Auditing sales and revenue - part 1
Summary
TLDRIn this video series, Amanda introduces accounting transaction cycles from an audit perspective, focusing on sales and cash receipts. She outlines the typical sales process, inherent risks, and control activities in different firms. Amanda also discusses how to test controls and perform substantive procedures. The series is designed to help students understand transaction processes in-depth and is broken into multiple parts for comprehensive coverage.
Takeaways
- 📈 The series will cover various accounting transaction cycles such as sales, purchasing, payroll, and long-term liabilities from an audit perspective.
- 🔍 It will analyze typical processes, inherent risks, and common control activities in different firms.
- 📝 The video on sales is divided into two parts: the first focuses on the sales process and inherent risks, while the second will discuss control testing and substantive procedures.
- 🛒 The sales process varies between retail and wholesale environments, with different payment, delivery, and salesperson remuneration methods impacting the process.
- 💼 Salespeople's compensation, such as commissions and bonuses, can increase the risk of material misstatement in sales and revenue recognition.
- 💻 Barcode scanning and price lists are examples of control activities that help ensure the accuracy and classification of sales transactions.
- 📊 The recognition of revenue is a critical accounting issue, with revenue only recognized once goods have been delivered to the customer.
- ✅ Assertions related to sales include occurrence, accuracy, classification, completeness, and cutoff, each with potential risks that auditors must consider.
- 🔑 Control activities are integral to the sales process, such as credit limit checks, order picking, and delivery confirmations, which auditors will assess.
- 🔍 The next video will delve into how to test control activities and gather substantive evidence to ensure the integrity of the sales process and financial reporting.
Q & A
What is the main focus of the new series on 'Amanda Loves to Audit'?
-The new series focuses on accounting transaction cycles from an audit perspective, covering various cycles such as sales and cash receipts, purchasing and accounts payable, payroll, property, plant, equipment, and long-term liabilities.
What are the key components analyzed in each transaction cycle?
-For each transaction cycle, the series analyzes the typical process, inherent and accounting risks, common control activities, how to test those controls, and substantive procedures.
Why is the series divided into multiple videos?
-The series is divided into multiple videos because the depth of analysis for each transaction cycle is extensive and would be too long for a single video.
How does the sales process differ between retail and wholesale environments?
-In retail, the process often involves customers selecting items, barcode scanning, payment processing, and receipt generation. In wholesale, it involves order placement, credit limit checks, warehouse processing, delivery, and obtaining customer signatures upon delivery.
What are the common inherent risks and accounting risks of material misstatement in the sales process?
-Common inherent risks include issues with revenue recognition, particularly around the timing of when goods are considered delivered. Accounting risks involve overstatement of sales due to bonuses or sales targets, accuracy of pricing, correct classification in journal entries, and ensuring completeness of sales records.
What is the importance of barcode scanning in the retail sales process from an audit perspective?
-Barcode scanning serves as an internal control in the retail sales process, ensuring that the correct price is applied to the item and that the total is accurately calculated, reducing the risk of misstatement.
How does the payment method affect the sales process and what controls are associated with it?
-Payment methods such as cash and credit cards require different processes and controls. Cash payments involve receiving the exact amount and giving change, while credit card payments involve charging the card and updating the accounting system. Controls include ensuring accurate recording of transactions and safeguarding against fraud.
What is the significance of delivery in the wholesale sales process from an audit perspective?
-Delivery is significant as revenue recognition in wholesale often occurs upon delivery. Audits must ensure that journal entries correctly reflect the delivery and that customer signatures or electronic confirmations are obtained as proof of delivery.
Why is the recognition of revenue a critical accounting issue in the sales process?
-The recognition of revenue is critical because it must align with accounting standards, which typically require goods to be delivered before revenue can be recognized. Misalignment can lead to overstating revenue and misrepresenting the financial position of the company.
What are the different assertions related to the sales account that need to be considered in an audit?
