Sales & Collection Cycle
Designing tests of controls substantive tests of transactions and analytical procedures for the sales and collection cycle require the understanding of the control risk, identifying key internal control deficiencies, associating the deficiencies with the objectives and assessing the control risk for each objective by evaluating the controls and deficiencies for each objective (Arens, Elder and Beasley, 2005, pp. 416 - 417).
Obtain and document understanding of internal control
The auditor needs to collect the relevant data in order to understand and assess the control risk. The relevant data comes in the form of the flowchart (see figure 1) and the internal control questionnaire (see figure 2).
Tests of Controls
The tests of controls that the auditor should look at are the following (Whittington &Pany, 2008):
1. Examining the significant aspects of a sample of sales transactions. These transactions should be representative of the controls in the flowchart in figure 1. The purpose is to test the controls which are put in place.
2. Compare samples of shipping documents to their respective sales invoices. The auditor needs to test the controls of the sales transactions to match the shipping documents to the invoices - doing this ensures that items which were not billed are also accounted for.
3. Review the use and authorization of credit documentation. The auditor should review allowances for customers returning inventory against their respective authorizations to ensure that an authorized manager has approved the credit. In addition, the auditor should ensure the document is dated and with a serial number showing the item was inspected prior to return.
Substantive tests of transactions
The substantive tests of transactions are used to verify the tests of transactions. These tests should consist of the following (Whittington &Pany, 2008):
1. Reconcile cash taken and sales receipts with sales journals. If there are any cash transactions, the auditor should reconcile the daily totals in the sales journal with the cash register tapes.
2. The auditor should obtain an aged trial balance and reconcile it to the ledgers.
3. The auditor should request a copy of the accounts receivable aged trial balance and compare the net sales, total balance and total outstanding (see figure 3) to the customer records to verify the validity of the transactions.
Analytical Procedures for Sales and Collections
Analytical procedures consist of verifying the potential of material misstatements. The auditor should consider the following:
1. Look at the schedule of revenues (see figure 4) and compare the current year to the previous year and note significant differences.
2. Review the schedule of revenues (see figure 5) and compare the previous years’ taxes to the current year and note significant differences.
1.
Figure 1 - Apollo Revenue Flowchart
Figure 2 - Internal Control Questionnaire: Sales Transaction Processing
Figure 2 - Internal Control Questionnaire: Sales Transaction Processing (Continued)
Figure 3 - Apollo Shoes Aged Trial Balance (Source: Apollo Shoes Case)
Figure 4 - Apollo Shoes Schedule of Revenues (Source: Apollo Shoes Case)
Figure 5 - Apollo Shoes Schedule of Expenses (Source: Apollo Shoes Case)
References
Arens, A. A., Elder, R. J., & Beasley, M. S. (2006). Auditing and assurance services: An integrated approach (11th ed.). Upper Saddle River, NJ: Pearson Education, Inc..
Louwers,T.J., & Reynolds, J.K. (2002 ). Apollo shoes casebook. New York, New York: McGraw-Hill.
Whittington, O. R.,&Pany, K. (2008). Principles of auditing and other assurance services (16th ed.). New York, NY: McGraw-Hill Irwin.
USA 
India