Chapter 14 Audit of the Sales and Collection Cycle - HCC Learning ...

Next, we find it useful to talk about the relationship between the financial statements,documents, and records.It is important that students thoroughly understand how the information gets into thefinancial statements, the nature and purpose of journals, master files, and documentsaffecting the cycle. It is difficult to teach the material without actually seeing documentsand records. The amount of time you need to spend depends on the students' backgroundin systems. We go through T-14-1 to help students understand the relationship in theaudit of sales and cash receipts.(See T-14-1)At the same time documents and records are discussed, the business functions inthe cycle can be reviewed (page 443). Ask students to explain how the transactions foreach business function discussed in the early part of Chapter 14 affect the balances inthe statements, and how they are recorded so that they are properly reflected. Table14-1 (page 444) is an excellent summary of the classes of transactions, accounts,business functions, and related documents and records in the sales and collection cycle.(See Table 14-1)Accounting Rules for the Timing of Recording TransactionsIt is important that students understand the "key point" for recording each type oftransaction in the cycle.(See T-14-2)Factors Affecting Evidence AccumulationWe try to relate the material from early chapters to this cycle.• Four audit evidence decisions that must be made in the cycle (Chapter 7).• Acceptable audit risk (Chapter 9).• Expectation of misstatements for each account (Chapter 9). We emphasizeinternal control, materiality of accounts receivable, sales returns and allowances,bad debts, and results of prior year tests as being especially significant.• Understanding internal control and assessing control risk (Chapter 10).• Scope restrictions by the client or conditions (Chapter 3).• Reliability of confirmations (Chapter 7).(See T-14-3)Overview of the Audit for the Sales and Collection CycleBefore we get into the details of the audit, we go over the approach in Figure 10-11(page 320), applied to sales and cash receipts. We want students to understand thatthis approach must be applied to each cycle. Also refer students to Figure 14-2 (page448) and make sure students understand the decision process.(See Figures 10-11 and 14-2)14-2