Topic 26 Internal Control Sales Cycle PDF [PDF]

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CPA P1 Auditing



TOPIC 26: INTERNAL CONTROL: SALES CYCLE To understand the need for controls, it is helpful to break down the sales process into its component stages. Bear in mind that a purchase (see next Session) is simply a sale viewed from the other party‘s perspective, and hence much of the documentation (and many of the controls) is a mirror of the sales process. The table shows the various stages of the sales .cycle., together with:



 What could go wrong  Control procedures to meet the control objectives (that things don‘t go wrong!)



It is essential that you understand the difference between:



OBJECTIVES – what the company wants to achieve (or avoid) PROCEDURES – what the company does to address its objectives- i.e. Control Activity put in place



Stage in Cycle Order Received



Risks/Objectives 1. Order may be forgotten 2. Customer unlikely to pay 3. Product not available 4. Goods are



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Control Activity 1. All orders confirmed in writing 2. Carry out credit checks for new customers 3. Warehouse checked 1



dispatched to poor



before orders



credit risks



accepted 4. Customer credit limit is reviewed prior to goods being dispatched



Goods Despatched (or service performed)



1. Wrong items sent 2. Customer does not receive delivery



1. Goods dispatch note prepared from Order form and all dispatches checked against GDN before they leave the warehouse. 2. A named person at customer is required to sign for goods, confirming receipt



Invoice raised



1. Wrong items



1. Invoice checked



invoiced



against GDN



2. Invoice does not add up 3. Delay in posting invoices 4. Errors in posting to Receivables Control Account



2. Random invoices arithmetic checked 3. Sequence checks on invoicing to ensure complete posting 4. Control Account reconciled on a regular basis to the Receivables Listing



Payment Received or..



1. Errors in posting



1. Control Account



payment to the



reconciled on a



Receivables Control



regular basis to the



Account



Receivables Listing



2. Payment is stolen by employees



2. The post is opened by 2 people, both



CPA P1 Auditing 3. Settlement discount wrongly allowed 4. Delay in Banking 5. Customer does not pay/is slow to pay



independent of the Accounts dept. A further non Accounts employee banks money 3. All settlement discounts to require authorisation of senior responsible official 4. Regular Bank reconciliations to spot delays in banking 5. Credit control function to chase customers



Credit Given (i.e. Sales Returns)



1. Wrong Amount credited 2. Unauthorised credit given 3. Sales returns mistakenly accounted for as purchases



1. Credit notes referenced back to original invoice 2. Goods to be returned and checked to ensure credit deserved. All credit notes to be authorised by manager 3. Booking system for returns, with separate holding area



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NOTES



 All documents should be pre-numbered in a sequence, so that completeness and validity are easy to verify



 All documents should be cross-referenced, so that it is easy to trace from the original order through to the Accounts



COMMON FRAUDS Money Received Is Stolen By Staff  Stolen money is hidden by false entries to the Receivables Ledger  Receipt of money (whether by post, or by bank transfers) should be organised by different staff to those able to make entries to the Receivables Ledger (segregation of Duties – Control Activity) In Shops, Money Stolen By Staff  Cash, so more attractive/easy to steal (Cash & Inventory are very susceptible to theft)  In McDonalds, staff have uniforms without pockets  Cash registers should need keys to open  These keys identify the member of staff  Cash registers require staff to enter PRODUCTS rather than amounts – to stop overcharging (and then stealing the excess)  Price lists should be easily accessible to customers, to avoid overcharging  Reconcile till record to cash therein (over/unders list published daily – Supermarkets!)



CPA P1 Auditing



INTERNAL CONTROL CHECKLISTS FOR THE SALES CYCLE. As noted earlier , auditors need to establish what controls are in operation, document the system (ICQ & ICEQ), and then test that controls are operating properly. We also saw that one method of documenting controls was to use some form of internal control questionnaire/checklist.



For sales, an Internal Control Questionnaire (ICQ) would be a checklist of questions to establish which controls were in operation. For example: ICQ – SALES ORDERS RECEIVED  Q1 Are all new customers credit-checked before goods are sent on credit?  Q2 Are all sales orders received in writing on standard, pre-numbered forms?



If the auditor is using an Internal Control Evaluation Questionnaire (ICEQ), the layout would be slightly different , with an emphasis on establishing whether specific errors/frauds are possible, rather than establishing whether certain desirable controls are in operation



ICEQ - SALES ORDER RECEIVED  Q1 Could the company send goods on credit to a customer who is unlikely to pay? (important to auditors as it impacts on the need for a doubtful debt provision)



Answer – no, because of the following controls:  All new customers are credit checked using an external reference agency  Customer is then given a credit limit, which is reassessed every 3 months



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TESTS OF CONTROL OF SALES (for inclusion in a work programme). If you can come up with control procedures, then tests of control are easy – simply ask yourself how you would find out if a particular control procedure had taken place? What evidence might exist? With some controls, the easiest form of evidence may be to observe the control in operation (one of the reasons auditors like to attend a client‘s inventory count). For those controls that have operated in the past, inspection of documents showing that the control took place (e.g. a signature to evidence authorisation) might be suitable.



CONTROL TEST



For a sample of customers, obtain the customer file and inspect written reply from credit reference agency. This test proves customer that a control exists over the screening of a potential customers credit worthiness so as to minimise the risk of selling to poor credit risk customers