Auditing sales and revenue - part 1

Summary

In 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.