Auditing Sales and Collection cycle in the auditing financial statements in AVINA – IAFC

Auditing financial reports is the synthesis of the audit results of separate economic profession cycle. Hence, it is to make conclusions on the financial statements which are presented honestly and reasonably and suffer no serious errors on critical aspects. The auditing financial statements is a basis for making objective and honest opinion on the financial statements and providing investors, suppliers, customers and interested persons and States agents reliable information. Thereby it contributes to enhancing the reputation, quality of services and increasing competitiveness with other auditing companies. Sales and Collection cycle has an important role in a business cycle, which is the final stage to assess the outcome of a full cycle of business operations. In fact, according to the judgment of professional auditor, the result of Sales and Collection cycle indicates the important items which has crtical function on the financial statements and the nature of this cycle demonstrates complex relationships of many parties. Hence, the results of the Sales and Collection Cycle is the primary subject that receive cocern of the financial statements’ users. Thus, performing Sales and Collection cycle in the auditing financial statements allows companies to save time, costs, and improve audit efficiency. It helps enterprise to see the flaws and weaknesses in the accounting and management to improve business production efficiency, to contribute to ensuring the legitimate of two parties and to determine the responsibility of enterprises in the implementation of their obligations to the State. Recognizing this importance, while studying at National Economics University and practical time in AVINA – IAFC, I have chosen the topic: “Auditing Sales and Collection cycle in the auditing financial statements in AVINA – IAFC”. Through the topic study, I want to have an in-depth understanding about nature as well as the implementation of audit work on both theoretical and practical perspectives based on my knowledge at the university and internship. The content of the thesis is as follows:

TABLE OF CONTENTS

LIST OF DIAGRAM iii

LIST OF TABLE iv

INTRODUCTION 1

CHAPTER 1: THEORETICAL FRAMEWORK ON AUDIT OF SALES AND COLLECTION CYCLE IN FINANCIAL AUDITS CONDUCTED BY AVINA - IAFC 3

1.1 Features of sales and collection cycle 3

1.2 Accounting for Sales and Collection 4

1.3 Fraud and errors in accounting information of Sales and collection 6

1.3.1 Fraud 6

1.3.2 Errors 6

1.3.3 The potential frauds and errors in accounting information reflecting Sales and Collection 6

1.4 Internal controls over Sales and collection cycle 6

1.5 Objectives in auditing the Sales and collection cycle 7

1.6 The necessity of auditing Sales and collection cycle in financial audits 9

1.7 Sequence in auditing the Sales and collection cycle in financial audits 9

1.7.1 Audit planning 10

1.7.2 Audit implementation 13

1.7.3 Completing the Sales and Collection cycle audit 19

CHAPTER 2: PRACTICE OF AUDIT SALES AND COLLECTION CYCLE IN FINANCIAL AUDITS CONDUCTED BY AVINA – IAFC 20 2.2 Objectives in auditing the Sales and collection cycle of AVINA – IAFC 22

2.3 Sequence in auditing Sales and collection cycle in financial audits conducted by AVINA – IAFC 24

2.3.1 Audit planning 24

2.3.2 Audit implementation 32

2.3.3 Audit Completion 57

CHAPTER 3 ASSESSMENTS AND RECOMMENDATIONS TO IMPROVE AUDIT OF SALES AND COLLECTION CYCLE IN FINANCIAL AUDITS CONDUCTED BY AVINA – IAFC 59

