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Audit of Sales, Purchases, Payroll

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Course

Auditing (AUD339)

402 Documents
Students shared 402 documents in this course
Academic year: 2021/2022
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Ally Louina
Universiti Teknologi MARA
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AUD SS FEAudit 1 - final

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AUDIT OF SALES AND COLLECTION CYCLE

Aspects of Operations Internal Control Possible errors/ weaknesses

Processing

customer

orders and

despatch of

goods

 Approval of sales

order

 Checking of credit

limit

 Preparation of

despatch

documentation

 Despatch of goods

 All orders received are recorded on pre-numbered

sales order forms

 Credit limit of customers must be approved prior to

delivery/ shipment of goods

 All sales orders are checked against the credit limit

(to be evidenced by an initial of the authorised

person)

 Despatch of goods must be supported by authorised

despatch notes/shipping documents

 Despatch notes are prenumbered and cross-

referenced to sales orders

 Acknowledgement should be obtained from

customer for delivery of goods.

 Segregation of duties between receiving orders,

approving credit limit, authorising despatch of

goods, delivering goods and billing to customers

 Credit limit granted to

unauthorised customer

 Goods not despatched to

customers

 Goods released before proper

approvals of customer credit.

 Sales recorded on fictitious

customers

 Proof of deliveries not obtained

from customers

Invoicing/

billing

customers

and

recording

sales

 Preparation of sales

invoices

 Processing of invoice–

recording in sales

journal and posting to

sales ledger (debtor

a/c) and general ledger

(sales a/c)

 Preparation of debtors

statement

 Sales invoices are pre-numbered and accounted for

 Issuance of sales invoices are duly authorised

 Invoices are correctly priced and independently

checked for accuracy of quantities, prices, trade

discounts and totals

 Segregation of duties between billings, posting to

the accounts and receiving cash/cheque.

 Double-recording of sales

invoices

 Omission in recording sale

transactions

 Incorrect particulars e., amount,

quantity sold on the sales invoices

 Prepares invoices without

verifying whether the goods have

been delivered.

Sales

returns and

adjustments

 Preparation of credit

notes for valid claims

of defective goods

returned by customer

 Credit notes/memorandum must be pre-numbered

and accounted for

 Issuance of credit notes are duly authorised

 Credit notes are checked to supporting evidence

i., goods returned notes and sales invoices

 Prices are checked to sales invoices

 Incorrect/invalid allowances

given

 Incorrect particulars on the credit

notes

Recording

of cash/

cheques

received

 Initial recording of

cash received

 Bank-in of

cash/cheque into the

Bank account

 Recording of

cash/cheque received

in cash book

 Posting to sales ledger

control account, sales

ledger (debtor a/c) and

general ledger (cash/

bank a/c)

 Reconciliation of bank

balances against bank

statements

 Segregation of duties between handling of cash and

record keeping

 Prepare “pre-listing” of all cheques and cash

received.

 Procedure that all cheques must be deposited on a

daily basis.

 Official receipts are issued at the point of receipt of

cash

 Official receipts are pre-numbered and accounted

for

 Receipts in the initial record must be independently

checked to cash book and debtors ledger

 Bank balances were reconciled with bank

statements on monthly basis

 Cash-in-hand were independently verified against

balances as per cash book at the end of the day

(Cash balancing procedure)

 Unrecorded cash receipts

 Cash receipts not deposited

promptly.

 Incorrect accounting (recording &

posting) of cash received from

customers in the relevant accounts

 Unauthorised issuance of official

cash receipts

General

recording

 Posting to sales ledger  Sales Ledger Control a/c and Schedule of Debtors

(listing of individual debtor’s a/c as per sales

ledger) are prepared

 Balance as per Sales Ledger Control a/c are

reconciled/ tallied to Schedule of Debtors. Any

differences noted are investigated

 Invalid/incorrect entries

(sales/sales return/ cash received)

in the sales ledger and sales

ledger control a/c

Overdue

accounts

 To follow-up on

overdue accounts

 To write-off bad debts

 To make provision for

doubtful debts

 Status of overdue accounts is closely monitored by

using aging schedule. Reminder letters are sent to

customers with overdue a/cs.

