The transaction flow in a client's sales process affects a number of the financial statement accounts, including accounts receivable, allowance for doubtful accounts, bad debt expense, sales, sales returns and allowances, and cash. Generally, an auditor is most concerned with the overstatement of sales and assets, and, therefore, audit procedures for this cycle tend to focus on existence (occurrence) and valuation (accuracy) assertions. See Appendix A for sample documents associated with these a
[blank_start]Accepting and processing[blank_end] orders — Customer orders should be received by sales staff. The details of the order are agreed upon, such as the quantity required, the selling price, and the shipping terms. These details are documented on the sales order form. When the order is received, the availability of the goods in inventory should be verified.
Accepting and processing
Authorizing credit—Before a customer order is forwarded to the warehouse, [blank_start]a credit check should be performed[blank_end]. A credit check should be required for both new and existing customers. New customers should complete a credit application, and sales staff should obtain a credit report from a credit rating agency. If the customer is determined to be creditworthy, the credit manager approves the credit application. The customer is then set up in the accounts receivable master file with the established credit limit. For existing customers with credit terms, the credit available should be checked to prevent customers from exceeding their predetermined credit limit. If the customer's order exceeds the credit limit, the order should not be processed until the credit manager grants special approval.
In order to ensure the appropriate segregation of duties, the sales staff should not be responsible for approving credit. Otherwise, they may accept sales from customers that are not creditworthy to boost sales. Therefore, the credit department should have responsibility for approving credit.
a credit check should be performed
Shipping goods—[blank_start]Once credit has been granted[blank_end], a copy of the approved sales order is sent to the warehouse, so the order can be assembled and shipped to the customer. To ensure the appropriate segregation of duties, order assembly and shipping should not be done by the person who approved the order.
Once the goods have been shipped
Once credit has been granted
Once the good were accepted
Invoicing customers—The receipt of the shipping document in the accounting department serves as verification that the goods have been shipped and triggers the creation of a sequential sales invoice. The invoice is created based on the quantity of goods ordered and shipped per the shipping documents, and on the agreed upon price per the sales order form or pre-approved price list. Once the invoice is prepared, it should be reviewed by an independent person for accuracy.
5. [blank_start]Recording sales and trade receivables[blank_end]—Once the invoice has been created and sent to the customer, it should be posted to the appropriate account in the sales journal and in the accounts receivable sub-ledger in the appropriate accounting period. This updates the accounting records and records the earned revenue. The sub-ledger should be reconciled to the general ledger at the end of each accounting period. The sales journal should be reconciled to the related general ledger accounts. Accounts receivable statements should be sent to customers on a regular basis so discrepancies can be dealt with.
Recording sales and trade receivables
Trading receivables and sales
Processing cash receipts— The cheques should then be sent to the cashier for prompt deposit to the bank. A copy of the pre-listing and the remittance advice is sent to the accounts receivable department for posting to the customer's account. To ensure an appropriate segregation of duties, the person responsible for receiving the cash should have no involvement in the recording of the cash collections within the accounting system
Once invoiced, collection of the cash is expected within the credit period. Cheques received by mail should be prelisted and endorsed for deposit only to the specific account.
The cheques should then be sent to the cashier for prompt deposit to the bank. A copy of the pre-listing and the remittance advice is sent to the accounts receivable department for posting to the customer's account.
The cashier should reconcile the pre-list, the duplicate bank deposit slip, and the cash receipts journal.
To ensure an appropriate segregation of duties, the person responsible for receiving the cash should have no involvement in the recording of the cash collections within the accounting system
A copy of the pre-listing and the remittance advice is sent to the accounts receivable department for posting to the customer's account.
When the order is received, the availability of the goods in inventory should be verified.
A credit check should be required for both new and existing customers.
[blank_start]Writing off uncollectable accounts[blank_end] and providing for bad debts—A review of the accounts receivable aging should be performed regularly by a person independent of the sales and cash receipts functions. Collection activities should be employed over aging accounts. Once an account is determined to be uncollectable, the approval to write off the account should be performed by someone independent of the cash receipt function. Otherwise, a sale could be recorded, the cash collected and stolen, and the related accounts receivable written off as uncollectable