-The assertions related to the sales account include occurrence, which ensures that all sales have occurred; accuracy, ensuring the correct amount is recorded; classification, that sales are correctly categorized in financial statements; completeness, that all sales are recorded; and cutoff, ensuring that sales are recorded in the correct accounting period.
Outlines
📚 Introduction to Accounting Transaction Cycles Audit Series
Amanda introduces a new series on auditing from the perspective of accounting transaction cycles. The series will cover various cycles such as sales, purchasing, payroll, and long-term liabilities. Amanda plans to analyze typical processes, inherent risks, control activities, and substantive procedures within different firms. The series is a response to requests for in-depth analysis of transaction processes, aiming to aid students and professionals in understanding auditing standards. The first topic, sales, will be explored in two parts: the sales process and its inherent risks in part one, and control and substantive testing in part two.
🛒 Delving into the Sales Process and Its Controls
Amanda discusses the sales process, focusing on the product type, payment methods, and delivery logistics. She emphasizes the importance of understanding whether the entity sells goods or services, the payment terms, and the delivery process. Amanda also highlights the significance of sales personnel and their compensation, which can impact the risk of material misstatement. The paragraph concludes with a flowchart illustrating a typical retail sales process, including barcode scanning, price calculation, and payment processing, all of which serve as internal controls.
📊 Flowcharting the Sales Process in Retail and Wholesale
Amanda contrasts the sales processes in retail and wholesale environments. In retail, the process involves customer selection, barcode scanning, payment, and receipt generation. For wholesale, the process starts with an online order, includes a credit limit check, and continues with warehouse operations like order processing, item collection, and delivery. Amanda also mentions the need for a customer signature upon delivery, which updates the system and triggers journal entries for revenue recognition. The paragraph provides a detailed flowchart for each scenario, highlighting the steps and controls involved.
💼 Accounting Issues and Revenue Recognition in Sales
Amanda addresses accounting issues related to the sales process, particularly the recognition of revenue. She explains that revenue can only be recognized upon delivery, not at the point of order placement. This affects the accuracy of financial reporting, especially regarding the cutoff assertion. Amanda also discusses the risks associated with sales accounts, such as overstatement due to bonuses or commissions, and the importance of accurate pricing and journal entries. The paragraph concludes with a discussion of the potential for understatement of sales and the implications for revenue recognition.
🔍 Upcoming: Testing Controls and Gathering Substantive Evidence
In the concluding paragraph, Amanda outlines the plan for the next video in the series, which will focus on testing control activities and gathering substantive evidence. She summarizes the key points covered in the current video, including the sales process, controls, and potential accounting issues. Amanda invites viewers to engage with the content by liking, subscribing, and visiting her website for more resources on auditing. She expresses her appreciation for the viewers' time and looks forward to continuing the series.
Mindmap
Keywords
💡Transaction Cycles
💡Inherent Risks
💡Control Activities
💡Substantive Procedures
💡Point of Sale (POS)
💡Accounts Receivable
💡Sales Commissions
💡Barcode Scanning
💡Journal Entries
💡Audit Assertions
Highlights
Introduction to a new series on accounting transaction cycles from an audit perspective.
Analysis of traditional processes in various transaction cycles like sales, purchasing, payroll, and long-term liabilities.
Identification of inherent and accounting risks associated with different transaction cycles.
Discussion on common control activities and how to test those controls.
Explanation of substantive procedures that can be used in auditing.
The decision to split the sales video into two parts due to the complexity of the topic.
Exploration of the typical sales process in different types of companies.
Consideration of product types and how they affect the sales process.
Discussion on payment methods and their impact on the sales process.
Importance of understanding delivery methods in the sales process.
Analysis of how sales personnel are compensated and its implications for the sales process.
Mapping out a flow diagram of a typical sales process in a retail environment.
Identification of internal controls within the retail sales process.
Flowchart example of a wholesale sales process, including order placement and credit limit checks.
Discussion on the importance of recognizing revenue at the correct time in the sales process.
Analysis of potential accounting issues related to the sales process, such as revenue recognition and cut-off.