3.1 Assessment on audit of Sales and collection cycle in financial audits conducted by AVINA – IAFC 59

3.1.1 Strengths 59

3.1.2 Weaknesses 60

3.2 Recommendations 62

3.2.1 The necessity of accomplishing Sales and Collection cycle 62

3.2.2 Solutions to improve the audit of Sales and Collection cycle in financial audits

by AVINA – IAFC 63

CONCLUSION 65 REFERENCES 66

LIST OF DIAGRAM

Diagram 1.1 The cycle of production and business operations of

manufacturing commercial enterprises 3

Diagram 1.2.1 Process of vouchers circulated in the Sales and Collection cycle 4

Diagram 1.2.2 Accounting process of sales and collection cycle 4

Diagram 1.5 Steps to implement the objectives of the audit 8

Diagram 1.7 The process of auditing the sales and collection cycle 9

2.1 Features of Sales and Collection of customers that affect financial audits conducted by AVINA - IAFC 20

Diagram 2.1: Function of the sales and collection cycle 20

Diagram 2.3.1 The company accounting system 29

Diagram 2.3.2.1 Reconcilation process 37

Diagram 2.3.2.2 The process of confirmation letter of receivables 38

LIST OF TABLE

Table 1.7.2.1 Tests of control with sales transactions 13

Table 1.7.2.2 Tests of control with collection cycle 14

Table 1.7.2.3 Test of details of of sales transactions 16

Table 1.7.2.4 Test of details in Cash Collection 17

Table 1.7.2.5 Audit procedures on customer receivables 18

Table 2.2 Auditing objectives for the sales and collection cycle specified by AVINA - IAFC 22

Table 2.3.1.1 Balance Sheet (31/12/2014) 26

Table 2.3.1.2 Income Statement (31/12/2014) 27

Table 2.3.2.3 The procession of inspecting customer receivable items in detail 56

Auditing financial reports is the synthesis of the audit results of separate economic profession cycle Hence, it is to make conclusions on the financial statements which are presented honestly and reasonably and suffer no serious errors

on critical aspects The auditing financial statements is a basis for making objective and honest opinion on the financial statements and providing investors, suppliers, customers and interested persons and States agents reliable information Thereby it contributes to enhancing the reputation, quality of services and increasing competitiveness with other auditing companies

Sales and Collection cycle has an important role in a business cycle, which is the final stage to assess the outcome of a full cycle of business operations In fact, according to the judgment of professional auditor, the result of Sales and Collection cycle indicates the important items which has crtical function on the financial statements and the nature of this cycle demonstrates complex relationships of many parties Hence, the results of the Sales and Collection Cycle is the primary subject that receive cocern of the financial statements’ users Thus, performing Sales and Collection cycle in the auditing financial statements allows companies to save time, costs, and improve audit efficiency It helps enterprise to see the flaws and weaknesses in the accounting and management to improve business production efficiency, to contribute to ensuring the legitimate of two parties and to determine the responsibility of enterprises in the implementation of their obligations to the State

Recognizing this importance, while studying at National Economics University and practical time in AVINA – IAFC, I have chosen the topic: “Auditing Sales and Collection cycle in the auditing financial statements in AVINA – IAFC”

Through the topic study, I want to have an in-depth understanding about nature as well as the implementation of audit work on both theoretical and practical perspectives based on my knowledge at the university and internship

The content of the thesis is as follows:

Chapter 1: Theoretical framework on auditing Sales and Collection cycle

in financial audits conducted by auditing firms

Chapter 2: Practice of auditing Sales and Collection cycle in financial audits conducted by AVINA - IAFC

Chapter 3: Assessments and Recommendations to improve auditing Sales and collection cycle in Financial audits Conducted by AVINA - IAFC

Due to limited internship time and knowledge, my thesis inevitably has shortcomings Therefore, I am looking forward to receiving my teacher’s advices and suggestions to improve my thesis

I would like to express my most sincere thanks to Assoc Prof Dr Nguyen Thi Phuong Hoa, the staff from AVINA – IAFC and my teachers from Auditing Department of National Economics University who help me to complete this thesis

CHAPTER 1: THEORETICAL FRAMEWORK ON AUDIT OF SALES AND COLLECTION CYCLE IN FINANCIAL AUDITS

CONDUCTED BY AVINA - IAFC 1.1 Features of sales and collection cycle

Diagram 1.1 The cycle of production and business operations of

manufacturing commercial enterprises

The Sales and collection cycle is the last cycle in the capital circulation This cycle is extremely important in companies, especially manufacturing business or commercial services The outcome of this cycle is used to evaluate the effectiveness

of the previous cycles and results of the whole process of production and business

The Sales and collection cycle is the ownership transfer of goods and services through goods – money transfer and only ends when the money is obtained

or customer payments are accepted An efficient cycle means that the funds are mobilized properly, cash flow is distributed seamlessly to set the stage for the next production and business cycle

The Sales and collection cycle is the cycle shows most clearly the result of the continuous operation of production and business systems as well as the performance of the company

Capital in cash

Sales and

Collection

Receiving and Returning

Purchasing Payment

Salaries and Employees

Inventory

1.2 Accounting for Sales and Collection

During the Sales and Collection cycle, vouchers and invoices are rotated through the various functional units

Diagram 1.2.1 Process of vouchers circulated in the Sales and Collection cycle

All accounting information will be reflected on the account system, including:

1 Discount, sales returns

7 Write-off uncollectible receivables

8 Reserve provision for bad receivables

9 Provision for bad debts

Diagram 1.2.2 Accounting process of sales and collection cycle.

