What Are the Audit Procedures for the Sales & Collection Cycle?

The sales and collection cycle begins at the initial purchase and continues through billing and payment receipt for every transaction. Since this is the core of your revenue bookings, you need to be sure it is accurate at all times. Auditing the records from your sales and collections regularly will ensure that you identify any procedural problems or potential errors right away.

The general ledger and financial statements both contain the sales and revenue figures for the given period. The very first step of the audit is to verify that the figures reported in the financial statements match those in the general ledger. A trial balance report and an account summary from the ledger should reflect the same sales revenue figures as the financial statements.

Depending on the accounting approach of the business, sales are recorded when the order is shipped or when payment is received. Under cash accounting, the sale is recorded upon payment, while accrual accounting demands that the sale be recorded when the product ships, not when the cash is received. Review a sampling of the sales transactions to validate that these procedures are being followed. Reporting sales outside of these guidelines can potentially create a material misstatement of revenue, so the audit phase is essential for these controls.

Tracking the actual cash flow is just as important as ensuring that the sales are recorded accurately. A company's sales records offer little without the actual revenue being received from customers. Select a representative sample of roughly 3 to 5 percent of the cash transactions, and follow the cash from receipt to deposit to ensure it was booked in the ledger correctly and appears in the bank account deposit records. For companies that also sell on credit, review the open receivables and assess the aging of the accounts. There should be a predetermined aging point at which accounts are written off, and every effort should be made to collect on those funds before that bad debt determination. Follow the collection process for a sample of the aging accounts to ensure that the procedures are followed appropriately to close these open accounts.

The key to this type of audit is to ensure that the company's procedures are solidly implemented with no margin for error. The audit should also look for any areas where checks and balances are missing, such as an employee who has access to both the payables and the bank account. Review the company's procedural manuals and make sure the audit is testing each of the documented policies. Any red flags that come up during the audit should be addressed right away to protect your company from potentially significant financial loss.