Explanation of the assertions related to the sales account and the associated risks.
Preview of the next video in the series, which will cover testing control activities and gathering substantive evidence.
Invitation for viewers to engage with the content by subscribing and accessing additional resources on the Amanda Loves to Audit website.
Transcripts
what's up audit fans welcome to amanda
loves to audit
and the launch of my new series on
accounting
transaction cycles from an audit
perspective so what are we going to look
at in this series
well for a range of different
transaction cycles like
sales and cash receipts purchasing and
accounts payable
payroll property plan equipment long
term liabilities
we're going to analyze what a
traditional or typical process
looks like in a range of different firms
then we're going to look at the sorts of
inherent and accounting risks
that are going to arise we're going to
try and identify common control
activities how you test those controls
and different
sorts of substantive procedures you
could use
why am i doing this well i've had lots
of requests
for analyzing transaction processes in
depth
and helping students develop some
examples
like my series on auditing standards
this is a really big
undertaking so this is not something
that's going to happen in just a couple
of weeks
it's going to take quite a long time to
get through all the videos
but i look forward to making them and
sharing them with you so without further
ado
let's get into it
[Music]
so my video on sales is going to be
broken into
two parts the first part is going to be
about the process
what should we expect to see in a
regular sales process
in different types of companies then
we're going to look at the common
inherent risks and accounting potential
accounting
risks of material misstatement we'll
also identify the control
activities in today's video however
in part two of this video we're going to
look at
the types of tests of internal controls
that we can do over the control
activities that we identify
and also the type of substantive tests
now why have i broken it into
two videos well it'd just be too long
for one specific video so make sure
you've got yourself a snack
a cup of tea and i'm going to start
drawing on my tablet right now
so let's try and understand that process
related to sales and we need to find out
you know
what exactly is happening so there are
so the sorts of things that you're going
to want to ask or you're going to want
to find
out are about what sort of product
does the entity sell is it something big
is it something small
is it a good so i guess there's some
issues there we want to find out if it's
a good
or if it's a service we need to find
out if it's a what i call a one stage
item
which means you buy it you take it away
straight then and there
or is it multi-staged
so that might mean that you buy
something that has a number of different
components maybe it needs delivery later
so we need to think about what is the
product and how do they sell it how is
it sold
to the customer so once you've figured
out the product
then you need to think about the payment
all right so how do people pay is it a
retail
operation where it's cash
and credit cards so that's likely to be
retail
or is it more wholesale
where people are likely to purchase
on credit or on account and that on
credit or on account
is that accounts receivable process
that a lot of wholesalers manufacturers
will use
because remember there are different
processes if we do have credit
then there are going to be questions
about exactly
who receives credit and what is the
approval process so do we need to look
at bank
statements do we give everybody a
generic approval process or
some sort of generic uh you know
everybody gets 50 000
worth of credit straight away and then
you also need to think about
payment terms so when it comes to
payment terms it might be that you have
to pay within 30 days within 60 days
do you get a discount if you pay early
so payment is really
important now the next thing we need to
consider
is also going to be delivery
how do customers actually receive their
goods
is it that they take it with them
oops can't spell their
take it with them or
is there delivery now when you have
delivery you need to think about
two specific things number one who does
the delivery is it the client
with their own trucks um or delivery
service
or do they contract
some sort of career company or delivery
company
now this is all important because if
they deliver it themselves
then how do we account for those costs
if it's a courier company then when it
comes time to audit expenses we know we
need to look for those
doing the audit the next thing
that i typically think about when i'm
analyzing a sales process
is the sales people so who are how are
sales made are sales made online
are they made with sales people if
they're made with sales people
then we want to ask questions about
how are they paid or remunerated
because if they're paid with a salary so
they get a fixed amount per year
or an hourly wage
then we don't need to think about
whether their pay
affects sales however
if they also receive some commissions
we know this increases our risk of
material misstatement and i'll explain
more on that later
and then the last one do they receive
some sort of bonus again bonuses
are going to impact how
they might manipulate sales accounts
receivable or cash
