Professional Documents
Culture Documents
2024 - For Merge1
2024 - For Merge1
2024 - For Merge1
Cash sales often constitute a substantial part of collection of a business organization. Most of the
functions relating to cash handling are the responsibility of finance department, under the direction of
treasurer .These functions include handling and depositing of cash receipts of cash ;signing checks;
investing idle cash; and maintain custody of cash, marketable security and other negotiable asset.
The functions of finance department and accounting department should be integrated in a manner that
provides assurance that
1. All cash should have been received was in fact received, recorded accurately, and deposited
promptly.
2. Cash disbursements have been made only for authorized purpose and have been properly recorded
examining whether the authority to execute sales. receive the payment, and deliver the
goods in assigned to different persons;
examining whether there is a system of maintaining up to date price lists and of verifying
the prices to be charged with such price lists;
examining whether there is a system of proper authorization of discounts and refunds to be
given to customers; and
examining whether cash receipt vouchers are pre – numbered, and whether the unused
cash receipt vouchers are kept under the custody of a responsible official.
You have to apply the following substantive procedures in auditing cash sales:
check the prices charged, docents allowed, and rates of sales tax charged, as shown in the
cash receipt vouchers to ensure that they are proper and duly authorized;
check the arithmetical accuracy of cash receipt vouchers
compare the copies of the cash receipt vouchers with the daily cash sales summary sheet;
check the arithmetical accuracy of the daily cash sales summary sheets and the entries in
the cash receipt journal;
if the cash sales are recorded through mechanical cash registers, compare the licked-in
totals provided by the cash register with the recorded receipts in the cash receipt journal;
and
examine the classification of cash sales to ensure that the credit is recorded to correct
accounts.
5.2.4 Auditing credit sales and cash collections from Credit Sales.
An essential part of the auditor’s task is identifying weaknesses in controls that increase risk of fraud. In
auditing cash receipts, the auditor has to collect sufficient audit evidence to obtain reasonable
assurances on the following assertions:
(1) occurrence: the receipts recorded in the accounts represent amounts actually received by
the organization during the period under audit.
(2) completeness: the receipts that took place during the period under audit have been
recorded in the books of accounts.
(3) measurement: this includes:
(a) cash receipts have been recorded at appropriate amounts.
(b) receipts have been properly classified between revenue and capital and further
under appropriate account heads. for example, if certain receipts represent income
of future periods, they have to be classified as income received in advance.
(c) cash receipts have been arithmetically accurate.
(4) presentation and disclosure: this includes the following essential points:
(a) cash Receipts have been properly classified and disclosed under appropriate
account heads in the financial statements.
(b) the disclosure of cash receipts in the financial statements is in accordance with
recognized accounting principles and relevant statutory requirements.
The audit procedures you apply should be designed to help you collected sufficient relevant audit
evidence about the reliability of cash receipts. You will be able to achieve this by applying the following
steps:
studying the accounting system and internal controls in relation to receipts and evaluation them
through compliance testing procedures.
testing transactions relating to cash receipts and applying analytical procedures.
Section 6.2 Performing Audit for Receivables
Below are the audit procedures applied by auditors to achieve the audit objectives of receivables and
sales.
Verify Accuracy of Accounts Receivable Trail Balance and Agreement with General Ledger Control.
Apply analytical procedures.
Confirm accounts receivable.
Vouch recorded receivables to supporting documentation.
Perform sales cutoff test
Examine subsequent collections
Vouch aged trial balance to supporting documentation.
Compare statement presentation with GAAP.
Below are the audit procedures applied by auditors to achieve the audit objectives of receivables and
sales.
Verify Accuracy of Accounts Receivable Trail Balance and Agreement with General Ledger Control.
Apply analytical procedures.
Confirm accounts receivable.
Vouch recorded receivables to supporting documentation.
Perform sales cutoff test
Examine subsequent collections
Vouch aged trial balance to supporting documentation.
Compare statement presentation with GAAP.
Each audit procedure is discussed in the following paragraphs.
Verify Accuracy of Accounts Receivable Trial Balance And Agreement with General Ledger Control
Accounts receivable trial balance is a manual listing or computerized printout of individual customer
balances in the accounts receivable ledger. You have to check if the trial balance agrees with the
accounts receivable control in the general ledger. An accounts receivable aging analysis is useful in
evaluating the adequacy of the allowance for doubtful accounts. Subsequent remittance by the
customer is the best evidence of collectibles at the balance sheet date.
Analytical procedures are related to the existence, completeness and valuation of receivables.
The confirmation letter is prepared by the client staff. But you must control the mailing of the
confirmation requests. To maintain control, you may either mail the forms directly or carefully supervise
the client's mailing of the confirmations. For positive confirmation requests, a self-addressed envelope is
included with the customer statement and confirmation requests to assure that customer replies are
received directly by the auditor. Sample confirmation of both positive and negative are presented
below.
