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Lecture Notes Ch. 14 & 16 (ACCT-422)

Lecture Notes Ch. 14 & 16 (ACCT-422) - Chapters 14...

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Chapters 14 and 16 Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions and Substantive Tests of Details of Balances (Accounts Receivable) Chapters 14 – 17 cover the application of the audit process to the Sales and Collection cycle. Although we will not cover Chapters 15 and 17 in this course, the two chapters discuss in detail both statistical and non-statistical audit sampling methods for the Sales & Collection cycle. Chapter 14 begins our study of the Sales & Collection cycle by giving us an introduction to the operations of the cycle. Obtaining an understanding of the transactions, accounts, source documents, and the accounting records that make up the cycle is critical to conducting an efficient and effective audit of the Sales & Collection cycle. Chapter 14 then addresses the methodology for designing tests of controls and substantive tests of transactions for the classes of transactions under the Sales & Collection cycle classes of transactions. Although there are 5 classes of transactions (sales, cash receipts, sales returns and allowances, charge-off of uncollectible accounts, and estimate of bad debt expense), both the text and this lecture emphasize the Sales transaction. Chapter 16 continues our study of the Sales & Collection cycle by discussing the methodology for designing substantive tests of details of balances for Accounts Receivable. As illustrated in Figure 14-1 on page 442, the following financial statement accounts (both income statement and balance sheet) make up the Sales and Collection cycle: Income statement 1. Sales 2. Sales discounts 3. Sales returns and allowances 4. Bad debt expense Balance sheet 5. Cash 6. Accounts Receivable 7. Allowance for uncollectible accounts Both cash and credit sales are credited to the Sales account. In the case of cash sales, the cash account is debited while in the case of credit sales, the accounts receivable account is credited.
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The most important (but not necessarily all) of the documents and accounting records Source Documents 1. Customer order 2. Sales order – containing details of customer’s order (description of goods ordered, quantity ordered, etc.). Usually prepared in multiple copies. 3. Shipping document – authorizing the shipping of goods and usually contains description of goods, quantity shipped, etc.) Shipping document is usually one of copies of sales order. 4. Sales invoice – bill sent to customer containing description of goods sold, quantity of goods sold, freight charges, insurance terms, etc.) 5. Remittance Advice – part of sales invoice that is detached by customer and returned to seller along with payment. 6.
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Lecture Notes Ch. 14 & 16 (ACCT-422) - Chapters 14...

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