened by a person who does not have access to the A/R
ledger.
One receipt copy should be sent to cashier (or treasury) for bank deposit. Another copy sent
to A/R dept.
for entry into the A/R subsidiary ledger. A third copy should be sent to acctg dept. for entry
into the
general ledger
Testing controls for Sales
• Inquire about credit procedures for new customers (valuation) (ARC)

• Compare sales journal to subsidiary ledgers

• Inspect a sample of prenumbered shipping documents and

- agree to sales order (existence)
- account for prenumbered (completeness)

• Vouch a sample of sales invoices, trace a sample of shipping documents

• Inspect customer exception file and disposition (existence, completeness, rights and

valuation)

• Send confirmations – follow up on error reports (rights and obligations)

• Test cutoff

• Test adequacy of uncollectible accounts

Expenditure cycle
Purchases
1.Purchase requisition – the dept. needing an asset or services sends an approved serially
numbered
requisition to the purchasing dept
2. Purchase orders – obtain competitive bids from various suppliers to make sure that the
best price is
obtained. Use prenumbered purchase orders
3. Receipt of goods or services- it is preferable that the copy not indicate the quantity
ordered (blind copy),
thus the receiving dept is forced to count the goods upon arrival