As you receive the replies, you have to analyze them to clear all exceptions. Many exceptions consist of
goods or remittances in transit, and assuming proper cutoff, do not require audit adjustment. You have
to explore in depth those exceptions that are indicative of genuine disputes concerning prices,
discounts, allowances, or returns.
For customers not responding to the initial requests for positive confirmations, you should mail second
and possible third requests. In the absence of replies to second and third requests, you have to apply
alternative procedures. Such procedures may be in the form of examining billing and shipping
documents, or remittance advice in support of subsequent collections. If customers cannot confirm
balance because the sales and accounts receivable systems restrict information to transactions, you
have to consider confirming selected transactions with these customers.
In addition to completeness, existence, and valuation, you must gather evidence in support of proper
presentation and adequacy of disclosure relative to sales revenue and trade accounts receivable. Credit
balances in customers' accounts and non-trade receivables are best detected through inquiry of
management. To support your inquiry, you have to analyze the accounts receivable subsidiary ledger as
part of the confirmation process. Substantive testing of trade accounts receivable provides evidence in
support of operating revenue transactions. You are also expected to apply substantive procedures to
miscellaneous revenues. The first step in auditing miscellaneous revenues is to perform analytical review
procedures. These consist of comparing balances in the accounts with the prior year, for both amount
and source of revenue.
This test provides evidence primarily about the existence of receivables. Besides, the supporting
documentation also provided evidence concerning the gross claim on the customer (valuation
assertion), and that the client bolds a legal claim on the customer for payment (rights assertion), and
that the client holds a legal claim on the customer for payment (rights assertion)
The basis for recognizing sales normally is the date of shipment, but when goods are shipped F.O.B (fee
on board) destination, the seller may arbitrarily add several days to the shipping date,
Since legal title does not pass in such case until the buyer receives the goods. The sales cutoff test
usually in made as of the balance sheet date. The test involves the following:
examining shipping documents for several days before and after the cutoff date to determine
the date and terms of shipment.
tracing shipping documents to the sales and inventory records to establish that the entries are
made in the correct accounting period.
inspecting invoices for a period of time before and after the cutoff date to ascertain the validity
and propriety of the shipments and corresponding entries.
inquiring of management about any direct shipment by outside suppliers to customers and
determining the propriety of related entries.
If you have assessed control risk as high, there is a possibility of fictitious sales. For example, unordered
goods may be shipped to a regular customer shortly before the statement date, with the subsequent
return not made and booked until the following period. If the cut off test shows you material errors in
recording year-end sales, you should request the client to make the necessary adjustments.
This test provides evidence concerning the completeness and existence assertions for the accounts
receivable.
The best evidence of collectibles is the receipt of payment from customer, prior to actual receipt; the
collectibles of an account can only be estimated. The client may receive collections on prior year's
receivables between the balance sheet date and the conclusion of your examination. Thus, you have to
compare such collections back to balances outstanding at the statement date to establish the
collectibles of receivables.
This test provides evidence as to the existence and valuation of accounts receivable assertions. This test
also provides evidence about the completeness of accounts receivable.
The provision for bad debts is an accounting estimate made by management that involves both
objective and subjective considerations. Your responsibility is to judge the reasonableness of the
provision and the resulting fairness of the allowance account. In making this assessment, you should
evaluate the controls over the granting of credit and the control over the write-off of bad debt accounts.
If the internal control over these areas is strong, the related control risk is low. Thus, you would need
less evidence. However, if control risk is high, you need to gather more evidence to substantiate your
test.
In carrying out an audit of sales, your aim, as an auditor, is collecting sufficient appropriate audit
evidence to reasonable assuring yourself about the following assertions:-
1. Occurrence: The sales recorded in the books of account represent the exchange of goods
for cash, receivables or other consideration during the period under audit. In this context,
it is important to understand at what point of time sales should be recognized in accounts.
2. Completeness: The sales made during the period under audit have been recoded in the
books of account
3. Measurement: Sales have been recorded at appropriate amounts. To satisfy this audit
objective sale should be properly classified in to different categories and arithmetical
accuracy has been maintained while recording the books of account.
4. Presentation and disclosure: Sales have been properly classified and disclosed under
appropriate account heads in the financial statements in accordance with recognized
accounting principles and relevant statutory requirements.
Study the accounting system and internal control relating to sales and evaluating them through
compliance procedures.
Perform substantive procedures through tests of transactions relating to sales and analytical
procedures. The auditor also examines the presentation and disclosure of sales in the financial
statements.