Demand for

buying Purchase orders

- Approving the sale

- Making Sales invoices

- Making the delivery bills

Storekeepers Marketing room Accountants

Stock out

- Carriage

- Prepare shipping documents

Recording and making the report

Storing and preserving vouchers

Accounts used in the accounting process of the sales and collection cycle:

Ac 531, 532: Reduced cost of goods sold and returned goods

Ac 511: Revenue for sales

Ac 3387: Deferred revenue

Ac 131, 136: Receivables

Ac 642: General and administration expenses

Ac 139: Provision for bad debts

- Bad debts written off

- Bad debts had been written off now collecting

1.3 Fraud and errors in accounting information of Sales and collection

1.3.1 Fraud

Fraud is deliberate deception to falsify economic, financial data made by any people of Board of Directors, staff, etc that affects financial statements Fraud may present in the form like erroes but it is deliberate (falsify documents, modify documents, falsify financial reports, etc.)

1.3.2 Errors

Based on VAS 29, errors may arise from the recognition, valuation, presentation of the items in financial statements Therefore, the causes of errors include:

• Due to calculation

• Due to misapplication of accounting policies

• Due to ignoration, misunderstanding or incorrect interpretation

• Accounting year is misstated

• Books and accounting vouchers is recorded dishonestly, violate the regulation of Accounting Law

• Lack of invoices when economic transactions arise

• Lack of signatures of authorized person on receipts, etc

1.4 Internal controls over Sales and collection cycle

The internal control system is different from a company to another, depending on characteristics and size of the business and attitude awareness of managers towards internal controls The general purpose of enterprises is to build

an internal control system that intends to serve controlling activities and providing information quickly and reliably to help managers direct their own activities.

The system of internal control is all the policies and procedures established

by an organization to control and maintain the activities of the unit in order to achieve the following objectives:

• Directing the business effectively

• Ensuring that all activities are carried out as planned

• Timely detection of problems and errors can be handled

• Preventing and detecting fraud, errors in time

• Protecting asset and organization information

• Performing the accounting and reporting

The system of internal control makes an important role for the company's operations Likewise, for the sales and collection cycle, the internal control system helps to monitor and complete the activities of the cycle.Internal control system consists of three main components:

• Environmental Control

• Information and Communication system

• The control procedures

1.5 Objectives in auditing the Sales and collection cycle

According to Vietnam Auditing Standards No 200 (objectives and general principles governing an audit of financial statements) or Statement on auditing standards of Australia No.10 (SAS - AU 10), “The objective of an audit of financial statements, as aimed at by the auditor and the audit firm, is to express an opinion as

to the fairness of the financial statement on the basis of the general principle governing an audit of financial statements”

The audit objectives set out with closely related to the assertions of the business management about the financial information presented in the financial statements Normally the objective of an audit is implemented through the following steps (diagram 1.5)

(Source: Vietnam Auditing Standards No 16, page 200, International Auditing Standards No 1):

Diagram 1.5 Steps to implement the objectives of the audit

Five assertions in audit of the sales and collection cycle included

+ The existence : Revenue on the income statement reflects the exchange of

goods and services actually happened, the receivables in the balance sheet is made

on the date of recording in the balance sheet

+ C ompleteness : All sales of services, goods and receivables are collected

including recording in financial statements

+ Ownership: goods and receivables of the business at the date of the

balance sheet owned by the enterprise

+ Evaluation and classification : revenues, receivables are classified

correctly the nature and correctness

+ P resentation : Revenue and receivables are presented truthfully and

correctly on the balance sheet or in the financial statements in accordance with accounting systems of this enterprise and the current accounting regulations

Financial statementsThe components of the financial statement)

Confirmation from Board of Directors of the components of financial statement

The overall audit objective for components

The specific auditing objectives for components

Besides the assertions of the administrator of the enterprise, the general objectives and specific objectives of the audit should be considered.Sales and collection cycle is a component of the financial statements Therefore, when conducting audit sales and collection cycle must comply with the general process of financial statements auditing to ensure consistency.

