Auditing Notes

Chapter 10
THE CYCLES

Revenue and Acquisitions Inventory and

receipts and Payment production

Payroll and Finance and

Personnel Investment
Revenue and Receipts Cycle
 Accounting system and internal control
◦ Characteristics of the cycle
◦ Documents in the cycle
◦ Cycle description
 Auditing the cycle
◦ Financial statement assertions and the revenue and receipts cycle
◦ Important accounting concepts
◦ Fraud
◦ Test of controls
◦ Substantive tests
◦ Use of audit software
◦ Other procedures
SALES AND COLLECTION CYCLE
Characteristics of the Cycle
 Variation: plenty of variations in the systems you encounter in practice.
Eg: Goods can be sold over the counter, over internet, phone etc.. Goods
as well as services are sold, a sale sometimes takes long time to complete
or may be instant.

 Cash sales: Selling goods for cash, having cash is a security risk that
need to be addressed. Potential for theft and physical harm for
employees.

 Credit sales: When a company allows a customer to charge a sale made

to an account. There is a risk that customer will not pay and company
will suffer a loss. Therefore check the creditworthiness before sale is
made.

 Legislation: For companies who sell to consumers, need to comply with

legislation. The Consumer Protection Act.
Basic Functions
 Order department: (1) receiving customer order (2) authorising the sale.
Receiving customers orders: received in a variety of ways.
Authorising the sale: granting or confirming credit before the order is
processed.

 Warehouse/despatch: (1) processing the order (2) despatch

Processing the order: manual process of gathering the goods
Despatch: manual process of releasing the goods ordered to the
customer.

 Invoicing: notifying the customer regarding the amount owed

 Recording sale and raising the debtor: creating the records of sale and debtors

 Receiving and recording payment from debtors: collecting payments from

debtors, banking it and recording it in CRJ and DJ

 Credit management: (1) evaluating creditworthiness (2) collecting amounts

owed.
Other functions:
 Controlling goods sold but returned from

customer.
 Passing credit notes for goods returned
 Granting discounts on payments from

customer
 Considering and effecting write offs of bad

debts.
DOCUMENTS
 Search the Internet for examples of the following documents:
◦ Customer order: customers instruction as to what goods
are required.

◦ Internal sales order: compiled by sales order clerk, records

the goods ordered by the customer.

◦ Picking slip: lists all items which the customer has ordered,
used to assist the stores personnel to pick the goods.

◦ Invoice: document sent to customer to notify quantity and

price of the goods sold to them.

◦ Delivery note: details the date, description and quantity of

the goods despatched to the customer and is signed by the
customer.
DOCUMENTS
◦ Statement: summary of all transactions for a
period, usually a month, sent by the company to
the customer.
◦ Credit application: document filled in by the
prospective customer so that customers
creditworthiness can be evaluated.
◦ Receipt: records details of payments received
from customers.
◦ Remittance advice: document send by the
customer with their payment to indicate precisely
which invoices are being paid
DOCUMENTS
◦ Remittance register: a register or list of payments
received by the company
◦ Credit note: document made out by the company
and sent to the customer to acknowledge that the
customers account has been reduced for some
reason other than for a payment received.
◦ Deposit slip: a bank document which is filled in
by the company to record the deposit of
payments received from the customer
◦ Price lists: document containing prices of
company’s products to be referred by sales order
clerk when customers require prices
DOCUMENTS
◦ Back-order note: document contains details of goods
which could not be supplied when ordered by a
customer as there was no inventory available.
◦ Goods returned voucher: document made out by the
company which is used to record the details of goods
which have been returned by the customer.
◦ Masterfile amendment form: document used to record
the amendments to debtors master file.
◦ Logs and variance reports: computer can be
programmed to compile logs, variance reports etc. A
log is simply an activity that has taken place in a
computer. Eg, a log of master file amendments.
Order department:
(1) Receiving customer order.
To record orders from customers and initiate
action to fill them.

Persons receiving the order need to establish

that the customer is a valid customer and the
details of the order are accurate and complete.

Documents used: Customer order, ISO and

Pricelists.
RISK
• Order may be accepted from
a non-account holder.

