Chapter 14 Instructors Guide.docx

Chapter 14 Instructors Guide.docx

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Chapter14InstructorsGuide

Chapter14

AuditoftheSalesandCollectionCycle:

TestsofControlsandSubstantive

TestsofTransactions

Thisisanessentialchapterbecauseitisthefirstchaptertodealwithspecificevidenceinanauditarea.Itisessentialthattheconceptsofpreviouschaptersbeappliedtothesalesandcollectioncycle.Thefollowingaretheprimaryareascovered:

⏹Chapteropeningvignette

⏹Accountsandclassesoftransactionsinthesalesandcollectioncycle

⏹Accountingrulesforthetimingofrecordingtransactions

⏹Factorsaffectingevidenceaccumulation

⏹Overviewoftheauditforthesalesandcollectioncycle

⏹Typesofaudittestsappliedtosalesandcashreceipts

⏹Methodologyfordesigningtestsofcontrolsandsubstantivetestsoftransactionsforsales

⏹Designandperformanceformatauditprocedures

⏹Methodologyfordesigningtestsofcontrolsandsubstantivetestsoftransactionsforcashreceipts

⏹Effectoftheresultsoftestsofcontrolsandsubstantivetestsoftransactions

⏹Suggestedhomeworkproblemsandcases

ChapterOpeningVignette–“TheChoiceIsSimple-RelyonInternalControlorResign”

Thisvignettemakesthepointthatsomecompaniesaresolargeandsocomplexthattheonlywaytheycouldpossiblybeauditedisthroughrelianceoninternalcontrols.Thispresentsadilemma:

whatdoesanauditordoifheorshefindsthatalargeclienthaspoorcontrols?

Theproblemisexacerbatedbythedemandsforpubliccompaniestoissueannualreportsatanearlydate,andtofiletheirForm10-KwiththeSEC.WeremindstudentsthattheSarbanes–OxleyActrequiresauditorstoalsoreportoninternalcontrolforpubliccompanies

Thiscaseoffersanopportunitytodiscussthedifferencesbetweenauditinglargeandsmallcompanies,andauditingpublicandnon-publiccompanies.Studentsmaybeinterestedinthefactthateventhelargestfirmshavemoresmallclientsthanlargeonesinabsolutenumbers.However,mostaudithoursarespentonthelargeones.

AccountsandClassesofTransactionsintheSalesandCollectionCycle（p.444）

Weliketostartwithasetoffinancialstatementsandremindstudentsthattheoverallstatementsarebeingaudited.ReferencecanalsobemadetotheHillsburgHardwareCompanyfinancialstatementsincludedintheglossyinserttothetext.Allsalesandcollectioncycleaccountsinthestatementscanbeidentifiedtoshowwhichareasareinvolved.Figure14-1（page444）ishelpfulhere.

（SeeFigure14-1）

Next,wefinditusefultotalkabouttherelationshipbetweenthefinancialstatements,documents,andrecords.

Itisimportantthatstudentsthoroughlyunderstandhowtheinformationgetsintothefinancialstatements,thenatureandpurposeofjournals,masterfiles,anddocumentsaffectingthecycle.Itisdifficulttoteachthematerialwithoutactuallyseeingdocumentsandrecords.Theamountoftimeyouneedtospenddependsonthestudents'backgroundinsystems.WegothroughT-141tohelpstudentsunderstandtherelationshipintheauditofsalesandcashreceipts.

（SeeT-14-1）

Atthesametimedocumentsandrecordsarediscussed,thebusinessfunctionsinthecyclecanbereviewed（page445）.AskstudentstoexplainhowthetransactionsforeachbusinessfunctiondiscussedintheearlypartofChapter14affectthebalancesinthestatements,andhowtheyarerecordedsothattheyareproperlyreflected.Table14-1（page446）isanexcellentsummaryoftheclassesoftransactions,accounts,businessfunctions,andrelateddocumentsandrecordsinthesalesandcollectioncycle.

（SeeTable14-1）

AccountingRulesfortheTimingofRecordingTransactions

Itisimportantthatstudentsunderstandthe"keypoint"foreachtypeoftransactioninthecycleforrecordingpurposes.

（SeeT-14-2）

FactorsAffectingEvidenceAccumulation

Wetrytorelatethematerialfromearlychapterstothiscycle.

⏹Fourauditevidencedecisionsthatmustbemadeinthecycle（Chapter7）.

⏹Acceptableauditrisk（Chapter9）.

⏹Expectationofmisstatementsforeachaccount（Chapter9）.Weemphasizeinternalcontrol,materialityofaccountsreceivable,salesreturnsandallowances,baddebts,andresultsofprioryeartestsasbeingespeciallysignificant.

⏹Understandinginternalcontrolandassessingcontrolrisk（Chapter10）.

⏹Scoperestrictionsbytheclientorconditions（Chapter3）.

⏹Reliabilityofconfirmations（Chapter7）.

（SeeT-14-3）

OverviewoftheAuditfortheSalesandCollectionCycle

Beforewegetintothedetailsoftheaudit,wegoovertheapproachinFigure10-11（page322）,appliedtosalesandcashreceipts.Wewantstudentstounderstandthatthisapproachmustbeappliedtoeachcycle.AlsoreferstudentstoFigure14-2（page450）andmakesurestudentsunderstandthedecisionprocess.

