AUDIT OF THE REVENUE AND COLLECTION CYCLE: TESTS OF CONTROLS AND SUBSTANTIVE TESTS OF TRANSACTIONS

REVENUE AND COLLECTION CYCLE

 Consists of activities relating to the exchange of goods and services with customers and the collection of the revenue in cash.
 Classes of Transactions for Trading Concern
A. Sales (cash and credit)
B. Sales Adjustments (discounts, returns and allowances and uncollectible accounts provisions and write-offs)
C. Cash Receipts (collections on accounts and cash sales)
 Typical Accounts Affected
1. Sales
2. Accounts and Notes Receivable
3. Sales Returns and Allowanced
4. Cash in Bank (debits from cash receipts)
5. Sales discounts
6. Allowance for uncollectible accounts
7. Uncollectible accounts expense
8. Inventories (merchandise, finished goods)

Documents Used in the Revenue and Collection Cycle

1. Customer’s Purchase Order
- May be received by telephone, letter, a printed form that has been sent to prospective and existing customers,
though salespeople, or in other ways.
- It provides evidence that a customer actually ordered the goods.
- Purchase order numbers are generally recorded on sales invoices so that auditor can determine the purchase order
to which an invoice relates.
2. Sales Order
- A prenumbered document for recording the description, quantity, and related information for goods ordered by a
customer.
- Frequently used to show credit approval and authorization for shipment
- It contains the seller’s understanding of the sales terms.
- A seller should account for the numerical sequence to help ensure that shipments are made for sales orders and
that all sales are billed.
3. Shipping Document or Bill of Lading
- A prenumbered document prepared to initiate shipment of the goods indicating the description of the
merchandise, the quantity shipped and other relevant data
- The signature of the carrier or the customer on the shipping document provides externally created evidence that
goods have been shipped.
- Sellers should account for the numerical sequence to help ensure that all shipments are recorded as sales.
4. Sales Invoice
- A prenumbered document indicating the description and quantity of goods sold, the price including freight,
insurance, terms and other relevant data.
- It indicated credit terms, shipping terms, and price charged for merchandise.
- Sellers should account for the numerical sequence to help ensure that all sales are recorded.
5. Credit Memo
- Prenumbered document indicating a reduction in the amount due from a customer because of returned goods or
an allowance granted/
- It often takes the same general form as a sales invoice, but it supports reductions in accounts receivable rather than
increases
- It provides evidence that a seller has reduced the amount previously billed to a customer
- Sellers should account for the numerical sequence to help ensure that all credit memos are recorded
6. Remittance Advice
- A document that a customer attaches to a check in payment of an invoice.
- It may be a turnaround document, a part of a check, or a statement identifying the invoices being paid.
- It facilitates recording of cash receipts
- If a customer does not return a remittance advice, the employee opening the mail generally prepares one.
- It usually indicated the date and amount of payment and the invoiced paid.
- Sellers generally file remittance advices by date
7. Uncollectible Account Authorization Form
- A prenumbered document, indicating authority to write an account receivable off as uncollectible
- Sellers should account for the numerical sequence to ensure that all write-offs are recorded
8. Monthly Statement
- A document sent to each customer indicating the beginning balance of accounts receivable, the amount and
date of each sale, cash payments received, credit memos issued, and ending balance due
- A statement mailed to a customer reporting a beginning balance and transactions that occurred during the period.
- If the statement is inaccurate, many customers would contact the seller.