RISK
• Orders may not acted upon
timeously or at all.

RISK
• Inaccurate or Incomplete
order details
CONTROL ACTIVITIES:
 Record all orders sequentially on ISO
 Don’t accept any orders from a non-approved
customer.
 Attach customer order to ISO and this can be
verified by another staff member.
 For telephonic orders- request, customers account
number and order reference. Confirm all order
details by reading them back to the customer.
 Order clerk must sign all ISOs
 Match ISOs to delivery notes to identify any errors.
Order department:
(2) Sales authorisation.
To assess whether orders should be
accepted.

Done to determine whether the customer is

credit worthy. This function begins when the
customer fills in the credit application form.

Documents used: Credit application and

Debtors ledger.
RISK Sale made to a
person who is not
credit worthy
CONTROL ACTIVITIES:
 Before processing the order, checks should
be carried out by the credit controller, to find
out customer has not supplied any fictitious
details and customers credit status is
satisfactory.

 ISOs to be authorised by the credit controller

before being sent to the warehouse.
(3) Warehouse.

To fill accepted, authorised orders

promptly and accurately

This is the manual function of picking

the goods from the warehouse.

Documents used: Picking slip, Delivery

note, Back order note.
RISK • Not using valid ISO or picking slip.
• Goods removed for fictitious sales.

RISK • Incorrect items can be picked.

• Inaccurate delivery notes being made.

RISK
• Out of stock items not identified.
• Customers not notified about Out of stock
items.
CONTROL ACTIVITIES:
 Picker to initial the picking slip for each item picked
and identify the out of stock item.

 Supervisory checks to ensure that all goods picked are

supported by signed picking slip.

 Warehouse clerk
 check goods picked to picking slip
 Prepare delivery note from picking slip
 Prepare back order note from picking slip
 Send copy of the back order note to order clerk and to the
buying department
(4) Despatch
To ensure that goods supported by
authorised picking slip and accurate
delivery notes, are despatched.

To ensure a prompt despatch of goods

to the correct customer.

Documents used: delivery note, list of

deliveries.
RISK • Theft may be facilitated by uncontrolled
despatch.

RISK • Despatch errors, incorrect goods despatched

or goods delivered to wrong customer.

RISK
• Customers denying goods received
• Goods released from warehouse never
despatched.
CONTROL ACTIVITIES:
 On receipt of goods from warehouse the
despatch clerk should check the quantities
and description of the goods against picking
slip and delivery note.
 Despatch clerk must sign picking slip and

delivery note to acknowledge the receipt of

goods.
 Retain two copies of delivery note and return

the signed picking slips to warehouse.

 The goods picked should be compared to the
picking slip and delivery note as they are
packed into boxes. Also check the address on
the box is right and the box should be sealed
immediately.
 Despatch clerk should prepare a list of

deliveries to be made, and the list should

match with delivery notes and the physical
goods loaded on to the vehicle.
 .
 Delivery staff should supervise loading the
truck and sign a copy of the delivery list to
acknowledge the receipt of goods and delivery
note. Driver must have a copy of delivery list
and delivery note. Despatch clerk also must
have a copy of the delivery list.
 Gate controls can be exercised if its practical,
otherwise despatch controls must be tight.
 On delivery, the customer should sign both
copies of delivery note, retain one copy and
return the other copy with the driver.
(5) Invoicing

To notify the customer promptly of the amounts

due for goods supplied.

When the signed delivery note is being returned

from the customer, it should be matched with the
sales order and an invoice should be generated.

Documents used: Sales invoice, Price lists.

RISK
• Goods despatched may not
be invoiced

• Invoices may be
RISK inaccurately
prepared/misstated
CONTROL ACTIVITIES:
 A copy of ISO and signed delivery note should
be filed sequentially in the invoicing section.
 Investigate ISOs and delivery note on a

regular basis.
 Invoice clerk should compare ISO and delivery

note.
Check prices quoted to the official price list.

Prepare properly numbered invoice and

compare it with delivery note and customer
order.
 A supervisor should check the prepared
invoice again with regard to price, discounts,
VAT calculations, customer details and sign.
(6) Recording of Sales.

