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The Sales. Receivables. Cash Cycle

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The Sales. Receivables. Cash Cycle

The above-mentioned cycle approach ensures consistency in the manner in which the recording of transactions within journals along with ledgers is undertaken. The standard approach of considering control internally along with substantive testing aims at dividing the transactions of the auditee, balances as well as identical control procedures into related items groupings. Some of the relevant accounts put into consideration are trade receivables, cash, bad debts allowance, expenses of bad debt expense, sales, other receivables, as well as sales returns. Comprehending the manner in which information along with documents flow within a specific cycle assists the auditor to establish the already established controls. It also enables the auditor to determine the effectiveness of the controls in the process of safeguarding assents and prevention or detection or correction of errors along with fraud.

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There are various transaction processes, which take place in the course of the cycle. The customer receipts are received with the Mail Room. Within the mailroom, the emails are opened and the separation of remittance advice from the checks is carried out. Afterward, a day-to-day listing of all the received checks is prepared. The daily checks listing made are usually termed as the ‘daily remittance list’. If remittance advice is not available, the mail clerks are supposed to formulate one. The remittance advice acts as part of the sales invoice copy, which, is forwarded to the customer and should be brought back in the course of finalizing payment. The remittance advice should bear the name of the client, the number of the invoice as well as its amount. One of the copies of each day‘s remittance list is then forwarded to the respective controller. Cash receipts along with the original daily remittance list are sent to Cash Receipts. It is within this section that a deposit ticket is prepared and recordings were done within the relevant register of cash receipts. The receipts are then deposited each day by Cash Receipts. Afterward, the deposit ticket, which has been validated by a bank, is sent back to the concerned Controller. The Controller undertakes the reconciliation of the deposit ticket, which has been validated by a bank in respect to the cash remittance, which had been prepared within the Mail Room.

However, there are other several transactions, which are related to other sales-receivables. In the first place, sales returns along with allowances must possess controls to ensure that there is proper approval as well as processing. The major controls consist of aspects such as the approval of return goods by the respective sales department. They also involve the authorized receiving department confirming the returned goods receipt as well as preparing the receiving report. Sales return alongside allowances credit memos are also approved separately, that is, approved by an individual who does not belong to the sales department. Nevertheless, bad debts should be written off under strong controls. The key controls, which are utilized in the course of writing- off debts, are such as:

  • The write-off should be initiated by the concerned credit manager and approved by the respective CFO or any other officer. The evaluation of the credit manager, in part, depends on the volume of bad debts, which have been written off, and strong evidence is required prior to the initiation of a write-off.
  • Establishment of a unique accounting ledger for the written-off accounts

This cycle is considered to have a weighty impact on any business entity. However, the process is associated with various inherent risks. For instance, if the final objective of the cycle involves the generation of cash, there are numerous risks, which can be incurred within the process. The first risk involves dispute resolution. Customer retention is also another risk undertaken along with proper billing as well as cash allocation.

The process should have a clear separation of duties in order to avoid the emergence of errors and the occurrence of fraud. It is the Auditor’s responsibility to obtain a clear understanding of the specific entity along with its environment, in addition to the entity’s internal control. This is essential as it enables the auditor to assess the material misstatement risk along with formulating more audit procedures. The advanced audit procedures plan should reflect the decision of the auditor regarding whether the controls’ operating effectiveness will be tested over the cycle of sales-receivables-cash receipts. The plan also makes a reflection on the timing, nature along with substantive procedures’ extent. Nevertheless, the business structure is supposed to separate responsibilities along with duties such that every individual within the entity is unable to perpetuate as well as conceal fraud or even errors. The ideal duties separation process encompasses the proper structuring of transaction authorization. This is because certain transactions may need specific authorization, for instance, odd credit approvals, even though other transactions like cash sales from retails require general authorization. The ideal duties separation also covers the manner in which transactions will be recorded. It also specifies the individuals who are supposed to take custody of assets (for example, inventory, cash, as well as receivables) that are related to the transactions.

However, cost-benefit issues normally have an influence on the targeted organizational structure and thus there is the possibility of being unable to undertake complete separation. In the event that the duties separation is not retained, there is a high probability of establishing compensating controls. The normal compensating controls are such as more supervision along with proprietor involvement within the process. The personnel within the cycle of sales-receivables-cash receipts have diverse responsibilities. The salespeople are expected to undertake sales orders preparation in accordance with the orders placed by customers. The credit manager is expected to approve customer credit as well as initiate the process of writing-off bad debts. Credit managers are answerable to the Chief Finance Officer (CFO). The inventory warehouse is assigned the duty of maintaining the products’ physical custody. The shipping department is concerned with the preparation of shipping documents along with ships’ products based on the approved sale orders. Those working within the billing department undertake the preparation of customer invoices in accordance with the goods shipped. The subsidiary ledger of the accounts receivable is maintained by the accounts receivable personnel. The Mail Room personnel are involved with the receiving of mails along with the preparation of the preliminary records of cash receipts.

The Cash Receipts personnel undertake the safeguarding and ensure prompt depositing of cash receipts. On the other side, the General Ledger personnel are assigned the responsibility of maintaining the control account of accounts receivable as well as recording sales. The sales journal consists of records of the day-to-day sales summaries. The summation of the sales journal details is usually featured within the general ledger on a monthly basis. Finally, the receiving reports are prepared by the receiving department. This department also handles every goods receipt inclusive of sales returns. In the event that the duties are not properly segregated, errors may arise such as the absence of evidence that deliveries were made to the customer. In addition, fraud may take place because the records may indicate that payments were made while in reality they were not made. The fraud of commissioning unauthorized debts write-offs also takes place.

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One of the control tests carried out within this process is the verification of the accounts receivable mathematical accuracy. The assertion related to this test is valuation. The test is undertaken by obtaining the aged trial balance of the accounts receivable from the personnel within the department of Accounts Receivable. Afterward, the obtained trail balance is footed (addition of columns) as well as cross-footed (horizontal summation of column totals). The objective of this test is to make a comparison of the accounts receivable total in accordance with the trial balance with the accounts receivable within the general ledger. Financial statements review is the other test, which is carried out. The assertion related to this test is presented along with disclosure. The objective of the test is to establish whether disclosures are sufficient. Analytical procedures are also undertaken to establish whether the receivables balances are reasonable. The assertion related to this test is existence completeness valuation. Receivables collectability review is another test, which is carried out. Its objective is to establish the allowance adequacy within doubtful accounts. The assertion related to this test is the valuation rights.

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