Accounting Records in the Revenue and Collection Cycle

1. Sales Journal
- A journal for recording sales transactions
- Usually indicates gross sales for different classifications, such as product lines, the entry to accounts receivable, and
miscellaneous debits and credits.
- It can also include sales returns and allowances transactions
2. Sales Returns and Allowances Journal
- A journal similar to the sales journal except the merchandisers use it to record returns of merchandised or
adjustments to invoice prices.
3. Cash Receipts Journal
- A journal for recording cash receipts from collections, cash sales, and all other cash receipts
4. General Journal
- A journal in which are recorded all transactions for which a special journal has not been created
- Sales and collections cycles transactions frequently recorded in the general journal include entries to estimate
uncollectible accounts expense and entries to write – off accounts identified as uncollectible
5. Accounts Receivable Master File/Subsidiary Ledger
- A file for recording individual sales, cash receipts and sales returns and allowanced for each customer and
maintaining customer account balances.
6. Accounts Receivable Trial Balance
- A listing of the amount owed by each customer at a point in time.
- Prepared directly from the accounts receivable master file
AUDIT OF SALES TRANSACTIONS
Business Activities under Sales Transactions
1. Accepting sales order
2. Approving credit
3. Filling sales order
4. Shipping sales order
5. Billing customers
Evaluation of Internal Control over Sales Transactions
 Information concerning specific controls over sales transactions is obtained through:
o Inquiry
o Observation
o Review of documentation
Test of Controls over Sales and Receivables
 Assertions
1. Existence or Occurrence: Recorded sales are for shipments actually made to customers
2. Completeness: all sales transactions that occurred are recorded
3. Rights and Obligations: sales recorded represent only sales transactions
4. Valuation or Allocation: Sales are correctly billed and recorded
5. Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in
accordance with PAS/PFRS
 Existence or Occurrence: Recorded sales are for shipments actually made to customers
CONTROLS
1. Recording of sales is supported by customers’ orders,
sales orders approved by credit department and
approved and executed shipping documents.
2. A clerk independent of accounts receivable prepares
and mails monthly statements to customers for all
trade accounts receivable and follows up on any
complaints.
 Completeness: all sales transactions that occurred are recorded
CONTROLS
3. Prenumbered shipping documents are accounted for
to determine that a sales invoice is prepared for all
shipments
4. Prenumbered sales invoiced are accounted for to
determine that all sales are recorded
5. Procedures to ensure timely recording of sales and
proper cut-off are established
 Rights and Obligations: sales recorded represent only sales transactions
CONTROLS
6. Clerk should check sales orders and sales invoices for
terms to determine that transaction is a sale rather
than a consignment.
 Valuation or Allocation: Sales are correctly billed and recorded
CONTROLS
7. For all goods shipped, good are counted and
descriptions and quantities are compared to
quantities and descriptions on sales orders and
shipping documents prior to shipping.
8. Customer credit is approved by a responsible official
prior to merchandise shipment. Although approval of
credit prior to shipment does not guarantee absence
of uncollectible accounts, the procedure reduces the
likelihood of the account becoming uncollectible
9. Sales invoices are checked for:
a. Proper pricing
b. Mathematical accuracy
c. Terms
10. The accounts receivable subsidiary ledger is balanced
to the general ledger control account regularly. The
absence of this control results in the possibility of
TESTS OF CONTROLS
 The auditor examines approved customer order, sales
order, shipping document and copy of sales invoice
for a sample entries in the sales journal
 The documents should bear the required approval
 The description, quantity of goods shipped, name,
address and other details regarding the transactions
should be consistent.
 The auditor can observe whether a clerk
independent of the account receivable bookkeeper
prepares and mails monthly statements and follow
ups any complaints.
 He can also examine files on complaints received for
selected months.
TESTS OF CONTROLS
 The auditor can observe the client performing the
procedure or select a sample of shipping orders and
examine the invoice that bills the sale,
 The presence of a sales invoice copy indicates that
the shipment was billed.
 The auditor can observe the client recording sales if
he is accounting for the numerical sequence of
invoices and determined why any missing invoices
have not been processed.
 The auditor can also select a sample of sales invoice
copies to trace into the sales journal
 The auditor should inquire how procedures are
followed, observe procedures being followed and
inspect report on the last shipments that the shipping
clerk sends to the billing clerk
 Proper cut-off also provides evidence about the
existence of transactions
TESTS OF CONTROLS
 The auditor should observe that the control is being
performed
TESTS OF CONTROLS
 The auditor observed that the control is being
performed and examines a sample of shipping orders
for the signature on the shipping documents that
indicates that the counting and comparison
occurred
 The auditor examines a sample of sales order for
credit approval prior to shipment
 The auditor performs the following:
a. Inquiry about the updating and use of price lists
b. Examine a sample of invoice copies to
determine that they contain a signature
indicating that the price, mathematical
accuracy and terms have been checked
 The auditor observes that it is being performed
 The auditor may also fool the account receivable
subsidiary ledger and compare the total with the
 careless recordkeeping and omission of postings of balance appearing in the general ledger control
sales or payments account

 Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance
with PAS/PFRS
CONTROLS TESTS OF CONTROLS
11. Sales must be properly classified to generate  The auditor can test this control by determining that
accurate segment reporting. Entities may require a the invoice copy contains the signature that
second person to independently review or check the indicated approval on account classifications used.
account coding on invoices

Audit Program for Test of Controls: Sales

 To test for Existence or Occurrence, the auditor tests from accounting records back to underlying documents that indicate that
the transaction occurred.
 To test whether transactions are recorded, an auditor compares prenumbered documents to entries in the accounting records.
 Audit Procedures
A. For a Sample of entries in the sales journal
i. Compare data in the sales journal to approved customer order, sales order, shipping document, and copy of sales
invoice for:
a. Customer order number
b. Invoice number
c. Customer name
d. Date
e. Description of goods
f. Quantity
g. Price
h. Invoice amount
i. Terms
ii. Determine credit approval
iii. Determine that signature are on invoices indicating independent checking for:
a. Proper pricing
b. Mathematical accuracy
c. Terms
iv. Examine signature evidencing recheck of account coding
B. For a sample of shipping documents,
 Examine signatures indicating that for goods shipped, goods are counted, quantities and descriptions of the goods
shipped are compared to quantities and descriptions on sales orders and shipping documents prior to shipping, and
the transactions are recorded in the sales journal
C. Discuss the procedures followed with the person who mails to customers monthly statements for all trade accounts receivable
and follows up on any complaints. Review the client’s correspondence files reflecting resolution of these items.
D. Observe the procedures followed to ensure a proper cutoff of sales at year end.
E. Observe that the accounts receivable subsidiary ledger is balance to the general ledger control account regularly.
F. Examine evidence of accounting for the sequence of sales orders, shipping documents and sales invoices.
 The foregoing tests of controls over sales transactions may reveal the following weaknesses, possible errors and misstatements:
Internal Control Weaknesses / Factors that Examples of Fraud/Error Description of Possible Errors or
Increases the Risk of the Misstatement Misstatements
1. Ineffective board of directors,  Recording of fictitious sales  Recording of unearned revenue
audit committee, or internal without receiving a customer
audit function; undue pressure order or shipping the goods
to meet sales targets; top  Intentional over-shipment of
management action not goods  Early (late) recognition of
conducive to ethical conduct.  Holding the sales journal open revenue – Cutoff error
to record next year’s sales as
having occurred in the current
year  Recording revenue when
 Recording sales when the significant uncertainties exists
customer is likely to return the
goods  Recording revenue when
 Recording franchise revenue significant serviced still must be
when the franchises are sold performed by seller
even though an obligation to
perform significant services still
exists  Overstatement of the amount
 Misstating the percentage of revenue earned
completion of several projects
by a construction company
using the percentage-of-
completion method of revenue
recognition
2. Ineffective billing process in  Recording sales based on the  Recording unearned revenue
which billing is not tied to receipt of orders from customers
shipping information rather than the shipment of
goods
3. Ineffective controls for testing  Inaccurate billing and recording  Recording unearned revenue
invoices, or ineffective input of sales
validation checks and
computer reconciliations to
ensure the accuracy of
databases
4. Inadequate accounting  Recording cash that represents  Recording unearned revenue
manual; incompetent a liability as revenue
accounting personnel
5. Ineffective cutoff procedures in  Recording sales in the wrong  Early (late) recognition of
the shipping department period based on incorrect revenue – Cutoff error
shipping information
6. Aggressive attitude of  Recording sales when the  Recording revenue when
management toward financial customer’s payment is significant uncertainties exists.
 reporting; incompetent chief contingent upon the customer
accounting officer receiving financing or selling the
goods to another party
 Overestimating the percentage  Overestimation of the amount
of completion on project by a of revenue earned.
construction company using the
percentage-of-completion
method of revenue recognition