 Writing-off of bad debts are duly authorised by

higher authority

 Allowance made for doubtful debts is

independently reviewed

 Bad debts not written-off

 Under/over provision of doubtful

debts

IC OBJECTIVES (sales & collection cycle)

 Recorded sales are made to existing customer [not fictitious customer] (existence)

 Existing sales transactions are recorded completely [without omission] (completeness)

 Sales are recorded on the correct date (timeliness)

 Sales are correctly billed and recorded (accuracy)

 Sales transactions are properly classified (classification)

 Sales transactions are properly posted to the accounts receivable

master file and are correctly summarized in accordance

with the MFRS requirements (posting and summarisation)

Examples of TEST OF CONTROL (for sales & collection cycle)

 Examine copies of sales invoices for supporting delivery documents and customers’ orders.

 Examine customer order for evidence of credit approval.

 Account for numerical sequence of delivery documents.

 Account for numerical sequence of sales invoices.

 Examine copies of sales invoices for proper authorisation.

 Examine evidence of verification of sales documents.

 Review chart of accounts for adequacy.

 Observe whether monthly statements are mailed to debtors.

 Observe whether there is proper segregation of duties between various job functions (approval of customer’s

credit, preparation of documents, recording of transactions, handling of stocks and handling of cash).

 Observe independent reconciliation of bank accounts.

Examples of SUBSTANTIVE TESTS OF TRANSACTIONS (for sales & collection cycle)

 Trace sales journal entries to supporting documents (copies of sales orders, sales invoices and despatch

notes/shipping documents).

 Trace despatch notes/shipping documents to entry in perpetual inventory records..

 Trace despatch notes/shipping documents to sales invoices and entry into sales journal and accounts

receivable master file.

 Recompute information on sales invoices.

 Trace details on sales invoices to shipping documents, approved price lists and customers orders.

 Examine documents supporting sales transactions for proper classification.

 Compare dates of recorded sales transactions to dates on shipping records.

 Trace transactions recorded in cash receipt journals to bank statements.

 Examine bank reconciliation statements for accuracy and completeness.

 Examine sales invoices to determine whether discounts allowed are consistent with the company policy.

 Examine documents supporting cash receipts for proper classification.

IC OBJECTIVES (purchases & payments cycle)

 Recorded purchases are for goods received (existence)

 Existing purchase transactions are recorded completely (completeness)

 Purchases are recorded on the correct date (timeliness)

 Recorded purchase transactions are accurate (accuracy)

 Purchases are properly classified (classification)

 Purchase transactions are properly posted to the accounts payable master file and are correctly summarised

(posting and summarisation)

Examples of TEST OF CONTROL (for purchases & payments cycle)

 Examine evidence of approval on purchase documents.

 Examine indication of internal approval on purchase documents.

 Examine evidence that price quotation is obtained from different suppliers.

 Account for numerical sequence of purchase orders and identify reasons for gaps noted.

 Observe whether receiving reports are prepared for goods received from supplier.

 Account for numerical sequence of receiving reports.

 Review chart of accounts for adequacy.

 Observe whether there is proper segregation of duties between various job functions (approval of purchase,

preparation of documents, recording of transactions, handling of stocks and handling of cash).

 Observe the procedures for handling of inventories by the storeroom personnel (e., whether goods

received are checked against purchase order and supplier’s despatch note).

 Examine whether supporting documents are cancelled after processing of payment to supplier.

 Observe independent reconciliation of bank accounts.

Examples of SUBSTANTIVE TESTS OF TRANSACTIONS (for purchases & payments cycle)

 Trace selected purchase orders to related supplier’s invoices and purchase journal entries.

 Trace receiving reports to entry in perpetual inventory records.

 Trace supplier’s invoices to entry in the purchases journal and accounts payable master file.

 Trace purchase journal entries to supporting documents (receiving reports, copy of purchase orders and

purchase requisitions).

 Examine particulars of purchase orders and other internal documentation supporting recorded transactions in

the purchases journal.

 Recompute information on supplier’s invoices.

 Recompute the calculation of stock movements in the stocks register.

 Examine documents supporting purchase transactions for proper classification.

 Compare dates of recorded purchase transactions to dates on receiving reports and supplier’s despatch notes.

 Trace from cash payment journals to bank statements.

 Examine bank reconciliation statements for accuracy and completeness.

 Examine documents supporting cash payments for proper classification.

Payroll – Transactions Related Audit Objectives and Internal Controls

TRANSACTION

RELATED AUDIT

OBJECTIVES INTERNAL CONTROLS

EXAMPLES OF TESTS OF

CONTROL

EXAMPLES OF

SUBSTANTIVE TESTS OF

TRANSACTIONS

 Recorded payroll

payments are for

work actually

performed by

existing

employees

(Existence)

 There is proper

authorisation to work such

as a letter of appointment

or a written authorisation

to work overtime.

