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AUDIT OF THE SALES AND COLLECTION CYCLE

AUD 339

LMM2021

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KEY POINTS – CONTROL ACTIVITIES

  1. Physical controls
    • Relates to the custody of assets
    • Aims at restricting access to assets (only authorized personnel have access)
    • Eg: inventory/stocks and cash
  2. Authorization controls
    • All transactions should require approval or authorization by a responsible officer whose duties and authorization limits are clearly defined
  3. Segregation of duties
    • To separate the duties of various individuals so that no one is in a position to record and process a complete transaction
    • Reduce the risk of fraud and error
    • There should be a division of responsibilities for:
      • Authorizing or initiating the transaction
      • The physical custody and control of assets involved
      • Recording the transaction

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LMM2021

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Cont.

  1. Supervision controls
    • Responsible officers should supervise on a day-to-day work in carrying out and recording of transaction
    • Eg: independent or internal checking of the work performed by junior staff to ensure the completeness and accuracy of records
  2. Documentation
    • Should be sufficiently (multicopy) and appropriately prepared by responsible personnel
    • Should be in a prenumbered form (serial number) to avoid any duplication of recording or incomplete recording (missing or misplaced documents)

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LMM2021

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Audit of Revenue Cycle

LMM2021

Business functions:

Order entry

(Sales dept)

Acceptance of customers orders into the system in accordance with management criteria (approved sales order & check the authenticity of the order)

Credit authorization

(Credit dept)

Appropriate approval of customers orders for creditworthiness (new & existing customers); done by separate department

Shipping

(Warehouse)

Shipping of goods that has been authorized (attach also shipping document and customer-signed form)

Billing

Ensure that all goods shipped and billed at authorized price (sending sales invoice to customer)

Cash receipts & Accounts receivables

All cash receipts are properly identified and promptly deposited at the bank.

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Internal control – Sales and Collection Cycle

LMM2021

Functions

Control procedures

Possible misstatements

Ordering

  • Approval sales order
  • Checking credit limit
  1. Customer background checking and credit limit must be approved
  2. Prenumbered (serially numbered) sales order and duplicate copy is retained
  3. Sales order has been approved and authorized
  1. Sales are made to fictitious customers and may increase unnecessary debt to the company
  2. Missing sales orders might not be detected which resulting in non-recording of sales transactions
  3. Fictitious order may be recorded or errors might not be detected

Shipping and Invoicing

  • Preparation of despatch documentation
  • Despatch of goods (shipment)
  • Billing the customer
  1. Shipping document (despatch notes) and sales invoices must be prenumbered and are accounted for
  2. Shipping documents and invoices are approved by responsible officer
  3. Invoices are charged based on authorised price-list
  4. Acceptance of goods by customers (customers acknowledgment)
  5. Duplicate copies of invoices are retained
  6. Sales order cross-referenced to shipping document
  7. Separation of duties between receiving orders, authorizing, delivering goods and billing
  8. Monthly statement is prepared and sent to each customer (reconciliation purpose)
  1. May result an understatement of sales amount due to missing sales invoices
  2. Fictitious sales transactions may be recorded or goods are issued for unauthorized orders
  3. Prices are incorrectly stated in the invoice which may bring loss to company
  4. Customers may deny that they receive the goods or the goods were sent to wrong customer
  5. Unable to trace transactions occurred thus no proof for future reference
  6. Error of unrecorded sales or wrong type and quantity could be delivered to customers
  7. Misappropriation of collection can be made by staff in charged or manipulation of the accounting records and documents may occur
  8. Unable to trace any error because there is no notification of the current balance for the customers to check

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Example: Audit of Revenue Cycle

LMM2021

No.

Weaknesses

Possible effects

Recommendations

1

No checking was made by the credit controller on customers’ orders.

Running the risk of selling to customers who are not creditworthy, thus may incur higher bad debts.

Customers background checking and their creditworthiness should be checked before further process.

2

The despatch notes were not compared with customers’ orders.

Wrong type and quantity of goods could be delivered to customers.

The goods should be inspected and matched against the orders before making any delivery.

3

There is no acknowledgement by customer upon the arrival of the goods.

The customer might deny that they received the goods or the goods may be delivered to wrong customer.

Customer-signed copy should be enforced to avoid any misunderstanding .

4

The invoices are just checked without any indication of approval before the recording is made.

Company’s sales and debtors may be understated or overstated.

The invoices should be approved and signed by Encik Sani before posting them to the ledger.

5

No monthly statement is prepared and sent to every customer.

Difficult to trace any discrepancies that may occur.

The company should send ‘monthly statement’ to notify of the current balance.

6

No proper segregation between handling cheques received and accounting functions such as posting invoices to debtors’ accounts and posting of cash/cheques to debtors/sales ledger.

Company may lose cheques or cash received and debtors may be misstated if fraudulent activity is done.

The company should have different persons to handle various tasks to ensure efficient of work done.

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LMM2021