Test of Controls in an On-Line Accounting System

 Auditors generally may use test data to evaluate the effectiveness of controls.
 In an on-line accounting system, many of the controls are programmed. Hence, when testing controls auditors frequently examine
exception reports.
 Existence or Occurrence: Recorded sales are for shipments actually made to customers
ASSERTIONS & CONTROLS TESTS OF CONTROLS
1. The system allows the recording of sales only when  Use Generalized Audit Software (GAS) to select
supported by approved sales orders and approved sample of entries in the sales journal and to determine
and executed shipping documents. that a sales invoice and bill of lading exists and that
credit has been granted.
 Examine the bill of lading for appropriate signature.
2. The system allows only appropriate personnel to enter  Observed individuals who are entering data.
data.
3. A clerk independent of accounts receivable prepares  Observe procedures and examines follow-up files
and mails monthly statements for all trade accounts
receivable to customers and follows up on any
complaints.

 Completeness: all sales transactions that occurred are recorded

ASSERTIONS & CONTROLS
4. The system produces a daily report on incomplete
transactions
5. Prenumbered shipping documents are accounted for
to determine that all items shipped are billed
6. Prenumbered sales invoices are used and accounted
for to determine that all sales are recorded
TESTS OF CONTROLS
 Inquire about procedures followed.
 Examine a sample reports
 Observe procedure.
 Use GAS to select a sample of shipping documents
and to determine whether an invoice exists for the
shipping documents
 Observe procedures
 Use GAS to determine whether out-of-sequence
entries exist in the sales journal

 Rights and Obligations: sales recorded represent only sales transactions

ASSERTIONS & CONTROLS TESTS OF CONTROLS
7. Terms are determined by the system based on  Use GAS to search for non-routine terms in the sales
quantity ordered and customer account number. file.
Terms can be changed only by sales manager

 Valuation or Allocation: Sales are correctly billed and recorded

ASSERTIONS & CONTROLS
8. For all goods shipped, goods are counted and
descriptions and quantities are compared to quantities
and descriptions on sales orders and shipping
documents prior to shipping
9. Customer credit is approved by reference to a credit
limit or by a responsible official prior to merchandise
shipment.
10. Sales invoices are checked for
a. Proper pricing
b. Mathematical accuracy
c. Terms
11. The accounts receivable subsidiary ledger is balanced
to the general ledger control account regularly.
TESTS OF CONTROLS
 Observe procedure
 For a sample, examine signature on pull-tickets
evidencing performance
 Use GAS to determine that credit was authorized
for a sample of sales.
 Examine exception reports
 Inquire about the updating and use of approved
price lists.
 Use an integrated test facility to test valuation by
entering transactions and determining that for
these transactions proper pricing and terms are
used and that the invoice is correctly computed.
 Use GAS to foot subsidiary ledger

 Presentation and Disclosure: Sales and accounts receivable are recorded to result in presentation and disclosure in accordance
with PAS/PFRS
ASSERTIONS & CONTROLS TESTS OF CONTROLS
12. An independent review is made of account coding  Observe procedure
for recorded sales.  Use GAS to select a sample of invoices
 Recheck account coding

Substantive Tests of Sales Transactions

 In deciding on substantive tests of transactions, some procedures are commonly employed on every audit regardless of the
circumstances whereas others are dependent on the adequacy of the controls and the results of the tests of controls.
 Substantive Audit Procedures for Sales Transactions
Assertions Audit Objectives Audit Procedures
I. Occurrence and Validity A. To determine that recorded 1. Review the sales journal,
II. Rights and Obligations sales are authorized and are general ledger and accounts
for shipments actually made receivable master file or trial
to nonfictitious customers. balance for large or unusual
items.
2. Trace sales journal entries to
copies of sales orders, sales
invoices and shipping
documents.
3. Trace shipping documents to
entry of shipments perpetual
 inventory records.
4. Compare prices on sales
invoices with authorizes price
lists or properly executed
contracts.
III. Completeness B. To determine that existing 5. Trace shipping documents to
sales transactions are resultant sales invoices and
recorded on a timely basis entry into sales journal and
accounts receivable master file
6. Compare dates of recorded
sales transactions with dates on
shipping records or perform
sales cutoff tests.
IV. Valuation or Allocation C. To determine that recorded 7. Recompute information on
sales are for the amount of sales invoice
goods shipped and are 8. Trace entries in sales journal to
correctly billed and recorded sales invoices
9. Trace details on sales invoices
to shipping documents, price
tests and customer’s orders
V. Presentation D. To determine that sales 10. Examine document supporting
transactions are properly sales transactions for proper
classified classification

