Introduction to Sales Cycle | Auditing and Attestation | CPA Exam

IN this video, I discuss auditing the sales cycle.
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The sales and collection cycle involves the decisions and processes necessary for the transfer of the ownership of goods and services to customers after they are made available for sale. It begins with a request by a customer and ends with the conversion of material or service into an account receivable, and ultimately into cash.

Processing Customer Orders

A customer’s request for goods initiates the entire cycle. Legally, it is an offer to buy goods under specified terms. The receipt of a customer order often results in the immediate creation of a sales order.

Customer Order
A customer order is a request for merchandise by a customer. It may be received by telephone, letter, a printed form that has been sent to prospective and existing customers, through salespeople, electronic submission of the customer order through the Internet, or other network linkage between the supplier and the customer.

Sales Order
A sales order is a document for communicating the description, quantity, and related information for goods ordered by a customer. This is often used to indicate credit approval and authorization for shipment.

Granting Credit

Before goods are shipped, a properly authorized person must approve credit to the customer for sales on account. Weak practices in credit approval often result in excessive bad debts and accounts receivable that may be uncollectible. An indication of credit approval on the sales order often serves as the approval to ship the goods. In many companies, the computer automatically approves a credit sale based on preapproved credit limits maintained in a customer master file. The computer allows the sale to proceed only when the proposed sales order total plus the existing customer balance is less than the credit limit in the master file.

Shipping Goods

This critical function is the first point in the cycle at which the company transfers ownership of assets. Most companies recognize sales when goods are shipped. A shipping document is prepared at the time of shipment, which can be done automatically by computer, based on sales order information. The shipping document, which is often a multicopy bill of lading, is essential to the proper billing of shipments to customers. Companies that maintain perpetual inventory records also update them based on shipping records.

Shipping Document
A shipping document is prepared to initiate shipment of the goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. The company sends the original to the customer and retains one or more copies. The shipping document serves as a signal to bill the customer and may be in electronic or paper form.

One type of shipping document is a bill of lading, which is a written contract between the carrier and the seller of the receipt and shipment of goods. Often, bills of lading include only the number of boxes or pounds shipped, rather than complete details of quantity and description. (For the purpose of this textbook , however, we will assume that complete details are included on bills of lading.)

The bill of lading is often transmitted electronically, once goods have been shipped, and automatically generates the related sales invoice as well as the entry in the sales journal. Many companies use bar codes and handheld computers to record removal of inventory from the warehouse. This information is used to update the perpetual inventory records.

Billing Customers and Recording Sales

Because billing customers is the means by which the customer is informed of the amount due for the goods, it must be done correctly and on a timely basis. The most important aspects of billing are:

All shipments made have been billed (completeness)
No shipment has been billed more than once (occurrence)
Each one is billed for the proper amount (accuracy)
Billing the proper amount is dependent on charging the customer for the quantity shipped at the authorized price, which includes consideration for freight charges, insurance, and terms of payment.