Chapter 14 Instructor's Guide

Chapter 14 Instructor's Guide - Chapter 14 Audit of the...

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Chapter 14 Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions This is an essential chapter because it is the first chapter to deal with specific evidence in an audit area. It is essential that the concepts of previous chapters be applied to the sales and collection cycle. The following are the primary areas covered: Chapter opening vignette Accounts and classes of transactions in the sales and collection cycle Accounting rules for the timing of recording transactions Factors affecting evidence accumulation Overview of the audit for the sales and collection cycle Types of audit tests applied to sales and cash receipts Methodology for designing tests of controls and substantive tests of transactions for sales Design and performance format audit procedures Methodology for designing tests of controls and substantive tests of transactions for cash receipts Effect of the results of tests of controls and substantive tests of transactions Suggested homework problems and cases Chapter Opening Vignette – “The Choice Is Simple - Rely on Internal Control or Resign” This vignette makes the point that some companies are so large and so complex that the only way they could possibly be audited is through reliance on internal controls. This presents a dilemma: what does an auditor do if he or she finds that a large client has poor controls? The problem is exacerbated by the demands for public companies to issue annual reports at an early date, and to file their Form 10-K with the SEC. We remind students that the Sarbanes–Oxley Act requires auditors to also report on internal control for public companies This case offers an opportunity to discuss the differences between auditing large and small companies, and auditing public and non-public companies. Students may be interested in the fact that even the largest firms have more small clients than large ones in absolute numbers. However, most audit hours are spent on the large ones. Accounts and Classes of Transactions in the Sales and Collection Cycle (p. 444) We like to start with a set of financial statements and remind students that the overall statements are being audited. Reference can also be made to the Hillsburg Hardware Company financial statements included in the glossy insert to the text. All sales and collection cycle accounts in the statements can be identified to show which areas are involved. Figure 14-1 (page 444) is helpful here. 14-1
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(See Figure 14-1) Next, we find it useful to talk about the relationship between the financial statements, documents, and records. It is important that students thoroughly understand how the information gets into the financial statements, the nature and purpose of journals, master files, and documents affecting the cycle. It is difficult to teach the material without actually seeing documents and records. The amount of time you need to spend depends on the students' background in systems. We go through
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Chapter 14 Instructor's Guide - Chapter 14 Audit of the...

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