Record the sales and to raise the corresponding

debtors.

Invoices must be recorded accurately and

entered against the correct debtor. Total sales
also must be posted to relevant general ledger.

Documents used: Invoice, Sales Journal,

Debtors ledger, General ledger.
RISK • Invoices are omitted / duplicated in sales
journal

RISK • Invoices are inaccurately entered in the

sales journal.

RISK • Invoice entered against incorrect debtor

when posting to debtors ledger.
CONTROL ACTIVITIES:
 Invoices must be entered in the sales journal
in a numerical sequence. In the case of
cancellation of invoice its number should be
entered and written ‘cancelled’.

 Prior to entry in the sales journal, invoices to

be added to obtain control total. This total is
then compared to the total in the sales
journal after entering individual invoices.
 An independent staff member should
-sequence check sales journal entries and
follow up on any missing invoices.
-compare customer name and amount entered
in sales journal to the invoice for accuracy.
- Check postings from the sales journal to the

debtors ledger and general ledger.

 Reconciliation of the debtors ledger to debtors

control account in the general ledger on a

regular basis, to be conducted by an
independent employee.
(7) Receipts mail room/Cashier
Receiving the payment from debtors
The arrival of a payment from a debtor is
recorded and prepared for banking.

Receipts should be made out for all

cash received and possibly for cheque
payments as well.

Documents used: Remittance register,

Customer remittance advice, Receipts,
Bank deposit slip.
RISK Payments received may
not be banked due to
theft or carelessness
CONTROL ACTIVITIES
 Post must be opened by two people working
together.
 All payments received in the post should be

recorded in a remittance register by those

responsible for opening the post and a
receipt should be made out for each payment
received.
 Pre numbered receipts should be issued for

all payments received

 All amounts received should be banked daily.
 Deposit slip to be made out by the cashier, not the
employees opening the post.
 Cashier must reconcile cheques and cash to
remittance register and receipts before accepting
them for banking.
 Remittance register and receipts issued should be
reconciled to bank deposits by an independent
employee.
 Bank deposits should be reviewed regularly and
gaps in daily banking, investigated by
management.
(8) Recording of Receipts:
Record the receipts from debtors in the
CRJ and credit the debtors accounts
promptly

Receipts must be recorded accurately

and entered against the correct debtor.

Documents: Bank deposit slip, CRJ,

Debtors ledger, General ledger
RISK • Deposits may never be recorded or not
recorded timeously.

• Recorded deposits may be:

RISK Inaccurate
•
• Overstated
• Credited to wrong debtors
CONTROL ACTIVITIES:
 CRJ should be written up on a daily basis by
date and receipt number
 Supervisory staff should review CRJ for

missing dates and gaps in sequence of

receipts.
 The “cash book” should be reconciled to the

bank statement every month by an employee

independent of the banking/recording of
cash. The bank reconciliation should be
reviewed by a senior employee.
 Queries from debtors should be investigated
by an employee independent of debtors and
banking.

 Reconciliation of the debtors ledger to the

debtors control account in the general ledger
should be conducted on a regular basis by
the financial accountant.
(9) Goods returned by customer
 ACTIVITY: Control goods that have been returned
by customers. The goods must be recorded on
their return and the debtors account must be
credited.
 Documents used: Goods returned vouchers, Credit
note, Returns and allowances journal, Debtors
ledger, General ledger.
 RISKS: the description and quantity of goods
returned may be incorrect resulting in an incorrect
credit note being passed.
A credit note may be passed for goods which
have not been returned.
Credit notes may be inaccurately recorded and
credited to the incorrect debtor.

CONTROL ACTIVITIES:
 All goods returned must be received by the

company’s goods receiving department.

 The goods receiving clerk must count and

check the goods being returned, make goods

returned voucher, sign and retain a copy of the
customer documentation and attach it to the
goods returned voucher
 Stores clerk must check description and
quantity of physical goods on transfer from
goods receiving into warehouse.
 Credit notes to be made out by the

accounting department. Cross referenced to

original invoice and presented to a
supervisory clerk.
 Credit notes to be entered sequentially
 Senior (financial ) manager should review this.
(10) Credit management
 ACTIVITY: limit the loss from bad debts and to encourage
debtors to pay promptly.