1.6 The necessity of auditing Sales and collection cycle in financial audits

Textbooks financial audit 186 pages, National Economic University Publisher marked "Sales - collection (consumption) is the process of transferring ownership of the goods through good exchange - money (between audited guests and their customers) With that sense, the process is started from requirement of customer buying (purchase orders, purchase contracts .), ending with the transformation goods into money."

The concept of "collection" there is not just the narrow sense when people purchase payment as collection but this concept also implies that customers purchase, accept payments Therefore, when auditing sales and collection cycle, it also encompasses the auditing for customer’s receivable accounts

1.7 Sequence in auditing the Sales and collection cycle in financial audits

Auditors perform specific audit procedures will be based on the process that company has established and depending on the characteristics of the client's business

Diagram 1.7 The process of auditing the sales and collection cycle

1.7.1 Audit planning

Stage 1: Preparing the audit

Prepare audit is the first step work of the audit institutions, it decisive to the quality of the whole auditing This work is often done by senior auditors and processes perform the following tasks:

It can be confirmed that the audit planning has an important role requires auditors to ensure the efficiency and quality of the whole auditing By which, the audit plan for sales and collection cycle consists of the following steps:

Step 1: Prepare the audit plan

In this step, the company will consider whether to accept or not customers, identify possible risks and find out why customers need to audit.This reason may know through original interview the director of company (for new clients) or through review of last auditors (with old client) Also in this first step, the audits will be appointed after a thorough review of the scale and characteristics the audits: competence and personal experience of each person as well as independent their customers

Step 2: Finding, collecting information about customers

Understanding the business situation of the customer: Auditing Standards

310 said "to conduct audit financial statements, auditors must have the necessary knowledge, comprehensive business situation in order to assess, and analyze the events and operational practices of the unit.” The understanding of the business situation is critical for auditors to make professional assessments

Through the collection of this information, auditors need to understand the field of business, major clients, key clients, consumer policy, credit policy and revenue recognition criteria Based on the information and documents that the

customer provided, auditors will conduct a preliminary analysis to help auditors know the changes in the business activities of customers as well as identify questionable on operability of the company

Researching the internal control system of the customer indicates the existence of audit risk and control environment, which is estimated the volume, complexity of the audit, the estimated time and identified focal auditing Internal control system more effective, the smaller the control risk is and conversely, the higher the control risk is when internal control system is weak

To obtain this information, the auditor may collect through the following sources:

• Talking to the director, chief accountant, liability accountant, treasurer about the internal control system for the sales and collection cycle

• Talking with internal auditors and reviewing the internal audit report

• Experience in auditing this unit in the previous year

• Finding through the public media

• Profile audited last year

• Exchanging with predecessor auditor

• Talking with experts and external objects (economist, superior agencies, customers, suppliers )

• The legislation and regulations related companies

• Visiting Factory

Step 3: Collecting information about legal obligations clients

Collecting legal obligations help auditors to grasp the processes affects production and business operations of the company Auditors need collect established license of this companies, companies charter, financial statements, minutes of the General Meeting of Shareholders, the major sales contract

Step 4: perform analytical procedures

According to the Auditing Standards No 520, "Auditor shall perform analytical procedures in planning the audit period review the overall of the audit" Process analysis helps auditor to determine the content, schedule and extent of other

audit procedures At this stage, the Auditor may apply both horizontal analysis and vertical analysis.

