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Business and Finance

Audit of the Sales and Collection Cycle


All the organizations expect to maximize their profit while working to minimize their losses. One of the main ways that the c companies can achieve this is through performing internal audit to evaluate assertions. Moreover, the firms should conduct a regular audit to assess the understatement of overstatement of the company asserts (Lidstone, & MacLennan, 2017). On the other hand, an auditor must perform substantive internal audit in order to recognize as well as control the deficiencies in the company. The company should therefore follow all the recommendation issued by the auditors to achieve its goals.


The main goal of auditing of the cycle of sales and collection is to assess if the accounts balances influenced by the cycle are moderately presented in line with the standards of the accounting. However, the nature of the accounts can vary relying on the industrial as well as the customer involved (Soykan, & Ulucak, 2016). Moreover, there are differences in the account titles and nature for the service business, an insurance company and the retail company. However it is important to note that, the key ideology remains the same.

Classes of transaction

Further, there is a way in which the accounting information should flow through several accounts in the cycle of sales and collection. The figure below shows the five classes of transformation that the information should flow in the cycle of the sales and collection. It is significant to note that the cycle of sales and collection involves the decisions as well as procedures that are considered to be essential for the transfer of goods ownership, and the services to clients as soon as they are accessible for sale. This process starts with a demand by the clients and finishes with the change of service or material into the account that is receivable and eventually into cash (Awadallah, & El Said, 2017).

The eight business roles for the cycle of sales and collection happen in all the business within the recording of the classes of transactions within the cycle of sales and collection. Notably, in the business functions, the first four procedures which are granting credit, shipping goods, billing customers, and recording sales, are used for sales recording, whereas all the other classes of transactions comprises of just one business function. Therefore, before the auditors can evaluate the control risk as well as design the relevant test of control and tests of substantive of the transaction, they are required to completely understand documentation and the business function as well as records in the business.

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Customer orders

The cycle is imitated by the clients who requests services and goods. Further, in legal terms, it is a proffer to purchase goods or services under particular terms of the purchase. Therefore, the receipt of the clients order frequently results in the instant creation of the sale demand. In this sense, a customer order is a demand for services or goods by the clients (Young, & Moyes, 2014). Besides, these orders may be received via letters or telephone that is sent to the prospective and existing clients, through internet or salesperson, a working network connection between the customer and supplier. On the other hand, sales order is the document that is used to communicate the description and quality of the goods order by the client. Moreover, it is usually used to indicate the credit approval as well as automation for the required shipment.

Granting credit

Nevertheless, before the shipment of the goods, a properly authorized individual should approve the credit to the client for the sales on account. Therefore, a weak practice in the credit approval constantly results in extreme debts, and account receivable which might be uncollectible. The indication of approval of credit on sales order serves as an approval for the shipment of goods. In most organizations, the computer is formulated to automatically approve the sales credit based on the pre-approved credit limits sustained in the customer file of known as the customer master file. Moreover, the computer permits the sales to progress only at a time when the proposed order of sales total plus the existing client balance is less than credit limit within the master file.

Shipping goods

This is the critical role in the initial point in the cycle at which the organization gives up an asset. Several firms recognize sales at the point of shipment of goods. Further, a shipping document is always prepared at the period of shipment that is done automatically by the computer dependant on the information of the sales order (Young, & Moyes, 2014). The document of shipping is significant to the proper billing of the shipment to the clients. The organizations that sustain perpetual records of inventory also update them in line with the shipping records. In this case, the shipping document is a document prepared in order top starts the shipment of the services and goods, which indicates the description of the goods, quantity shipped, and any other relevant information. Therefore, it is the responsibility of the company to send the original shipping order to the client and keeps one or even more copies of the shipping document. Moreover, the document of shipping serves as an indication to the bill the client and might be in paper or rather electronic form.

The main type of shipping document is the lading bills that are the written contract between the seller and carrier of the receipt as well as shipment of goods. Usually, the lading bills comprises of the number of pounds or boxes shipped, instead of the complete detail of the description and quantity (Young, & Moyes, 2014). Moreover, the lading bill is usually electronically transmitted, once the goods have been shipped as well as automatically generates the invoice of the related sales and entry in the journal sales. Several organizations use handheld computers and bar code to record the removal of inventory from the company warehouse. The data is the used to update the records of perpetual inventory.