to meet particular bonus targets it
increases the risk
so when we're thinking about a sales
process how is the sale made
i forgot to add up here is it a good or
a service
is it something that perhaps is
delivered online as well
so we need to think about the product
the payment the delivery
and the sales people to be able to
understand the process because remember
retail is going to be different from
wholesale so next up let's map
out a quick flow diagram or flow chart
of what a process might look like i'm
going to switch to a slightly smaller
pen because we're going to need to fit
quite a lot here on the page
so imagine we've got a start point okay
now here
let's talk about sales in a retail
environment so let's say
sales
retail here okay so in a retail
situation you have your customer comes
in
they pick up the item it needs to be
purchased
so what sort of process what might we
see
well customer
selects item oh i'm not going to run out
i'm going to run out of room here
so they've selected the item it needs to
be
barcode scanned all right so
scan barcode
of the item now when you scan that
barcode
that's going to bring in a control
activity and the barcode acts as a
control activity itself so you're going
to have
some sort of computer price list all
right so you're going to scan all your
items
then the system is going to calculate
the total for the sale
all right so it's going to add
everything up that also acts as an
internal control process
now here i'm going to add a payment
process
so payment type
and let's say if it's cash then
they are received cash
and give change all right and that's
probably
at some point going to update
my accounting system right we don't some
sort of point of sale system
so they're going to have to enter the
cash and receive the change
now if it's a credit card
there'll be a process here
to charge the credit card so regardless
of which payment method we have there's
going to be a process to generate a
receipt
all right so we have to generate
a receipt i'm going to shift this flow
chart up a little bit so i can keep
writing the receipt's going to come from
that accounting system
if we charge the credit card that's
information is going into the accounting
system as well i've got some lines
crossing over here it's not exactly the
neatest flowchart
that's going to give us a little
document receipt
and that's going to go to the customer
okay so in this process let me try and
show it all on one page here i'm going
to highlight the activities
where there is an internal control okay
so scanning the barcode that's an
internal control
we've got the price list acts as an
internal control
the system automatically calculates the
total sales
that's a control that we have to
generate a receipt and then it updates
the accounting
that's going to be a control as well now
if you think about your supermarket
there might also be some process where
you have to deactivate an rfid
tracker on an item if it's an electronic
store
or you're selling something quite
expensive but this is the sort of
process that you might see
in some sort of sales environment now
also i didn't add up here
that prior to when the customer scans
the item
there might also be a step depending on
the business
about the sales person
scans their id all right that could be
in there as an extra control to make
sure that you know exactly who is
selling
or who is using the cash register at
that specific time
so that's an example for retail let's
look at an example
for a wholesale environment
all right so let's say in a wholesale
environment the customer places an order
via the website okay so let's say here
order via the website
okay so they've placed an order into our
system
let's say this is the point of sale
or the web system so pause or a web
system
then what happens typically is that
there will need to be let's not do that
as a square
let's do a credit limit check
so we need to figure out for
how much they owe do they still have
money to be able to
spend on account so if they've
exceeded the limit we're going to need
to send something
denying the order
if they have cash to spare
so they are within the limit
then we can order
or process the sale
okay so there's going to be need some
sort of process there
now processing the sale means that now
we need to organize something happening
in our warehouse i'm going to draw a
line here
because this is in the warehouse so
we're going to process the sale
by entering the details here or
print the order details
so from this system they're going to
print the order details
and generally they generate something
called
a pick list or a pack list so that says
for these this order here are the five
items that need to be collected off the
shelves
that are going into this transaction so
there's going to be a manual process
where somebody has to go off and
collect the order items
all right and then as i collect them
hopefully they're marking them off
the pick list at the same time
so what needs to happen is once they've
collected all the items
let's write this here items
match the pick list
all right if no
then they need to go back and they need
to figure out what am i missing
but if they have all the items yes
they can probably box everything up
attach label
to the box so there has to be some sort
of label
that's generated so that it knows where
to go for delivery
and then probably in the system the mark
the order
