In the world of business, the sales and collection cycle is the process which starts from the moment when a person purchases certain goods or services and ends when the company that sells the item receives the full payment. As a company conduct a year-end audit on its financial statements, the external auditors (Also see What is an External Audit?) from the audit firms in Johor Bahru will perform some testing on the sales transactions and internal controls over them. This is to make sure that the company did not have any material misstatements on its accounts receivable and revenue. Also, they will conduct an assessment to make sure that no fraud is present in the company.
Verifying Individual Transactions
By doing so, the auditors may identify whether the amounts of accounts receivable and sales on the financial statements (Also see Differences Between Financial Accounting and Cost Accounting) of a company are correct. To ensure the accuracy of balances of the accounts receivable, they can send confirmation letters to the customers of the company to obtain their objective assurance. On the other hand, to verify the amounts of sales, the auditors should select some sales transactions from the company’s sales ledger and confirm that it has valid sales receipts to prove the transactions.
Tests of Control
The auditors should test the controls the company has established for the sales and collection cycle to identify the reliability and strength of those controls. If the controls are dependable, the auditors can conduct testing on fewer transactions. Sales invoice numbering, authorisation for writing off uncollectable receivables, as well as approval of the purchase order are some common examples of internal controls over the sales and collection cycle.
When auditing the sales and collection cycle, auditors (Also see What are the Audit Procedures and Its Objective?) should choose a sample of transaction randomly and assess the relevant customer statements, invoices and purchase orders. For instance, if the auditors are testing the numbering of sales invoices, they will make sure that the company has accounted for all the numbers without missing any. If the controls they are testing is about the management’s authorisation on the purchase orders, they will check if the manager has signed the document. If the auditors found some errors in the controls, they will increase the transactions they need to check in the audit.
Conducting Internal Audits
The companies may also audit their transactions and procedures to make sure that their internal controls are efficient and reliable. Internal audits will focus more on frauds that the employees may commit, and the internal auditors will design controls over the weak processes to prevent the workers from committing the frauds. Examples of such controls include separation of the job to thwart theft and cover-up, as well as applying mandatory vacation policies so that the staff cannot maintain the fraud scheme every day.
Inspecting for Fraud
Instead of revealing the fraud that the employees or the business owner have committed, the external financial statement (Also see Why Do We Need to Generate Financial Statements?) audits aim to give assurance of on the figures. Nonetheless, the procedures in the sales and collection cycle audit may help the management in discovering fraud.
The frauds that the employee will usually commit include stealing client’s payments and write off the amounts in the company’s accounting system so that those amounts disappear from the receivable. If a worker is accessible to the incoming mail and the accounting system, the auditors need to spend more time in inspecting the receivable that he or she has written off to make sure that they are legitimate and authorised. Also, when the auditors review the purchase orders, they may discover other common frauds, for example, a staff creates sales to fictitious organisations or customers so that they may steal the product.