 Discussion 1 – 5: For sample on entries in the sales journal, compare sales invoice copy, customer order and shipping document
o To test the existence of sales, some auditors examine the sales invoice, the customer’s order, the sales order bearing
credit approval and the shipping document for a sample on entries in the sales journal.
o If an entity has a procedure to accumulate these documents before recording a sale, their accumulation is an
indication that the control was performed.
o Other procedures may include:
 Trace from the entry removing the goods from inventory to the perpetual inventory record
 Examine the cash receipts in payment for the sale
 Confirm the existence of individual transactions with the customers.
 Discussion 6: For a sample of shipping documents, traces sales invoice and entry into sales journal and accounts receivable
subsidiary ledger. Perform cutoff tests
o The auditors may examine the sales invoice and determine that an entry was made in the sales journal and the
accounts receivable subsidiary ledger.
o When testing to determine that all transactions have been recorded, auditors start with a prenumbered document and
trance it into the journals and ledgers.
 Discussion 6: for a sample of sales invoices, examine the customer order and shipping document to determine whether the
transaction should have been recorded as a consignment transaction rather than as a sale.
o To determine that the entity has a right to the receivable arising from the sales transactions recorded; the auditor
examines a sample of sales transactions and be alert for indications of consigned shipments treated as sales.
o Auditors should also investigate the procedure from recording movements of merchandise among the various units of
the company.
 Discussion 7-9: For sample of entries in the sales journal, (a) examine sales invoice, shipping documents, and customer order for
consistency of descriptions and quantities; (b) examine sales orders for credit approval; and (c) check orices and extensions. Foot
sales journal and general ledger account.
o The audit procedure for verification of sales transaction that has been selected for testing may begin with comparison of
the customer’s purchase order, the client sales order, and the duplicate copy of sales invoice.
 The descriptions and quantities of items are compared on these three documents and traced to the duplicate
copy of the related shipping document.
o The credit manager’s signature denoting approval of the customer’s credit should appear on the sales order.
o The extensions and footings on each invoice in the sample should be proved to be arithmetically correct.
o After proving the accuracy of selected individual, the auditors next trace the invoices to the sales journal and to postings
in the accounts receivable subsidiary ledger.
o In addition, the date of each invoice should be compared with two other dates:
 The date on the related shipping document, and
 The date of entry in the accounts receivables subsidiary ledger.
 Discussion 10: For a sample of entries in the sales journal, verify the accuracy of account coding
o Auditors may review entries in the sales journal and the supporting sales invoice to determine whether the sales invoice
was coded correctly and whether it results in proper presentation and disclosure of the transaction in the financial
statement.
AUDIT OF SALES ADJUSTMENTS TRANSACTIONS

Adjustments to sales may include:

a) Granting cash discounts
b) Granting sales allowanced or reductions in price
c) Returns of merchandise
d) Volume rebates
e) Corrections of billing errors
f) Uncollectible accounts

Evaluation of Internal Control over Sales Adjustments Transactions

 A concern about these transactions is that a transaction may be recorded to cover a material misappropriation of cash receipts.
 Auditors generally pay little attention to these adjustments unless they are a material amount or individual adjustments are large.

