Control Procedures over Sales and Debtors

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Fundamentals of Auditing ACC 311

Lesson 24

TESTING THE SALES SYSTEM

Control Objectives

For many businesses, sales are made on credit and so objectives for the sales cycle includes control debtors

as well.

These control objectives include:

a) Customers' orders should be authorized, controlled and recorded in order to execute them

promptly

b) Goods shipped and work completed should be controlled to ensure that invoices are issued and

revenue recorded for all sales.

c) Goods returned and claims by customers (for example, in respect of damaged goods) should be

controlled in order to determine the liability for goods returned and claims received. .

d) Invoices and credits should be appropriately checked for accuracy and should be authorized before

being entered in the receivables' records.

e) Authorized customer transactions, and only those transactions, should be accurately entered in the

accounting records.

f) There should be procedures to ensure that sales invoices are subsequently paid by customers and

that doubtful amounts are identified in order to determine any provisions or write offs required

Control Procedures over Sales and Debtors

There are a large number of controls that may be required in the sales cycle due to the importance of this

area in any business and the possible opportunities that exist for diverting sales and cash receipts away from

the business.

Typical control procedures at key stages of the sales cycle are:

1. Orders

2. Dispatch

3. Invoicing and credit notes

4. Returns inwards

5. Receivables

6. Bad Debts

(a)

Orders

(i)

Existing customers should be allocated a credit limit and it should be ascertained whether this limit

is to be exceeded if the new order is accepted. If so the matter should be referred to credit control.

(ii)

Any new customer should be referred to the credit control department before the order is accepted.

(iii)

All orders received should be recorded on pre-numbered sales order documents so that a check can

be made that all orders have been dealt with -a completeness check.

(iv)

All orders should be authorized before any goods are dispatched.

(v)

The sales order document should be used to produce a dispatch note for the goods outwards

department. No goods may be dispatched without a dispatch note.

(c) Dispatch

(i)

Dispatch notes should be pre-numbered and a register kept of them to enable them to be matched

with relate to sales invoices and customer orders.

(ii)

Dispatch notes should be authorized before goods leave the company.

(iii)

Regular checks should be made to ensure that all dispatches have been invoiced.

(d) Invoicing and credit notes

(i)

Sales invoices should be authorized by a responsible official and matched with the authorized order

and dispatch note.

(ii)

All invoices and credit notes should be entered In daybook records, the sales ledger, and sales

ledger control account. Batch totals should be maintained for this purpose.

Fundamentals of Auditing ACC 311

(iii)

Sales invoices and credit notes should be checked for prices. casts and calculations by a person

other than the one preparing the invoice.

(iv)

All invoices and credit notes should be serially pre-numbered and regular sequence checks should

be carried out.

(v)

Credit notes should be authorized by someone unconnected with dispatch or sales ledger functions.

(vi)

Copies of cancelled invoices should be retained.

(vii)

Any cancellation of an invoice should lead to a cancellation of the related dispatch note.

(viii)

Cancelled (and free of charge) invoices should be signed by a responsible official.

(ix)

Each invoice should distinguish between different types of sales and, if relevant, different rates of

VAT or sales tax. Any coding of invoices should be periodically checked independently

(e) Returns

(i)

Any goods returned by the customer should be checked for obvious damage and, when accepted. a

document should be raised.

(ii)

All goods returned should be used to prepare appropriate credit notes

(f) Receivables/Debtors

(i)

A receivables ledger control account should be prepared regularly and checked to individual sales

ledger balances by an Independent official.

(ii)

Receivables ledger personnel should be independent of dispatch and cash receipt functions.

(iii)

Statements should be sent regularly to customers.

(iv)

Formal procedures should exist for following up overdue debts which should be highlighted either

by the preparation of an aged list of balances or by the preparation of regular customer statements.

(v)

Letters should be sent to customers for collection of overdue debts. A policy should be in place for

the Institution of legal proceeds where appropriate.

g) Bad debts

(i)

The authority to write off a bad debt should be in writing. Appropriate adjustments should be

made to the sales ledger and the control account

(ii)

The use of court action or the writing-off of a bad debt should be authorized by an official

independent of the cash receipt function.

Tests of Control

Tests of control should be designed to check that the control procedures are being applied and that

objectives are being achieved. Tests may be appropriate under the following broad headings.

(a) Carry out sequence test checks on invoices, credit notes, dispatch notes and orders. Ensure that all

items are included and that there are no omissions or duplications.

(b) Check the existence of evidence for authorization in respect of:

iii.

acceptance of the order (the creditworthiness check)

iv.

dispatch of goods

raising of the invoice or credit note

vi.

pricing and discounts

vii.

Write off debtors as bad debts.

Check both that the relevant signature exists and that the control has been applied.

viii.

invoices, including pricing, and VAT and sales tax calculations

ix.

credit notes,

This is often done by means of a 'grid stamp' containing several signatures on the face of the document.

Ensure that the control has been applied by checking the accuracy of such invoices and credit notes.

(d) Check dispatch notes and goods returned notes to ensure that they are matched with invoices and

credit notes.

(e) Check that control account reconciliations have been performed and reviewed.

In all cases, tests should be performed on a sample basis.

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