Deck 11: Audit Testing for the Sales and Customer Service Process

Question 1

What is the accounting impact in the sales and customer service process of routine transactions, non-routine transactions and accounting estimates?

Answer 1

a. Routine transactions affect sales and revenue, cash receipts, sales returns, costs of goods sold, sales related expenses, advertising and marketing costs
b. Non-routine transactions impact bad debt write-offs, price adjustments and promotions, valuation of returned inventory, and vendor allowances or rebates.
c. Accounting estimates in the sales and customer service process include bad debt expense, and warranty claims.

Question 2

Which accounts are of most interest to the auditor in the sales and customer service process?

Answer 2

a. Cash and short term investments: cash receipts
b. Receivables: Sales, receipts, returns, bad debts
c. Inventory: Cost of goods sold
d. Accrued liabilities: Commissions
e. Sales revenues and gains: Sales
f. Cost of goods sold: Cost of goods sold
g. Tax expense: Sales taxes
h. Other: Vendor rebates

Question 3

What are tests of controls? What is the purpose of tests of controls? Which controls must be tested? Describe tests of controls that relate to sales and customer service.

Answer 3

a. When risks may be reduced due to controls, especially controls related to financial reporting, the auditor must gather evidence to support the risk reduction using tests of controls.
b. The purpose of tests of controls is for the auditor to obtain evidence that important internal controls are operating effectively, especially those over financial reporting. Such tests results if positive can support reliance on controls, a lower assessment of control risk, a higher planned detection risk and thus less relatively expensive substantive tests. This results in a more efficient and cost effective audit.
c. Not all controls need to be tested by the auditor. The controls of primary importance for all audits are those that shift risk from a significant level to an acceptable level. For an integrated audit of U.S. registered public companies, all important internal controls over financial reporting must be tested by the auditor, even if they have not been identified as shifting risk significantly.
d. Tests of controls related to sales and customer service tend to emphasize proper authorization of transactions, including the establishment of credit, the release of inventory, the pricing of inventory, the billing of customers, and the timing of payment. The auditor would also want to know how the company initiates, approves, and implements changes to these authorization policies.

Question 4

Describe two types of direct process risks in the sales and customer service process.

Question 5

Describe typical financial reporting controls that are of particular concern to most auditors with regard to the sales process.

Question 6

What are the typical activities that make up sales and customer service?

Question 7

What is an alternative to direct handling of cash receipts?

Question 8

Describes the four basic categories of controls that might reduce risks related to sales and customer service?

Question 9

What are confirmations? Why do auditors do confirmations? Distinguish between positive and negative confirmations? What is the authoritative guidance on confirmations?

Question 10

What is electronic data interchange (EDI)? What types of business use EDI?

Question 11

Describe how an automotive manufacturer uses an EDI system.

Question 12

Describe the objectives of the sales and customer service process.

Question 13

Describe three types of indirect process risks in the sales and customer service process.

Question 14

Describe typical financial reporting controls that are of particular concern to most auditors with regard to the sales return processing portion of the sales and customer service process.

Question 15

Why is interviewing important to test of controls when the auditor is examining the sales and customer service process?

Question 16

Why should the auditor examine performance indicators? What kinds of performance measures should the auditor address?

Question 17

What must the auditor consider in deciding which performance indicators to examine and evaluate?

Question 18

Describe typical financial reporting controls that are of particular concern to most auditors with regard to the cash receipts portion of the sales and customer service process.

Question 19

What are the auditors' most critical concerns with regard to cash receipts?

Question 20

What people risks might arise in the sales and customer service process?

Question 21

Describe the cutoff tests the auditor will perform in an audit of the sales and customer service process in a wholesale operation.