Billing Customers and Recording Sales

Since billing clients is the means in which the client is informed of amount required for the goods, and it should be correctly done and should be on timely basis. The most significant elements of billing are accuracy, competence and occurrence. Therefore, billing the correct amount is dependent on the charging the client for the quality shipped at a price which is authorized that comprises of consideration for the chargers of freight, terms of payment and insurance (Gonzalez, Hoffman, & Ingram, 2014). In several systems, the billing of the client contains preparation of the electronic record or sales of multi-copy invoice as well as the actual time updating of the files of sales transaction, the account receivable master file, as well as the general ledger of the master file for account and sales receivable. Thus, the system of accounting uses this data to generate the journal of sales and along with the miscellaneous credit and cash receipts, in order to prepare the account receivable trail balances.

Description of related document

Sales invoice

A sales invoice is described as a document or the electronic record showing the description as well as quality of the good and services sold, their prices, insurance, freight charges, terms of the sales and any other relevant information. Moreover, the sales invoice is a method of signaling the clients concerning the amount of sales and the due date of payment. Normally, the company automatically generates the required sales invoice after the client quantity, number, sales terms as well as the destination of the goods shipped as entered. Moreover, the computer calculates the sales invoice total sales and extensions amount using the data entered, with the prices within the inventory master file.

Sales transaction file

This is a file which is computer generated which includes every processes of sale transactions by an accounting system for a number of period that might be on a daily, weekly or monthly basis. Moreover, the document comprises of all the data entered into the company system as well as the data for every transaction, like the name of the client, amount, date, salesperson, commission rate as well as the account classification. Beside, the file might also include the allowances and returns, or the company can provide a different file for the transaction of the returns and allowances (Lidstone, & MacLennan, 2017). Furthermore, the data within the sales transaction file can be used for different records, reports or listing, based on the requirements of the company. These might comprise of the sales journal, transactions for the particular account division or balance, and the accounts receivable master file.

Sales journal or listing

This is the document used for listing or generating report from the sales transaction file which generally include the name of the client, amount, and account classification for every transaction, and date. Also, it recognizes if the sale was for account or even cash receivable. Moreover, the sales listing or journal is normally done in a monthly basis but it can cover any period (Soykan, & Ulucak, 2016). Usually, the sales listing or journal comprises of the totals of each number of account for the required time. Moreover, the similar transaction which is included in the listing or journal is also recorded concurrently to the general ledger file, and if they are on the company account, to the account receivable master file. The listing or journal may include allowance and return or the company can organize for a separate listing or journal of the transactions.

Account receivable master file

This is a file generated by computer that is used to record individual sales, sales return, cash receipts and allowances for every client and to sustain client account balances. It is important to note that the master file master be updated from the sales returns, sales as well as the cash receipts computer transaction files. Besides, the sum of the individual account balances within the master file is equivalent to the total balance of the receivable account within the general ledger (Gonzalez, Hoffman, & Ingram, 2014). The printout of the receivable account master file indicates, by client, the starting balance in the receivable account, sales returns and allowances, every sale transaction, the ending balance as well as cash receipts.

Accounts Receivable Trial Balance

This report or list indicates that the total amount receivable for every client at a point of sale. It is directly generated from the account receivable master file, and is normally an aged trail balance which may include the outstanding total balance and the total days in which the receivable has been outstanding, which is usually categorized in the order of days.

Monthly Statement

Monthly statement is a document which is sent through mail or even electronically to every client showing the starting balance of the client’s account receivable, the date and amount of every sale, the credit memos that have been issued, the total cash payable receivable as well as the ending balance which is due. It is, indeed an important part of the client section of the account receivable master file.

Designing tests of controls and substantive tests

In this section, it is important to understand how the auditors attain the understanding of the internal control of the company. In applying a single usual approach for sales, the auditors study the flowchart of a customer, generate inquires of the customer using the internal control questionnaire, and finally perform the walk through tests of the relevant sales.