Tests of Controls over Sales Adjustments Transactions

 Audit of Cash Discounts
o Auditors audit this in connection with a test of cash receipts transactions and sales returns and allowances in connection
with sales.
o Oftentimes, auditors perform only substantive tests of account balances.
 Audit of Sales Returns, Allowances, Corrections
o For sales returns and allowances, the primary emphasis in normally on testing the existence of recorded transactions as a
means of uncovering any diversion of cash from the collection of accounts receivable that has been covered up by a
fictitious sales returns and allowances.
 Although the emphasis is often on testing the existence of recorded transactions, the completeness objective
cannot be ignored.
 Unrecorded sales returns and allowances can be material and can be used by a company’s management to
overstate net income.
o The other objectives, rights and obligations, valuation and proper classification should not of course be ignored.
 The same methodology for controls over sales transactions should be applied to controls over sales returns and
allowances.
 Audit of Uncollectible Accounts
o Existence of recorded write-offs in the most important transaction-related audit objective that the auditor should keep in
mind in the verification of the write-off of individual uncollectible accounts.
 This is because of the possibility of the client covering up a defalcation by charging off accounts receivable
that have already been collected.
o The major control for preventing this type of misstatement is proper authorization of the write-off of uncollectible
accounts by a designed level of management only after a thorough investigation of the reason the customer has not
paid.

Audit Program for Test on Controls: Sales Adjustments Transactions

 Audit Procedures:
1) Account for credit memoranda
2) Prove the footings on credit memorandum register
3) Trace the posting of credit memorandum to the general ledger
4) Review credit memoranda for approval
5) Check credit memoranda concerning returned goods for: (a) arithmetical accuracy; (b) quantities returned; and (c)
unit prices
6) Inspect credit files in support of accounts written off as uncollectible
 Weaknesses and Possible Errors.
Control Weakness Possible Errors
1. Lack of numeric control over credit memoranda  Fictitious transactions recorded
2. Unauthorized write-off of accounts receivable  Collectible account erroneously written off as
uncollectible
 Customer account intentionally written off to conceal
misappropriation of customer remittances
3. Unauthorized returns and allowances  Credit memos issued for authorized returns as well as
for goods not actually returned
 Credit memos written and recorded to conceal
misappropriation of customer remittances

Substantive Test for Sales Returns and Allowances

 The audit objectives are essentially the same for processing credit memos for returns and allowances as those describe for sales,
with two important difference:
1) The first relates to materiality. If the amount of sales returns and allowances are so immaterial, they can be ignored in the
audit altogether
2) The second relates to “emphasis on objective”. For sales returns and allowances, the primary emphasis is normally testing
the validity of recorded transactions as a means of uncovering any diversion of cash from collection of account
receivable that has been covered by a fictitious sales returns or allowances.
 Normally, the auditor also gives due attention to the other objectives and should be able to arrive at suitable substantive tests of
transactions which are essentially the same as for sales to verity amounts.
 The audit procedures that may be used for substantive tests of controls for sales returns and allowanced transactions include:
a) Review the use and authorization of credit memoranda
- All allowanced to customers for returned or defective merchandise should be supported by serially numbered
credit memoranda signed by an officer or responsible employee having no duties relating to handling cash or to
the maintenance of customer’s ledger.
b) Review credits for returned merchandise if supported by receiving report on the return shipment
c) Verify prices, extensions and footings and trace postings from the sales returns journal or other accounting record to the
customer’s accounts in the subsidiary receivable ledger.
AUDIT OF CASH RECEIPTS TRANSACTIONS

Basic Considerations
- Cash receipts may result from revenue transactions, short and long-term borrowing, issuance of share capital and
sale of marketable securities, long-term investments and other assets.
- Executing cash receipts transactions generally involve:
a) Receiving mail receipts
b) Receiving over-the-counter receipts
c) Aggregating total cash received
d) Depositing cash in bank

Tests of Controls over Cash Receipts Transactions

General Specific
1) Existence or occurrence  Recorded receipts represent actual collections of
cash from customers
2) Completeness  All receipts are processed and recorded
3) Rights and obligations  All cash receipts are deposited intact in the account
of the client
4) Valuation or allocation  Debits to cash and credits to accounts receivable are
valued at amounts received
5) Presentation and disclosure  Cash receipts transactions are recorded to result in
presentation and disclosure in accordance with
PAS/PFRS

