Ch14 Flashcards
(24 cards)
What is the overall objective in the audit of the sales and collection cycle?
To evaluate whether the account balances affected by the cycle are fairly presented in accordance with accounting standards.
Name the five classes of transactions in the sales and collection cycle.
- Sales (Cash and Sales on account)
- Cash receipts
- Sales returns and allowances
- Write-off of uncollectible accounts
- Estimate of bad debt expense.
What initiates the sales and collection cycle?
A customer’s request for goods (customer order).
What is the purpose of a shipping document?
To initiate shipment of goods, indicating the description, quantity shipped, and other relevant data.
When do most companies recognize sales?
When goods are shipped.
What are the three key audit objectives for billing customers?
- All shipments have been billed (completeness).
- No shipment is billed more than once (occurrence).
- Each is billed for the proper amount (accuracy).
What is a sales invoice?
A document indicating the description, quantity, price, freight charges, and terms of goods sold.
What is the purpose of the accounts receivable master file?
To record individual sales, cash receipts, and returns/allowances for each customer and maintain their balances.
What does the accounts receivable trial balance show?
The amount receivable from each customer at a point in time.
What is included in a monthly statement sent to customers?
Beginning A/R balance, sales amounts/dates, cash payments received, credit memos issued, and ending balance due.
What is a remittance advice?
A document returned with cash payments, showing customer name, invoice number, and amount paid.
What is the purpose of a prelisting of cash receipts?
To verify cash received was recorded/deposited correctly by someone independent of accounting records.
What is a credit memo?
A document supporting reductions in A/R due to returned goods or allowances (part of sales returns/allowances).
Where are sales returns and allowances recorded?
In the sales returns and allowances transaction file and accounts receivable master file.
What is required when an account is deemed uncollectible?
The amount must be written off, and an adjustment made to the financial records.
How is bad debt expense determined?
By estimating the amount of receivables not expected to be collected (per accounting principles).
Which document is used to initiate shipment of goods?
Shipping document.
What is the sales transaction file?
A record of all sales transactions used to generate the sales journal and update A/R/general ledger.
What is the consequence of weak credit approval practices?
Excessive bad debts and uncollectible accounts receivable.
What is the role of the general journal in the sales cycle?
To record adjusting entries like bad debt expense or write-offs (not part of sales transaction documents).
Which document is not part of sales transaction documents?
Accounts receivable trial balance, A/R master file, or general journal (these are records, not documents).
What does the cash receipts transaction file include?
All cash receipts processed, used to prepare the cash receipts journal and update A/R/general ledger.
What triggers the creation of a sales order?
Receipt of a customer’s order (offer to buy goods under specified terms).
How does a computer system enforce credit limits?
By allowing sales only if the order total + existing balance is less than the customer’s credit limit.