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Moreover, the auditor will then uses the data attained in the understanding how the internal control operates to evaluate the control risk. There are four important phases to this evaluation. The first step requires the auditor to obtain a framework for evaluating the control risk. This information or framework can be attained from the six transaction related audit goals. It is significant to note that the objectives are similar to all the audits of the sales. The second phase is that the auditor is required to recognize the key internal control as well as the deficiencies for the sales (Gonzalez, Hoffman, & Ingram, 2014). However, these will not be the same to the entire audit since every customer has diverse internal controls. The third step is after the auditor recognize the deficiencies and controls, the auditor the link them with the goals of the auditing. Finally, the auditor evaluates the control risk for every objective by assessing the control as well as deficiencies for every objective. This phase is vital to the auditing since it directly affects the decision of the auditor concerning the control test as well as test of substantive. Moreover, their decisions should be a subjective decision. Thus, the auditor should give their conclusion concerning the evaluated control risk of the company.

Audit program for test of control and substantive test

Adequate Separation of Duties

The first audit program is the separation of duties. This helps in the prevention of several categories of misstatement due to fraud and errors. Therefore, in order to prevent fraud, the management ought to deny the access of cash to all the individuals who are responsible for entering the cash and sale receipts transaction data into the company computers (Lidstone, & MacLennan, 2017). Moreover, the credit granting role must be separated from the other sales function, since the credit checks are supposed to offset the tendency of the salesperson in order to optimize the volume at the expense of extreme debt write off. Moreover, the personnel who are responsible for doing the internal comparison must be independent of the ones keying in the original information. For instance, the comparison of controlling the batch totals with the reports summary as well as the comparison of the receivable account master file totals with the general ledger balance must be conducted by independent person of the ones entering the cash receipt and sales transactions.

Proper authorization

The auditor should also be concerned about the authorization at the three main points; the credit should be authorized properly prior to sales, the goods must be only shipped after ensuring proper authorization and the prices, which includes the discounts basic terms and the freight should be also properly authorized. The initial two controls are in place to prevent the loss of organization asset through shipping to the clients who are fictitious or even the ones who cannot pay for the goods and services. On the other hand, the price authorization is put in place to make sure that all the sales are billed at the formulated price by the policy of the company. The authorization maybe either done for a particular transaction or as general authorization to a given particular class of transactions. The general authorizations are the ones done by the company computer automatically.

Adequate Documents and Records

Since every organization has a distinctive system of processing, recoding, originating and transaction, the auditor might find it hard to assess if every customer’s process are designed in order for a maximum control. However, adequate keeping of records processes should exist prior to most of the transactions which are related to the audit objectives that can be met. Certain organization, for instance, automatically generate a number of copies pre-numbered sales invoice at the moment a client order is received. The copies of the document are used for the approval of credit, record the total number of shipped units, bill clients as well as authorize shipment.

Pre-numbered Documents

Pre-numbering is meant for the prevention of both the failure to record and bill the sales as well as occurrence of billings that are duplicated and recording. However, it is not useful to have these documents without ensuring that they are accurately accounted for. Though to effectively use the documents, the billing clerk is supposed to file a single copy of every document of shipping in the order of sequence after the shipment is billed.

Monthly Statements

It is vital to send the monthly statement since it encourages the clients to respond whether the balance stated is incorrect (Lidstone, & MacLennan, 2017). However, the monthly statement must be controlled by individuals who do not have any responsibility for recording sales or even handling cash or account receivable in order to avoid the deliberate failure to send these statements. To maximize the effectiveness, every disagreement concerning the balances of account must be directed to the designated individuals who have no responsibility for account receivable, handling cash or even recording the company sales.


In summary, efficient and appropriate internal audit in a company ensures that the propriety of the firm. The sources of the information used in the auditing may come from the amount in the balance report, financial report or other related documents in the company. The effective direction relies on the primary purpose of the audit.


Awadallah, A., & El Said, H. (2017). Auditors’ Usage of Non-Financial Data and Information during the Assessment of the Risk of Material Misstatement for an Audit Engagement: A Field Study.

Gonzalez, G. R., Hoffman, K. D., & Ingram, T. N. (2014). The sales recovery audit: Learning to walk the talk. Industrial Marketing Management43(1), 146-154.

Lidstone, J., & MacLennan, J. (2017). Marketing planning for the pharmaceutical industry. Routledge.

Soykan, M. E., & Ulucak, R. (2016). Is There a Non-linear Relationship between Net Trade Cycle and Corporate Performance in Turkey?. International Business Research9(6), 95.

Young, R., & Moyes, G. D. (2014). An examination of the effectiveness of test-of-controls audit procedures for detecting fraud. International Journal of Auditing Technology2(1), 22-36.



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