Horizontal analysis: analysis is done by comparing the value on the financial statements, including comparative actual figures with estimated figures or estimates

of auditors, comparative figures for the year, compared to the industry norms by which auditors will compare with the industry average With sales and collection cycle proceeds, the auditors should compare the indicators: revenue, sales deductions this year compared to the previous year, beginning of the period compared to the end of the period, the actual revenue than planned

Vertical Analysis: analysis is done by comparing the relative proportion of the targets and different items on the financial statements With sales cycle proceeds, the auditors should compare the rate indicators of profitability, liquidity ratios, rates of return, the debt ratio

Based on analytical procedures, auditors get the initial assessment of the business and can delimiting the wrong domain, from which conduct auditing

Step 5: Assessing materiality and audit risk

Assessment of materiality: Materiality is the term to refer to the importance

of information without it or misleading information, it will affect the decisions of users With sales cycle proceeds, the materiality is allocated to the items of revenues, receivables and cash

Assessment of audit risk: The audit risk is the risk that auditors and audit firms give inappropriate opinion when the audited financial statements have remaining material misstatements Audit risk has 3 components: inherent risk (IR), control risk (CR), detection risk (DR)

Step 6: Understanding Internal Control Systems and assessment of control risk

This is an important task to require auditors to conduct seriously and carefully because its outcome will help auditors to determine next procedures Auditors need to find out 5 components of Internal Control System (according to International Standard on Auditing 315)

- The control environment;

- The entity’s risk assesment process;

- The information system, including the related business processes, relevant to financial reporting, and communication;

- Control activities; and

- Monitoring of controls

 Design auditing program for the sales and collection cycle

Based on the results of the work was done above, the sales and collection cycle consists with the specific conditions of the client company

1.7.2 Audit implementation

During this period, the Auditor and assistant auditor will conduct audit tests

in the audit program, including test of control and substantive test If the Internal Control System works effectively, auditors will increase test of control and reduce substantive test Otherwise, Internal Control System is considered inefficient, the auditors would not carry out control procedures, so they carry substantive test

Tests of control with collecting the sales and collection cycle are demonstrated in Table 1.7.2

Table 1.7.2.1 Tests of control with sales transactions

Validity Select a continuous range of book sales invoices, comparing the

recording amounts of sales to each invoice Considering the voucher associated as transport orders

Completeness Choose a range of sales invoices or shipping collated and

compare them with the sales journal, general journal, subsidiary ledger, inventory, accounts receivable

Rights &

obligations

Auditor check the arrangement and tracking of goods not owned

by the companyApproving Review of the lists or detailed records of sales and collection

comparing to economic contracts, transportation orders other vouchers approved to warehousing of goods, modes of transport.Collate vouchers approved with powers and authorities of the browser

Valuation Considering the price regulations

To compare the bill with regulation of price or economic contract

Considering signs for internal inspection

Classification To compare the accounting vouchers, the reciprocal relations

account to confirm the correctness of the classification of economic transactions by content and related accounts.Check method of recording economic unusually transactions

Accuracy To compare sales from transactions detailed books, journal sales,

and detailed records of sales, sales deductions and cash records Add up the numbers on the ledger and reconcile with the general ledger, sales journal

Timeliness Considering the transportation documents but not yet billed to

figure out the business can accommodate fraud.Considering the regulation recording time of sales transactions and comparing internal documents and recording up over time

Table 1.7.2.2 Tests of control with collection cycle

Validity Auditors examine the separation of responsibilities between the

holder and recorder auditors know through interviews, observation and investigation

Check document evidencing the inspection, periodic independent comparing between businesses and banks

Completeness Auditors inspect the split of responsibilities between the holder

and recorder Auditors know through interviews, observation and investigation

Check the numbering sequence prior the paper reported, receipts, statements of cash through review the continuity of these documents

Rights &

obligations

Collect the regulation of collection on approved conditions discount, etc Auditor conducted through interviews with the board of directors

Valuation Survey organization accounts receivable accounting

Consider a monthly comparing with the bank.For payments in foreign currency, it must be recorded at the exchange rate at the date of the transaction reality

Classification Check to used account scheme and regulations on reciprocal

Consider sign of internal control

Timeliness Observe the organization of reporting record collection revenue

in the related parts

Consider checking internal signs

Accuracy Consider separating the responsibility between the collection

revenue and recorder

Check sending the balance sheet about collection revenue.Consider internal inspection.