7.2.4 Substantive Procedures
You will recall that substantive procedures are procedures you apply to examine the completeness,
validity, and accuracy of an account balance. In auditing sales, the following are the most common
substantive procedures applied in auditing sales:.
check additions of the sales day book and sales returns day book.
check the posting of individual invoices to the nominal ledger and the control account.
check entries in the sales day book and sales returns day book to original invoices, credit
notes, dispatch notes, and vice versa.
b) Invoices and credit notes:
check copy sales invoices and credit notes with the sales day books and sales
ledger accounts. Check analysis of sales day books where appropriate and
d) General
test the year end control account reconciliation, checking back to source documentation
such as sales invoices, cash and returns records. Ensure that any reconciling items are
dealt with properly.
f) Analytical procedure: You should apply analytical procedures focusing on the following:
fluctuations in sales levels: fluctuations, particularly around the year end can be
identified by comparing levels of sales throughout the year on a month by month basis,
or comparing the sales in the last month of the year to sales in the first month of the
next year.
cut off problems: an increase just before the year end with low sales after year end may
indicate to maximize reported profits. thus, you should checking large items in the last
month and first month of the next period to ensure that goods reported as sold are
delivered to the buyer before the year end.
g) Disclosure: Sales revenue must be disclosed by class of business and geographical market.
You may have noted that the test of control and substantive procedures noted above sometimes
appear to be very similar. Remember that we have said that one test can serve both as a test of
control and as a substantive procedure where, for example, an invoice is checked for authorization
(test of control), it can also be checked for the accuracy of pricing (sustentative procedure). This
does not mean that tests of controls and substantive procedure are interchangeable! It is vital that
you understand the conceptual difference between the two types of test.
In both the case of manufacturing and trading enterprises, inventories generally constitute a significant
proportion of the total assets. Audit of inventories is, therefore, an important part of an independent
financial audit.
On the basis of his evaluation of the effectiveness of the internal controls, the auditor carries out
substantive procedures in relation to inventories. These substantive procedures include the following:
There is a considerable diversity regarding the records maintained by different enterprises in respect of
inventories. Some enterprises maintain detailed records in the form of stores / /stock ledgers. Some
other enterprises maintain only the quantitative record of receipts, issues and balances on a perpetual
basis in respect of each major item. Many enterprises, especially the smaller ones, do not maintain
perpetual inventory records; they just maintain the basic records relating to purchases and sales as also
statements of periodic stocktaking.
The auditor's examination of records relating to inventories depends upon the nature of records
maintained by the enterprise under audit. Where the enterprise maintains inventory records showing
quantities and values of inventories on a perpetual basis, the auditor examines such records (on a
sampling basis). Where such records are not maintained, the auditor suitably extends his other
procedures, i.e., review / observation of physical verification and analytical procedures.
Physical verification (or physical stock-taking) of inventories is the responsibility of the management of
the enterprise. However, since the closing stocks are usually determined on the basis of physical
verification to satisfy himself that the physical verification was carried out properly. In any case, the
auditor needs to review the procedures, work sheets and the follow-up action on the physical
verification of inventories carried out by the management.
It is the responsibility of the management of the enterprise to carry out physical verification of
inventories. It is for the auditor to decide whether he would observe the physical verification and, is so,
to what extent. However, where the inventories are materials and the auditor is placing reliance upon
the physical verification by the management, it may be appropriate for him attend the stock-taking. The
extent of the auditor's attendance at stock-taking depends on his assessment of the effectiveness of
internal controls, examination of the records maintained by the enterprise, and the results of analytical
procedures.
The auditor evaluates the effectiveness of stock-taking procedures by conducting test counts of
inventories. For this purpose, the auditor selects a sample of inventory items and accounts them to test
the accuracy of the counts performed by the stock-taking personnel.
Though the auditor may or may not observe the physical verification of inventories carried out by the
management depending upon the results of his other audit procedures, he, in any case, the auditor
must review the work sheet and should follow-up the fiscal verification.
In conjunction with the audit of fixed assets, you should also obtain evidence about the related accounts
of depreciation expense, accumulated depreciation, and repairs and maintenance expense.
The creditor's ledger contains individual accounts of suppliers from whom materials or goods have been
purchased or services received. In carrying out an audit of trade liabilities, the auditor aims at collecting
sufficient appropriate audit evidence to reasonably assure him/her self regarding the following
assertions:
a) Obtain a schedule of the trade payable with appropriate age analysis and check this with the
control account and the purchase ledger.
b) Debit and credit balances should be separated, debit balances being included the receivables
( this is known as grossing up)
c) Review the individual accounts with the largest throughput of transactions during the period
( not necessarily the largest balances at the year end)
d) Review the year-end cut-off procedures for purchases.
e) Review the internal control over the purchases systems which ensures that all goods received
are properly recognized as liabilities of the company.
f) The following should be considered during the tests of individual balances:
I. Is the balance made up of specific items outstanding within a reasonable period?
II. Have all the items been authorized for payment?
III. Does the amount agree or can it be reconciled with supplier's statements?
IV. Consider the need to perform a confirmation of accounts payable.
V. Review payments to payables just after the year end.
g) Perform analytical procedures on payables, comparing age analysis with pervious periods and
payable days.
A most significant document underlying the partnership from of organization is the partnership contract.
You will be particularly interested in determining that the distribution of net income has been carried
out in accordance with the profit-sharing provisions of the partnership contract. You have to verify
whether partners' capital accounts are maintained at prescribed levels and restriction of drawings by
partners to specify amounts are according to the partnership contract. You should also compare the
partners' loan accounts with the partnership contract to determine the treatment by the partners.