AUDIT OF THE

SALES AND
COLLECTION CYCLE:
TESTS OF CONTROLS
AND SUBSTANTIVE TESTS
OF TRANSACTIONS
CHAPTER 14

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 CHAPTER 14 LEARNING OBJECTIVES

14-1 Identify the accounts and the classes of transactions in the sales
and collection cycle.
14-2 Describe the business functions and the related documents and
records in the sales and collection cycle.
14-3 Understand internal control, and design and perform tests of
controls and substantive tests of transactions for sales.
14-4 Apply the methodology for controls over sales transactions to
controls over sales returns and allowances.

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 CHAPTER 14 LEARNING OBJECTIVES

14-5 Understand internal control, and design and perform tests of

controls and substantive tests of transactions for cash receipts.
14-6 Apply the methodology for controls over the sales and collection
cycle to controls related to uncollectible accounts receivable.
14-7 Understand the effect of tests of controls and substantive tests
of transactions on substantive tests of details of balances.

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 OBJECTIVE 14-1
Identify the accounts and
the classes of transactions
in the sales and collection
cycle

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 FINANCIAL STATEMENT CYCLES AND RELATIONSHIPS
AMONG CYCLES

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 ACCOUNTS AND CLASSES OF TRANSACTIONS IN
THE SALES AND COLLECTION CYCLE
There are five classes of transactions in the sales and collection
cycle:
1. Sales (cash and sales on account)
2. Cash receipts
3. Sales returns and allowances
4. Write-off of uncollectible accounts
5. Estimate of bad debt expense
The way accounting information flows through the various accounts in the
sales and collection cycle is shown in Figure 14-1.

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 CLASSES OF TRANSACTIONS

1 2

5
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OBJECTIVE 14-2
Describe the business
functions and the related
documents and records in
the sales and collection
cycle.

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 BUSINESS FUNCTIONS IN THE CYCLE AND There are eight
RELATED DOCUMENTS AND RECORDS
business
functions within the
sales and collection cycle:
1. Processing customer
orders
2. Granting credit
3. Shipping goods
4. Billing customers and
recording sales
5. Processing and
recording cash receipts
6. Processing and
recording sales returns
and allowances
7. Writing off uncollectible
accounts receivable
8. Providing for bad debts
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 1

5
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 OBJECTIVE 14-3
Understand
internal control,
and design and
perform tests of
controls and
substantive tests of
transactions for
sales.

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 METHODOLOGY FOR DESIGNING TESTS OF CONTROLS
AND SUBSTANTIVE TESTS OF TRANSACTIONS FOR SALES

The methodology for this process is shown in Figure 14-2.

1. Understand Internal Control—Sales: To gain an understanding, the
auditor can use the client’s flowchart or other documentation and perform
walkthrough tests. A flowchart is shown in Figure 14-3 on page 454.

2. Assess Planned Control Risk—Sales: There are four steps to this process:
1. Determine a framework for assessing control risk, which is provided by the
transaction-related audit objectives. (menentukan kerangka kerja untuk menilai
resiko pengendalian terkait transaksi)
2. Identify KEY INTERNAL CONTROLS and deficiencies for sales.
3. Associate the key internal controls and deficiencies with the audit objectives.
4. Assess control risk for each objective by evaluating controls and deficiencies.

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FLOWCHART OF SALES AND COLLECTION CYCLES

Dokumentasi untuk
memahami fungsi bisnis dalam
siklus penjualan dan
penagihan, pengendalian
internal (Control Activities)
dalam key control siklus dan
defisiensi, sebagai dasar untuk
menilai risiko dan
perancangan pengujian
pengendalian dan subtantif
transaksi

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Copyright © 2017 Pearson Education, Ltd. 14-14
*Please see on Element of COSO Framework (Chapter 11)

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METHODOLOGY FOR DESIGNING TESTS
OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR SALES (CONT.)
3. THE KEY CONTROL ACTIVITIES for sales:
• Adequate Separation of Duties—Pemisahan tugas yang tepat
membantu mencegah salah saji karena kesalahan dan penipuan.
• Proper Authorization—The auditor is concerned about authorization
at three points:
1. Credit must be properly authorized before a sale takes place.
2. Goods should be shipped only after proper authorization.
3. Prices, including basic terms, freight, and discounts, must be authorized.
• Adequate Documents and Records—May be paper or electronic.

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 METHODOLOGY FOR DESIGNING TESTS
OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR SALES (CONT.)

3. The key control activities for sales (cont.):

• Pre-numbered Documents—membantu mencegah kegagalan dalam
penagihan serta penyamaan antara penagihan dan pencatatan.
• Monthly Statements—This is a useful control because it encourages
customers to respond if their balance is incorrect.
• Internal Verification Process— Can be manual or computerized.
4. Determine Extent of Tests of Controls—auditor menilai risiko
pengendalian dan menentukan tingkat pengujian pengendalian.

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A sample matrix is included in Figure 12-3

Components of the Matrix include:

1. Identify audit objectives.
2. Identify existing controls.
3. Associate controls with
related audit objectives
4. Identify and Evaluate
Control Deficiencies,
Significant Deficiencies, and
Material Weaknesses

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 METHODOLOGY FOR DESIGNING TESTS
OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR SALES (CONT.)
A. Design Tests of Controls for Sales—Tests of controls for sales are
illustrated in Table 14-2 on page 457.
B. Design Substantive Tests of Transactions for Sales—Substantive tests
are designed for each transaction-related audit objective, including:
• Recorded Sales Occurred— There are three types of possible misstatements:
1. Sales included in the journals for which no shipment was made
2. Sales recorded more than once
3. Shipments made to nonexistent customers and recorded as sales
• Existing Sales Transactions Are Recorded—This is less likely to be tested
because the risk of overstatement of sales is more likely than
understatement.