• Perform analytical procedures

Analytical procedures used in all 3 phases of the audit In the implementation phase

of the audit, analytical procedures help auditors determine the content, timing and extent of other audit procedures Analytical procedures will help auditors make decision to expand or narrow the detailed inspection procedures Analytical procedures include ratio analysis and trend analysis

- Trend analysis:

When analyzing the amounts of revenues, auditors conducted comparing sales of each type of goods and services and the company's total sales, revenue deductions this year compared to last year, between the months together and compared with industry to assess the trend of revenues in the period , this year compared with last year goods tends to grow quickly, so there is reasonable growth

or not If there are any irregularities, need to focus and specific analysis to find the causes and explanations

When analyzing collection items, auditors conducted comparing customer receivables with previous periods in order to find trends Combined with the trends

of revenue items ,auditors can concludes about the sales and collection cycle

- Ratio analysis:

Auditors analysis ratios: Gross profit margin; Rotation inventories; Percentage of sales deductions to total revenue; Receivable turnover ratio; Provision expense ratio compared to sales on credit; Receivables on liquid assets ratio; Provision for doubtful receivables on total account receivables

Gross profit margin is a profitability ratio that measures how much of every dollar of revenues is left over after paying cost of goods sold (COGS)

Gross profit margin is calculated by subtracting COGS from total revenue and dividing that number by total revenue

Gross profit margin = (Revenue – COGS) / Revenue

The top number in the equation, known as gross profit or gross margin, is the total revenue minus the direct costs of producing that good or service Direct costs (COGS) do not include operating expenses, interest payments and taxes.

Provision for doubtful receivables on total receivables is calculated for each product, each region and for the whole ofenterprise to assess the effectiveness of business operations of customers

Auditors consider the rationality between the number of goods sold in the period with the actual capacity of machines or the level of reserves in inventories If the number of sales in the period is larger than the capacity of machinery, the auditor must see if it is the untruthful declaration

Based on a comparison of ratios and comparisons with industry, auditors make an accurate assessment of the situation in the sales and collection cycle

• Test of details

Table 1.7.2.3 Test of details of of sales transactions

Validity Sampling some operations and perform detailed testing:

Considering the sales journal, ledger, subsidiary ledgers, accounts receivable with major clients, the unusual operations

To compare and confirm the sales entry with bills of lading

To compare shipping documents with recording records of inventories (manufacturing operations)

To compare the sales entry with sell orders credit, shipping ordersCompleteness Revise vouchers according to a continuous sequence, especially at

the time of the subsequent accounting periods

To compare the bill of lading with the entry of sales are recorded

in order to verify all the documents have been recordedRights &

obligations Auditor compare prices on the price lists and the invoice has been signed

Collect documentsabout Credit policy regulations on rebates, discounts, method of delivery,etc and check if these policies have been perform properly or not

Classification Check the classification of internal sales and external with the

different tax rates

Valuation Auditors recalculate the numbers on sales receipts

Sampling some bills, check and compare the selling method, price and compare with the the listing price or agreement

To compare the sales journal with the bill of sale

To compare the details of lading bills with orders

Timeliness Sampling of services incurred before and after the cut off date,

compare dates indicated on sales order, delivery bill, etc Recheck the sales contract to determine whether existence provisions leads

to recorded sales postponed

Accuracy Choose a transactions range on the book details to recalculate and

reconciliation of accumulating, turning pages Collating data from ledger to detail from ledger to report

Table 1.7.2.4 Test of details in Cash Collection

Validity Sampling some cash collection, collation from ledger, subsidiary

ledger cash, deposits, book collection, receipts, cash receipts, bank's notice Especially It should be noted to the services incurred with large amounts

Completeness Cash is huge amounts of risk Should be collated from receipt,

through the receipt cash, to collection journal ,books detailing cash ledger

Deposit less risky more than, as tracked by 3rd party ,but deposits are likely to be missed Auditors collated from notices of the bank, in bank statements, detailed records of deposit accounts

Accuracy Select a range of collection cash, performing combined To

compare with the cash book entries and recording payment booksClassification Distinguish the customer transactions advances with direct

payment and customer receivables

Correctly classify of collection by bank deposits in various bank accounts

Foreign currency transactions need to take note exchange rate at the transaction date

Timeliness Sampling some transactions before and after the cut off date,

inspect, collate date on receipts, notices with journal collection, detailed books, cash ledger, deposits

• Test of details on customer receivables

To check details on customer receivables, audit procedures that are most effective are to send confirmation letter which provides auditors evidence from the 3rd party

that is validity targets, the valuation and timeliness Although it does not detect all errors, but it is the evidence that has high reliability and objectivity.

