Amanda Loves to Audit: Accounting Transaction Cycles

Introduction to the Series

• New series on accounting transaction cycles from an audit perspective.
• Will cover various transaction cycles:
  • Sales and cash receipts
  • Purchasing and accounts payable
  • Payroll
  • Property, plant, and equipment
  • Long-term liabilities
• Analyze traditional processes, inherent risks, accounting risks, common control activities, and substantive procedures.
• Aim: To help students understand transaction processes in depth.

Sales Process Overview

• Video split into two parts:
  • Part 1: Sales process expectations, inherent risks, and control activities.
  • Part 2: Tests of internal controls and substantive tests.

Part 1: Sales Process

• Product Considerations:
  • Type of product: Good or service?
  • Single-stage vs. multi-stage delivery.
• Payment Methods:
  • Retail (cash/credit cards) vs. Wholesale (credit/accounts receivable).
  • Payment terms: Discounts for early payment, etc.
• Delivery:
  • Who delivers? Client's service vs. courier companies.
  • Audit implications for delivery expenses.
• Sales Process Personnel:
  • Mode of sales: Online vs. salespeople.
  • Payment methods for salespeople: Salary, commissions, bonuses.
  • Commissions and bonuses increase risk of material misstatement.
• Process Mapping:
  • Retail and wholesale sales processes are different.

Retail Sales Process

• Customer selects item -> Barcode scanned -> System calculates sale total -> Payment processed -> Receipt generated.
• Internal controls: Barcode scanning, computer price list, automatic total calculation, receipt generation.

Wholesale Sales Process

• Customer orders online -> Credit limit check -> Order processed if within limit -> Warehouse picks items -> Items packed and labeled -> Delivery arranged -> Customer signs upon delivery -> Journal entries updated automatically.

Accounting Issues

• Recognition of Revenue:
  • Revenue recognized only upon delivery to customer.
  • Important to adhere to accounting standards for correct revenue recognition.
• Assertions for Sales Account:
  • Occurrence: Risk of overstatement with bonuses or sales targets.
  • Accuracy: Correct customer charges, price overrides, barcode systems.
  • Classification: Correct journal entries and system setups.
  • Completeness: Understatement of sales risk is low unless strategically beneficial.
  • Cutoff: Correct period recognition, important around delivery time.

Conclusion

• Future video will cover tests for control activities and substantive evidence gathering.
• Encouragement to subscribe and explore resources available on Amanda's website for audit knowledge enhancement.
• Thanks for watching, and the next video will delve deeper into testing methods.