 Existence or Occurrence: Recorded receipts represent actual cash collections from customers
Controls
1) A trustworthy employee prepares a prelisting of cash
receipts before further processing.
2) A validated deposit slip is obtained for daily deposits
and compared to the cash receipts summary
3) Duties of handling cash receipts are segregated from
posting to accounts receivable. A person performing
both functions could misappropriate cash and
conceal the shortage by making an entry directly to
the customer’s accounts.
4) A bank reconciliation is prepared monthly by a person
not involved in handling cash, accounts receivable,
or general ledger records. The reconciler should
receive the unopened bank statement and maintain
control over it until the reconciliation is completed,
Tests of Controls
 The auditor observes whether a prelisting is prepared
and inquiries of the preparer about the procedures he
follows.
 The auditor obtain copies of the validated deposit
slips and comparing them to the cash receipts
summary
 The auditor observes the separation of duties and
inquiring of client personnel about their responsibilities.
 The auditor observes that bank reconciliation have
been prepared by an independent employee

 Completeness: All receipts are processed and recorded

Controls Tests of Controls
5) Prelisting and cash register procedures should be  Auditors observe the monitoring of these procedures
monitored
6) Checks should be restrictively endorsed as soon as  Auditor observes the procedures in effect
they are received. This control prevents an
unauthorized employee from gaining access to a
check and cashing it.
7) A daily cash summary is prepared and reconciled to  Auditors can inquire of employees who carry out the
total of prelisting and over-the-counter receipts. The procedure about the regularity and consistency of its
summary total is compared to the total in the cash performance
receipts journal and the total on the validated deposit
ticket. This control ensures that all cash receipts are
deposited and recorded
8) The cash receipts journal total is independently  The auditor observes the procedures and makes
reconciled to the total posted to account receivable. inquiry of personnel performing the procedure.
This control ensures postings to accounts receivable

 Rights and Obligation: All cash receipts are deposited in the bank account of the client
Controls Tests of Controls
9) Cash receipts are deposited intact daily in the  The auditor observes the procedure and compares
company’s bank account. This control reduces the the cash in the prelisting with the validated deposit
likelihood of misappropriation of cash slip.

 Valuation or Allocation: Debits to cash and credit to accounts receivable are valued at amounts received
Controls Tests of Controls
10) Cash receipts should be recorded at the amount  The auditor compares entries in the cash receipts
indicated on the remittance advice. A remittance journal to remittance advices
advice that has been processed by a third party
serves as strong evidence on the amount received
from the customer

 Presentation and Disclosure: Cash receipts transactions are recorded to result in presentation and disclosure in accordance with
PAS/PFRS
Controls Tests of Controls
11) An accounting supervisor should approve  The auditor determines that the supervisor’s signature
classifications made in journalizing. This control of approval is recorded
reduces the likelihood of payments being posted to
the wrong accounts, resulting in credit balances in
accounts receivables
Audit Program for Test of Controls: Cash Receipts Transactions
 Audit Procedures
1. Compare remittances or other details of cash receipts with the entries in the receipts book.
2. Compare the recorded receipts with individual deposits as shown by bank statements
3. Compare the composition of authenticated duplicate deposit slips with the recorded receipts.
4. Compare the recorded receipts with an independent record prepared before receipts are transmitted to the cashier.
5. Test of cash discounts and other allowances or credits
6. Test postings to the general ledger to the customer’s ledger, and to other subsidiary ledger
7. Review cash receipts for unusual items.
 Possible errors that may result because of control weakness over cash receipts transactions:
Internal Control Weaknesses / Factors that Examples of Fraud/Error Description of Possible Errors or
Increases the Risk of the Misstatement Misstatements
1. Lack of segregation of duties of  Cash receipts are overstated  Fictitious cash receipts are
cash handling and on the books by transferring recorded; processing errors
recordkeeping; bank accounts cash between accounts (intentional or unintentional) are
not reviewed or properly without appropriate recording not discovered on a timely basis
reconciled. of the transfer to cover up an
embezzlement of cash.
2. Inadequate controls for  Cashier fails to ring up and  Failure to record receipts from
reconciling cash register tapes record cash sales and cash sales
and accounting records; embezzles cash.
inadequate controls for  Bookkeeper omits the recording  Unrecorded cash receipts are
reconciling bank accounts. of the receipts from one cash not deposited in the bank or
register for the day recorded cash receipts are not
deposited in the bank.
3. Sales not coded on cash  Sale of product A recorded as  Credits to wrong sales account
register tapes a sale of product B are committed.
4. Lack of segregation of duties  Cashier abstracts or embezzles  Failure to record cash from
between personnel who have cash payments by customers collections of accounts
access to cash receipts and on receivables without receivable
those who make entries into the recording collections from
accounts receivable records. customers.
 Cashier embezzles cash
collected from customers and
writes-off the related
receivables
5. Inadequate reconciliations of  Bookkeeper accidentally fails to  Failure to record cash from
subsidiary records on accounts record a payment in a collection of accounts
receivable with the general receivable receivables.
ledger account
6. Accounting manuals not used  Collection of rent income  Miscellaneous cash receipts
to assist in properly recording recorded as sale of credited to incorrect accounts.
miscellaneous cash receipts. merchandise
7. Ineffective board of directors,  Keeping the cash receipts  Erroneous presentation of more
audit committee, or internal journal open to record next liquid position.
audit function; undue pressure year’s cash receipts as
to show improved financial collections in the current year
position; top management
actuations not conducive to
ethical conduct
8. Failure to list and deposit cash  Recording cash receipts based  Cutoff error (early or late
receipts on a timely basis on erroneous information about recognition of cast receipts) is
date of receipt committed.