 Punch card / Time clock

system (including the use

of biometric technology)

in recording the

attendance to work.

 Time cards / attendance

records are verified by a

supervisor or other

responsible person.

 Procedure that a staff

should not process /

approve payments for

work done by him/her

 Segregation of duties

between personnel

(human resource dept),

timekeeping

(administrative dept) and

payroll disbursements

(finance dept).

 Examine personnel files for

evidence of authorisation

to work.

 Observe the system used to

record attendance to work.

 Examine time cards for

indication of verification.

 Examine payroll

documents for approval.

 Observe whether there is

proper segregation of

duties between personnel,

timekeeping and payroll

disbursements.

 Review the payroll

journal, general ledger and

payroll earnings records

for large or unusual

amounts.

 Compare copy of pay-slips

with payroll journal for

name, amount and date.

 Compare copy of pay-slips

with personnel records.

 Existing payroll

transactions are

recorded

(Completeness)

 Each payroll cheque

issued is accounted for

and recorded.

 Salary is credited directly

to the individual bank

accounts of the employee.

 Instruction for crediting of

the bank accounts of the

employee should be

approved by a responsible

person.

 Reconciliation of bank

account (Preparation of

bank reconciliation

statement) on a monthly

basis by an independent

person

 Account for the issuance of

payroll cheques.

 Discuss with employees

and observe preparation of

bank reconciliation

statement.

 Reconcile the

disbursements in the

payroll journal with the

disbursements on the bank

statement,

 Examine bank

reconciliation statements

for accuracy and

completeness.

 Recorded payroll

transactions are for

the amount of time

actually worked

and are calculated

at the proper pay

rate (Accuracy)

 Internal verifications of

calculations and amounts

in the salary records

(payroll master schedule).

 Authorisation of pay rate.

 Authorisation of

deductions e., income

tax, loan installment etc

 Distribution of pay-slips

to every employee,

 Examine indication of

internal verification and

authorisation on payroll

records.

 Recompute hours work

from time cards.

 Compare pay rates used

against the company’s

approved rate.

 Recompute gross and net

pay.

 Compare copy of pay-slips

against payroll journal for

accuracy of amount.

Cash Receipts – Transactions Related Audit Objectives and Internal Controls

TRANSACTION RELATED AUDIT OBJECTIVES INTERNAL CONTROLS
 Existence - Recorded cash received are for funds
actually received by the company
 Segregation of duties between the person who handles physical cash and the
person who maintains the recording
 Reconciliation of bank account (Preparation of bank reconciliation statement)
 Completeness – Cash received is recorded in cash
receipts journal
 Segregation of duties between the person who handles physical cash and the
person who maintains the recording
 Prelisting of cash received
 Internal verification of the recording of cash receipts (to be done by an independent
officer)
 Reconciliation of bank account (Preparation of bank reconciliation statement)
 Sending regular monthly statements to customers
 Accuracy - Recorded cash receipts are deposited
and recorded at the amount received
 Procedures that cash should be deposited daily.
 Reconciliation of bank account (Preparation of bank reconciliation statement)
 Classification - Cash receipts are properly classified  Use of adequate Chart of Accounts
 Internal review and verification
 Timing – Cash receipts are recorded on timely basis  Procedure requiring recording of cash receipts on daily basis
 Internal verification
 Posting & Summarisation – Cash receipts are
properly included in the subsidiary records and are
correctly summarised
 Reconciliation of bank account (Preparation of bank reconciliation statement)
 Internal verification

Cash Payments – Transactions Related Audit Objectives and Internal Controls

TRANSACTION RELATED AUDIT OBJECTIVES INTERNAL CONTROLS
 Existence – Recorded cash payments are for goods
and services actually received
 Adequate segregation of duties between the person who has custody over
cheques/signatories to the accounts and the person who maintains records
 Examination of supporting documentation before signing of cheques by an
authorised person
 Internal verification
 Completeness – Existing cash payments are recorded  Cheques are prenumbered and accounted for
 Reconciliation of bank account (Preparation of bank reconciliation statement) by
an independent person
 Accuracy – Recorded cash payments are correctly
stated
 Internal verification of calculations and amounts
 Reconciliation of bank account (Preparation of bank reconciliation statement) by
an independent person
 Classification – Cash payment transactions are
properly classified
 Adequate chart of accounts
 Internal verification of classification
 Timing – Cash payments are recorded on the correct
dates
 Procedures requiring transactions to be recorded on the day the cheques are
signed
 Internal verification
 Posting & Summarisation – Cash payment
transactions are properly posted to the ledger and are
correctly sumarised
 Internal verification
 Reconciliation of bank account (Preparation of bank reconciliation statement) by
an independent person
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Audit of Sales, Purchases, Payroll