（SeeFigures10-11and14-2）

TypesofAuditTestsAppliedtoSalesandCashReceipts

Itisworthwhiletoreviewthetypesofaudittestsusedinconductingtheauditanddiscussthembrieflyforsalesandcashreceipts.

（SeeT-14-4）

Askstudentstogiveexamplesofeachtypeoftestsforsalesandcashreceipts.ItisusefultorefertoFigure13-1（page404）asthisdiscussiontakesplace.

（SeeFigure13-1）

MethodologyforDesigningTestsofControlsandSubstantiveTestsofTransactionsforSales（page450）

WearenowreadytoreviewTable14-2（pages454-455）.

⏹Askstudentswhytransaction-relatedauditobjectivesareusedtodeveloptheauditprogram.

⏹Discusstheneedto,andhowtoconvertthegeneraltransaction-relatedauditobjectivestothoseusedincolumn1ofTable142.

⏹Remindstudentsthattherearefourauditevidencedecisions.Onlyauditproceduresarestudiedinthischapter.

⏹Selecttwotransaction-relatedauditobjectivesandgooverthemindetail,coveringcolumns1-5.Theimportantthingistoemphasizehowthecolumnsrelatetoeachother（seetopofnextpage）.

1.Transaction-relatedauditobjectives-allfourothercolumnsaretiedtotheobjectives.

2.Keyinternalcontrols-relatetoobjectives.

3.Commontestsofcontrols-relatetokeycontrols.

4.Deficiencies-relatetoobjectivesandindicateanabsenceofcontrols.

5.Commonsubstantivetestsoftransactions-relatetoobjectives.

（SeeT-14-5）

⏹AskstudentstoexplaintheeffectontestsofcontrolsandsubstantivetestsofeliminatingcertainspecificcontrolsinTable14-2.

⏹Askstudentstoexplainthedifferencebetweenoccurrenceandcompletenessforsales.Figure14-4（page457）isahelpfulillustrationhere.

（SeeFigure14-4）

⏹AskstudentswhycertainproceduresonTable14-2areincludedinmorethanoneplace.

⏹GooverProblem14-25.

DesignandPerformanceFormatAuditProcedures（page460）

Distinguishbetweenadesignandaperformanceformatauditprogram,andexplainwhyeachisimportant.ItisusefultocombineseveraloftheproceduresinTable14-2toshowhowitshouldbedone.

ReferstudentstoTable14-2（pages454-455）,Table14-3（page463）,andFigure14-6（page464）toillustrategoingfromadesigntoaperformanceformat.Weaskstudentstotraceaprocedureineachdirection.Askthestudentswhichformatisdonefirstbytheauditorandwhichformatisusedbytheauditorinthefield.

（SeeTables14-2and14-3,Figure14-6）

MethodologyforDesigningTestsofControlsandSubstantiveTestsofTransactionsforCashReceipts（page461）

Wespendlittletimecoveringcashreceiptsexcepttoemphasize:

⏹Theobjectivesandconceptsareidenticaltothosecoveredinsales.

⏹Thepotentialfortheftincashreceiptsandtheimportanceoftheprelisting.

⏹Therelationshipofsalesandcashreceipts,andwhytheyareapartofthesamecycle.

⏹Certainobjectivesaremoreimportantforcashreceiptsthansales,andothersarelessimportant.Itisusefultodiscusswhichonesareimportantandwhy.

⏹Defineandexplainthemeaningofaproofofcashreceiptsanditsimportanceasanaudittest.

⏹Defineandexplainlapping.

EffectofResultsofTestsofControlsandSubstantiveTestsofTransactions（page466）

Itisimportanttoremindstudentsthatonlytestsofcontrolsandsubstantivetestsoftransactionsauditprocedureshavebeendiscussed,notsamplesize,oritemstoselect.Alsodiscuss,again,therelationshipbetweentestsofcontrolsandsubstantivetestsoftransactionsandtherestoftheaudit.

Figure14-7（page467）providesagoodsummaryofthechaptermaterial.Thisfiguresummarizesthemajoraccountsinthesalesandcollectioncycle,howthetypesofaudittestsareusedtoaudittheseaccounts,andhowtheauditriskmodelrelatestotheauditofthesalesandcollectioncycle.

（SeeFigure14-7）

SuggestedHomeworkProblemsandCases

Tocompletethecoverageofthematerialinthischapter,wesuggestassigningProblem14-31orCase14-33.WesuggestusingPartIVofthePinnacleManufacturingIntegratedCase（Case1434）ifyouassignedPartIII（Case10-45）earlier.

CHAPTER14

CROSS-REFERENCEOFLEARNINGOBJECTIVESANDPROBLEMMATERIAL

LearningObjectives

Review

Questions

Multiple

Choice

Questions

Discussion

Questionsand

Problems

ACLProblemand

Cases

14-1Identifytheaccountsandtheclassesoftransactionsinthesalesandcollectioncycle.

14-23

14-2Describethebusinessfunctionsandtherelateddocumentsandrecordsinthesalesandcollectioncycle.

14-1,14-2,

14-3,14-4

14-24,14-27

14-5

14-3Understandinternalcontrol,anddesignandperformtestsofcontrolsandsubstantivetestsoftransactionsforsales.

14-5,14-6,

14-7,14-8,

14-9,14-10,

14-18,14-19,

14-20

14-21,14-22,

14-23

14-24,14-25,

14-26,14-27,

14-28,14-29,

14-31,14-32

14-33,14-34

14-4Applythemethodologyforcontrolso