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CONTOH PENGUJIAN PENGENDALIAN DAN
SUBSTANTIF TRANSAKSI PENJUALAN (P. 497)

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 METHODOLOGY FOR DESIGNING TESTS
OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR SALES (CONT.)

Design Substantive Tests of Transactions for Sales (cont.)

• Direction of Tests—The direction of the test fulfills different
objectives:
• Tracing—From source documents to the journals tests for omitted
transactions (completeness objective)
• Vouching—From the journals back to the source documents tests for
nonexistent transactions (occurrence objective)

The direction of tests related to sales is shown in Figure14-4.

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 TRACING PROCESS

VOUCHING PROCESS

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 METHODOLOGY FOR DESIGNING TESTS
OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR SALES (CONT.)

Design Substantive Tests of Transactions for Sales (cont.)

• Sales Are Accurately Recorded—Auditor concerns:
• Shipping the amount of goods ordered
• Accurately billing for the amount of goods shipped
• Accurately recording the amount billed in the accounting records
• Sales Transactions Are Correctly Included in the Master File and
Correctly Summarized
• Recorded Sales Are Correctly Classified
• Sales Are Recorded on the Correct Dates

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 METHODOLOGY FOR DESIGNING TESTS
OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR SALES (CONT.)
Summary of Methodology for Sales:
• Transaction-related audit objectives
• Key existing controls
• Tests of controls
• Deficiencies
• Substantive tests
Design and Performance Format Audit Procedures—Properly
designed and formatted audit programs do the following:
• Eliminate duplicate procedures
• All procedures on any one document are completed at the same time
• Enables the most effective order in which to perform procedures

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 OBJECTIVE 14-4
Apply the methodology for controls
over sales transactions to controls
over sales returns and allowances.

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 SALES RETURNS AND ALLOWANCES

Transaction-related audit objectives are essentially the same for

credit memos as those for processing sales, with two notable
differences:
1. First is materiality. Sales returns and allowances are often so
immaterial that auditors can ignore them.
2. The second is emphasis on the occurrence objective (menekankan
pada sesuatu kejadian). Auditors usually emphasize testing recorded
transactions to uncover any theft of cash in the collection of accounts
receivable that was covered up by fictitious sales returns or
allowances.

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 OBJECTIVE 14-5
Understand internal control, and
design and perform tests of controls
and substantive tests of transactions
for cash receipts.

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 METHODOLOGY FOR DESIGNING TESTS OF
CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR CASH RECEIPTS

Auditors use the same methodology for tests of controls and

substantive tests of transactions for cash receipts as they use for sales:
• Determine key internal controls for each audit objective.
• Design tests of control for each control used to support reduced control
risk.
• Design substantive tests of transactions to test for monetary
misstatement for each objective.
The control risk matrix for cash receipts is presented in Figure 14-5 on page
466. Key internal controls and common tests of controls are shown in Table
14-3 on page 465. The audit program is shown in Figure 14-6 on page 467.

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 METHODOLOGY FOR DESIGNING TESTS
OF CONTROLS AND SUBSTANTIVE TESTS OF
TRANSACTIONS FOR CASH RECEIPTS (CONT.)

Determine Whether Cash Received Was Recorded—It is difficult to detect theft if

cash when it occurs before the cash is recorded. Prenumbered remittance
advices and prelists of cash receipts are usually tested against journals, but this
is effective only if the prelist was prepared when the receipt was received.
Prepare Proof of Cash Receipts—Total cash receipts recorded in the journal for
a specific period is compared with the amount of cash deposited in the bank
during the same period.
Test to Discover Lapping of Accounts Receivable—Lapping is postponing entries
for cash receipts to conceal an existing cash shortage. This can be easily
prevented by adequate separation of duties.

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 OBJECTIVE 14-6
Apply the methodology for controls
over the sales and collection
cycle to controls related to
uncollectible accounts receivable.

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 AUDIT TESTS FOR UNCOLLECTIBLE ACCOUNTS

Similar to sales returns and allowances, the auditor’s concern in the

write-off of uncollectible accounts is the possibility that write-offs are
used to cover up embezzlement of cash receipts.
The auditor is also concerned with the balance-related objective of the
realizable value of net accounts receivable. Two controls that address
this issue:
• The preparation of a periodic aged accounts receivable trial balance
for review and follow-up by appropriate management personnel.
• A policy of writing off uncollectible accounts when they are no longer
likely to be collected.

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 OBJECTIVE 14-7
Understand the effect of tests of
controls and substantive tests of
transactions on substantive tests
of details of balances.

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 EFFECT OF RESULTS OF TESTS OF CONTROLS AND
SUBSTANTIVE TESTS OF TRANSACTIONS

The results of the tests of controls and substantive tests of transactions

have a significant effect on the remainder of the audit.
If the test results are unsatisfactory, it will be necessary to do additional
substantive testing.
The most significant effect of the results of the tests of controls and substantive
tests of transactions in the sales and collections cycle is on the year-end audit
test (direct tests e.g., confirmation process).
The type of confirmation, the size of the samples, and the timing are all affected.

The major accounts in the sales and collection cycle and the types of tests
are illustrated in Figure 14-7.

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DILAKSANAKAN
PADA INTERIM DILAKSANAKAN
AUDIT PADA INTERIM
AUDIT

DILAKSANAKAN
PADA YEAR-END
AUDIT

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