 RISKS: debtors do not pay at all or pay late.

Debtors are prematurely or inappropriately
written off.
Debtors are written off without authority.
 Documents used: Monthly statements, age analysis, credit

bureau information.

CONTROL ACTIVITIES:
a) monthly statements should be sent promptly to debtors
b) Monthly age analysis of debtors and immediate follow up by
phone or letter if credit terms are exceeded.
c) If this is not successful, the credit controller should
personally contact the customer to renegotiate credit terms.
d) If still no success, the debtor must be handed over before
too long

e) If the debt cannot be recovered, the debt write off must be

recommended by the credit controller and authorised by an
independent senior financial employee

f) Credit manager should reconcile all bad debts written offs

g) Senior manager should be provided regularly with sufficient

information to effectively manage the debtors
Assertions and ISA 315
 Sales transactions
◦ Sales actually occurred (occurrence)
◦ Sales are recorded at the correct amount and allocated to
the proper period (accuracy and cut-off)
◦ Sales are recorded in the proper account (classification)
◦ All sales have been recorded (completeness)
 Receipts
◦ Payment of the debtor occurred and belong to the entity
(occurrence)
◦ Receipts are recorded at the correct amount in the proper
period (accuracy and cut-off)
◦ All receipts have been recorded (completeness)
◦ Receipts are recorded in the proper accounts (classification)
Assertions and ISA 315
 Trade and other receivables
◦ Balances exist at balance sheet date (existence)
◦ Company has the right to the account (rights)
◦ All trade and other receivables are included
(completeness)
◦ Carry value is appropriate (valuation)
 Presentation and disclosure
◦ Complete presentation
◦ Balances correctly classified and accurately
presented
◦ Disclosed in an understandable manner
Characteristics of Good Control
 Control environment
 Competent trust worthy personnel
 Segregation of duties
 Isolation of responsibilities
 Access and custody control
 Source document design
 Comparison and reconciliation
◦ Order to invoice
◦ Invoice to payment
◦ Debtors ledger to general ledger
◦ Cash records to bank statement
Test:
 QUESTION 1
[5 marks]
 Discuss the different types of internal control ?

 QUESTION 2 [10 marks]

 Briefly explain the responsibilities of the management, internal auditor and
external auditor for the internal control of an organisation and what they
hope to achieve.

QUESTION 3
Explain the characteristics of good internal control [5 marks]
Question 4 [10 marks]

 The functions in a typical wholesaling company which sells on credit may be described
as follows:
 The Order department Recording of sales
 Warehouse Receipts mailroom/cashier
 Despatch Recording of receipts
 Invoicing Credit management
 The following control procedures are in place at Wildside (Pty) Ltd, a company which
wholesales a wide range of outdoor equipment.
 4.1 A monthly age analysis of debtors is printed off the system and debtors are
contacted by phone and mail if they have exceeded their credit terms.

 4.2 The financial accountant, Tembu Zungu inspects the daily bank deposit slips and
investigates any unexpected gaps in dates.

 4.3 Warehouse foreman checks goods picked to the picking slip.

 4.4 The gate controller confirms (by counting) that the number of boxes on the delivery
truck agrees to the number of boxes per the delivery notes held by the driver.
 4.5 The order clerk compiles an on screen internal sales order (ISO) for all orders
received from customers (phone, fax or mail).

 4.6 The financial manager approves the credit limits (for a customer) set by the credit
manager.

 4.7 The credit manager signs the ISOs before they are sent to the warehouse.

 4.8 The remittance register and receipts issued for debtors who have paid by cheque
are reconciled to the bank deposit slips by the financial manager on a weekly basis.

 4.9 Monthly statements are sent promptly to debtors

 4.10 On delivery of goods to the customer, the customer is required to sign the
Wildside (Pty) Ltd delivery note.

YOU ARE REQUIRED TO indicate the function under which each of the control procedures
listed above is most likely to occur at Wildside (Pty) Ltd.