Application of the Audit Process to the Sales and Collection Cycle

Answer the following questions:

• Describe the following documents and records and explain their use in the sales and collection cycle: bill of lading, credit memo, remittance advice, and accounts receivable trial balance.
• Accounting standards require that companies provide footnote disclosures that enable a reader to understand the nature, timing, amount, and uncertainty surrounding revenue and cash flows arising from contracts with customers. Provide an example of an internal control that the client can use to address this requirement and an example of a test of control the auditor can perform to test the operating effectiveness of the control.
• Explain why auditors usually emphasize the detection of fraud in the audit of cash receipts. Is this consistent or inconsistent with the auditor's responsibility in the audit? Explain.
• Distinguish between sampling risk and non-sampling risk. How can each be reduced?
• Identify when an auditor would not use sampling to test the effectiveness of a control or perform a substantive test of transactions. Explain circumstances when an auditor could test the entire population using a data analytic procedure using audit software.
• Why does an auditor review sale returns after year end? What audit objective does this procedure satisfy?
• Discuss whether email responses and oral responses are acceptable confirmation responses. How can an auditor verify the addresses for confirmations sent by mail and confirmations sent electronically?
• What is the relationship of each of the following to the sales and collection cycle: flowcharts, assessing control risk, tests of controls, and tests of details of balances?
• What are the major differences between (a) audit sampling for tests of controls and substantive tests of transactions and (b) audit sampling for tests of details of balances?
• Define what is meant by sampling risk. Does sampling risk apply to nonstatistical sampling, MUS, and variables sampling? Explain.