Course: Auditing (AUD339)

402 Documents
Students shared 402 documents in this course

University: Universiti Teknologi MARA

Was this document helpful?
Free notes: Not for sale
Jismi Md. Salleh
1
AUDIT OF SALES AND COLLECTION CYCLE
Aspects of Operations
Internal Control
Possible errors/ weaknesses
Processing
customer
orders and
despatch of
goods
Approval of sales
order
Checking of credit
limit
Preparation of
despatch
documentation
Despatch of goods
All orders received are recorded on pre-numbered
sales order forms
Credit limit of customers must be approved prior to
delivery/ shipment of goods
All sales orders are checked against the credit limit
(to be evidenced by an initial of the authorised
person)
Despatch of goods must be supported by authorised
despatch notes/shipping documents
Despatch notes are prenumbered and cross-
referenced to sales orders
Acknowledgement should be obtained from
customer for delivery of goods.
Segregation of duties between receiving orders,
approving credit limit, authorising despatch of
goods, delivering goods and billing to customers
Credit limit granted to
unauthorised customer
Goods not despatched to
customers
Goods released before proper
approvals of customer credit.
Sales recorded on fictitious
customers
Proof of deliveries not obtained
from customers
Invoicing/
billing
customers
and
recording
sales
Preparation of sales
invoices
Processing of invoice–
recording in sales
journal and posting to
sales ledger (debtor
a/c) and general ledger
(sales a/c)
Preparation of debtors
statement
Sales invoices are pre-numbered and accounted for
Issuance of sales invoices are duly authorised
Invoices are correctly priced and independently
checked for accuracy of quantities, prices, trade
discounts and totals
Segregation of duties between billings, posting to
the accounts and receiving cash/cheque.
Double-recording of sales
invoices
Omission in recording sale
transactions
Incorrect particulars e.g., amount,
quantity sold on the sales invoices
Prepares invoices without
verifying whether the goods have
been delivered.
Sales
returns and
adjustments
Preparation of credit
notes for valid claims
of defective goods
returned by customer
Credit notes/memorandum must be pre-numbered
and accounted for
Issuance of credit notes are duly authorised
Credit notes are checked to supporting evidence
i.e., goods returned notes and sales invoices
Prices are checked to sales invoices
Incorrect/invalid allowances
given
Incorrect particulars on the credit
notes
Recording
of cash/
cheques
received
Initial recording of
cash received
Bank-in of
cash/cheque into the
Bank account
Recording of
cash/cheque received
in cash book
Posting to sales ledger
control account, sales
ledger (debtor a/c) and
general ledger (cash/
bank a/c)
Reconciliation of bank
balances against bank
statements
Segregation of duties between handling of cash and
record keeping
Prepare “pre-listing” of all cheques and cash
received.
Procedure that all cheques must be deposited on a
daily basis.
Official receipts are issued at the point of receipt of
cash
Official receipts are pre-numbered and accounted
for
Receipts in the initial record must be independently
checked to cash book and debtors ledger
Bank balances were reconciled with bank
statements on monthly basis
Cash-in-hand were independently verified against
balances as per cash book at the end of the day
(Cash balancing procedure)
Unrecorded cash receipts
Cash receipts not deposited
promptly.
Incorrect accounting (recording &
posting) of cash received from
customers in the relevant accounts
Unauthorised issuance of official
cash receipts
General
recording
Posting to sales ledger
Sales Ledger Control a/c and Schedule of Debtors
(listing of individual debtor’s a/c as per sales
ledger) are prepared
Balance as per Sales Ledger Control a/c are
reconciled/ tallied to Schedule of Debtors. Any
differences noted are investigated
Invalid/incorrect entries
(sales/sales return/ cash received)
in the sales ledger and sales
ledger control a/c
Overdue
accounts
To follow-up on
overdue accounts
To write-off bad debts
To make provision for
doubtful debts
Status of overdue accounts is closely monitored by
using aging schedule. Reminder letters are sent to
customers with overdue a/cs.
Writing-off of bad debts are duly authorised by
higher authority
Allowance made for doubtful debts is
independently reviewed
Bad debts not written-off
Under/over provision of doubtful
debts

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