is ready for delivery
all right so in
the accounting system somewhere all the
delivery or the inventory management
system
we have to mark that as an order ready
for delivery
then we have to go out and deliver the
item so i'm going to run out of room
here so i'm going to do delivery
down here so imagine they have their own
delivery drivers in-house
so the driver
is going to
deliver the item now typically when you
receive a delivery you also need to have
a signature so
they're going to need to obtain
customer signature now that could be oh
i've got that as a manual process there
let me just make that an online process
because it could be signing on a tablet
which again is going to update that
system to say that the item is delivered
now once it's delivered then
automatically
what should happen is also
some journal entries
okay so we should automatically have
journal entries and that journal entry
would be to go
debit accounts receivable credit
sales and we know that that has to
happen there because that's the delivery
point so that's the accounting standard
rules
and then there will be a process later
where at the end of the month you say to
the customer
here is what you owe and here is what is
to be collected
now i just realized back in our examples
for
our retail entity we didn't talk about
where journal entries
would be made so generally we would make
the journal entry after we generate the
receipt
there would also be a process to create
the automatic
journal there and so that's going to be
debit cash
or money owed from the credit card
credit sales revenue
so that's pretty much the process that
we expect to see
so what we need to do next is think
about our
accounting issues
okay and i mentioned one of those
briefly before and the first one
is recognition of revenue so remember
that the goods
cannot be recognized as revenue until
they've been delivered to the customer
so a lot of businesses will say they can
recognize the revenue as soon as they've
given the parcel over to australia post
for example
but technically they don't earn that
revenue until the article has been
delivered
so we know that we have an issue around
the recognition of revenue
and in terms of assertions
that's going to affect our cutoff
assertion recognizing revenue
in the correct period now if there are
sales commissions
we know that actually let's take this to
from an assertion perspective let's look
at our assertions
occurrence accuracy
accuracy couldn't spell it there for a
minute
classification
completeness oops
and cut off
okay so these are our assertions
relating to the sales account because
this is a transaction account
we need to think about what are the
risks associated with this specific
account
so we're more worried about
overstatement of accounts
like sales because people are more
likely to
overstate revenue so we're worried about
occurrence
could there be any reason for there to
be fake sales or overstatement of sales
and that is most likely related to
bonuses or commissions
i can't write here today
or sales targets so that's going to be a
big one
accuracy is have we charged our
customers the correct amount
so this is often going to be related to
barcodes
and scanning and price lists
is there any way that people can
override the price
if there is a price override who
approves it is there a manager
classification is going to be our
journal entry so that's going to be
related to
do we have any risk in how the journal
entries are processed
set up for the specific account so how
is the accounting system set up
what are the default journal entries are
those journal entries correct
completeness is we're worried about
understatement of sales that's
unlikely everywhere unless you're trying
to receive a government supplement for
low business performance at the moment
so
when would a company be likely to
understate
sales so we have to investigate whether
there are any
issues about the entity or the
environment that would encourage
understatement
and then cut off and cut off is one of
those ones that is typically
related to delivery we can have mistakes
or companies potentially recognizing
sales
when the order is placed
not when the goods are delivered and
that's a really common one if you're
trying to bring sales into this period
alternatively companies might be trying
to push sales into the next period
if they've already reached their sales
targets so we need to look at our
accounting process and go to the client
interview them find out the process
and see if there are any indications
that we might have issues related
to these assertions so that's the end of
our first video in this series i've
talked about
sales i've talked about the sorts of
controls that we might want to see
and i've talked about the potential
accounting issues
what we're going to do in our next video
in this series is actually look at the
process
of how do i test those control
activities
and then also how do i gather
substantive evidence
of course if you thought the video was
useful i'd love for you to give me a
thumbs up
please consider subscribing to make sure
that you get all the videos in the
series
and check out all of my other work on
auditing
and my webpage on amanda loves to
audit.com there's lots of resources
there to help students
and to help you brush up on your audit
knowledge thanks for watching and i'll
see you next time
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