Substantive Tests of Cash Receipts Transactions

Assertions Audit Objectives Audit Procedures
I. Existence or Occurrence A. To determine that recorded 1. For a sample of entries in cash
receipts represent actual receipts journal, trace to the
collections of cash from prelisting of cash receipts and
customers. to remittance advice. For a
sample of entries, reconcile
daily deposit to validated
deposit ticket.
II. Completeness B. To determine that all receipts 2. For a sample of days, verify that
of cash and checks are all cash receipts are recorded
recorded. by reconciling daily listings of
cash receipts and validated
deposit ticket to cash receipt
journal.
III. Valuation or Allocation C. To determine that debits to 3. For a sample of entries in cash
cash and credits to accounts receipts journal, examine
receivable are valued at remittance advice and verify
amounts received. that discount taken was
appropriate. Foot accounts
receivable subsidiary ledger
and reconcile to the general
ledger account.
IV. Presentation D. To determine that cash 4. Review account coding for a
receipts transactions are sample of entries in the cash
recorded to result in receipts journal.
presentation and disclosure in
accordance with PAS/PFRS.
 Discussions – 1. For a sample of entries in cash receipts journal, trace to the prelisting of cash receipts and to remittance advice.
For a sample of entries, reconcile daily deposit to validated deposit ticket.
o To test the credits to accounts receivable, an auditor can trace from the entry in the accounts receivable ledger to a
cash receipts listing to a deposit ticket listing the payment and to the customer’s remittance advice.
 These documents provide evidence that a collection was made.
 Discussions – 2. For a sample of days, verify that all cash receipts are recorded by reconciling daily listings of cash receipts and
validated deposit ticket to cash receipt journal.
o To test whether all cash receipts are recorded, the auditor compares the names and amounts included in the prelisting
for selected days with the entries in the cash receipts journal.
 Any discrepancies may suggest that lapping is occurring.
o To test for lapping, an auditor identifies a period of several consecutive day and trace the names and amounts from the
prelisting of cash receipts to the validated deposit ticket to the cash receipts journal, and to the posting in the accounts
receivable subsidiary ledger.
 All dates, names and amounts should be consistent. If the details are consistent, lapping did not occur during
the time period examined.
o Auditors also test the mathematical accuracy of the recording of cash collections by footing the cash receipts journal,
and by footing the accounts receivable subsidiary ledger and reconciling it to the control account.
 Discussions – 3. For a sample of entries in cash receipts journal, examine remittance advice and verify that discount taken was
appropriate. Foot accounts receivable subsidiary ledger and reconcile to the general ledger account.
o To determine whether the credit to accounts receivable is proper, the auditor selects transactions from the cash receipts
journal and recomputes the cash discounts allowed to customer who have made payments.
o Auditors may also verify its approval by reperforming the procedure that should have been performed when credit was
approved.
 Discussions – 4. Review account coding for a sample of entries in the cash receipts journal.
o To determine that the transaction was coded correctly and will result in proper presentation and disclosure, the auditors
compare entries in the cash receipts journal with the remittance advices.