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Auditing Sales and Trade Receivables

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Audit ObjectivesThe audit objectives for sales and trade receivables relate to obtaining sufficient evidence about

each significant assertion for the applicable transactions and balances.

The principal audit objectives for these transaction classes and account balances are shown in Table 1.

Sales, Cash Receipts and Sales Adjustment Transactions

Credit Sales Transactions functions:• Accepting customer orders (authenticate, conformance with acceptable terms, stock

availability)• Approving credit (normally entrusted to sales department; due to increase in bad debts

many companies establish separate credit control mechanisms; collect information from agencies, compare order to customer’s order history and credit line, overdue debts)

• Filling and dispatching sale orders (send authorized orders to warehouse for fulfillment; segregate responsibility of dispatch from approval)

• Invoicing customers (all actual deliveries should be invoiced, at authorized prices; segregate invoicing from preceding functions, verify dispatch notes with invoices)

• Recording the sales (sales should normally be recorded upon shipment; sales invoices should be numbered consecutively; monthly statements should be sent to the customer for reconciliation)

Auditing Sales and Trade ReceivablesTable 1: Audit Objectives

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Auditing Sales and Trade Receivables

Cash Receipt Transactions functions• Receive cash (over-the-counter receipts: immediate visual display for the customer, the

amount of cash sale and the amount rendered; print receipt; print and control day’s totals; credit card receipts should be recorded separately and reconciled with cash and total sales; mail receipts should be processed by at least two clerks)

• Deposit cash in bank (sales cash should be deposited intact, i.e. without withdrawing for payments)

• Recording the receipts (access to the accounting records or computer program should be restricted to authorized personnel; in manual systems journalizing the cash receipts and posting the receipt to customer accounts are segregated).

Periodic cash and bank reconciliations should be performed by an employee not otherwise involved in the process.

Sales adjustment functions• Granting cash discounts• Allowing sales returns and allowances• Determining bad debtsProper authorization of all sales adjustment transactions should be given.Proper, detailed and accurate documentation should be usedAuthorization of sales adjustments and handling of cash receipts should be segregated.

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Auditing Sales and Trade Receivables

Developing the Audit Plan

Inherent and control risks• Pressure to overstate sales• Pressure to overstate cash and trade receivables• Errors due to volume• Issues related to the timing of the revenue recognitions• Use of sales adjustment transactions to conceal thefts

Assessment of control riskThis initially involves the design of internal controls and their effectiveness.

SalesThe control risk assessment considerations are shown in Table 2

Cash Receipts The control risk assessment considerations are shown in Table 3

Sales AdjustmentsThe control risk assessment considerations should include tests such as:• Recalculating cash discounts• Inspecting credit memoranda for sales returns for indication of proper approval and accompanying receiving

reports for evidence of the actual return of goods• Inspecting written authorizations and supporting documentation (such as correspondence with the customer

or collection agencies) for the write-off of bad debts

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Auditing Sales and Trade ReceivablesTable 2: Control Risk Assessment-Credit Sales Transactions

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Auditing Sales and Trade ReceivablesTable 3: Control Risk Assessment-Cash Receipts

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Auditing Sales and Trade ReceivablesTable 5b: Substantive Procedures

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Auditing Sales and Trade ReceivablesTable 5b: Substantive Procedures

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