Table 1.7.2.5 Audit procedures on customer receivables

Rationalization Check out the list, the balance sheet about the large amount of

cash receipts or unusual signs

Calculate the ratio and monitor large changes compared with previous year

Validity Taking and monitoring confirmation of buyer of the receivables

that have large scale Also choose some typically small amounts.Completeness Adding back list, the balance sheet accounts receivable,

reconciliation with General Ledger

To compare with the bill of lading , money collection books and record of debt

Accounts receivable incurred in the sales process has not been processed are be fully recorded

Rights &

obligations

Receivables are owned by companies

Accuracy Choose some accounts receivable, then reconciliation them with

collection books and ledger

Adding back the pages , accumulated list or the balance sheet about money collection and compare with other relevant recordsValuation Taking, monitoring confirmation of buyer of receivables, selected

some large receivable scale and some small receivable scale.Talking to the management about credit policies, the ability to recover , assess the recoverability

Classification Collate accounts receivable on list and the balance sheet about

money collection by deadline

Investigate, contact managers about the receivables in the voucher to verify the classification

Performance Check the bill proceeds, the minutes of the meeting

Discussions with the management about unclear accounts receivable

Timeliness Select transactions occurred before or after the cut off dat ,

compare with shipping documents

Note actual shipping date , record date

Check the return shipment after the date of the declaration of financial tables relating to the audit period

1.7.3 Completing the Sales and Collection cycle audit

In this stage, auditors must collect opinions, summarize the work done, give comments on the audit reports in general and audit sales and collection cycle in particular To make an opinion, auditors need to consider subsequent events, use analytical procedures to confirm once again the findings during the inspection of the accounts or items on the financial statements, help auditors make conclusions on the truthfulness of the whole financial reports reasonably

To sum up, auditors pointed out the materiality, suggest adjustments to accountants, require company to adjustment If customers accept, the auditor gives unqualified opinions with sales and collection cycle If customers do not accept, consider the materiality of errors and frauds that auditors will give qualified opinion

Finally make the report, write a letter to the management

CHAPTER 2: PRACTICE OF AUDIT SALES AND

COLLECTION CYCLE IN FINANCIAL AUDITS CONDUCTED

BY AVINA – IAFC2.1 Features of Sales and Collection of customers that affect financial audits conducted by AVINA - IAFC

Diagram 2.1: Function of the sales and collection cycle

Handling orders from buyers: There are several types of orders That could

be a purchase request form or require purchase by mail, telephone, the purchase contract - sale of goods and services Handling order is classifying orders according

to some specific criteria E.g by types of goods, quantity purchased, and the buyers,

it can eliminate some orders that don’t reach the required standards of the unit It

Handling orders from buyers

Consideration and approval of sales on credit

Delivering of goods

Sending invoices to buyers and recording sales transactions

Handling, recording cash receipts

Handling, recording sales returned items, discounts

Appraising and eliminating non-collected receivables

Provision for doubtful debts

can be considered that handling orders of buyers, is the starting point of the sales and collection cycle, which creates a legal basis, sometimes substitutes for customer contracts.

Consideration and approval of credit sale: Company assess the situation

and solvency of the buyer to decide whether to sell or not , sell part or the whole consignment This decision may also be on the economic contract as a condition agreed upon within trading relations in the contract The sold on credit consideration and approval is important but there are some companies ignore considering or if only make a deal leading to bad debts and irrecoverable debts Auditors audit the sales and collection cycle focus on this function because it helps auditors to assess internal control for consideration and approval of credit sales

Goods deliver: Marked by the enterprise goods delivered to the customer on

commodity ownership -one of 5 standards of revenue recognition This can be seen

to accept and recording sales book Shipping documents must be made at time of shipment from the warehouse line with the actual amount of goods, in accordance with the contract and other related documents The company has large-scale with regular sales operations that often make a shipped book to update the shipping documents Shipping documents are documents proving the transfer of goods to the purchaser Therefore, to test the real transfer of goods, auditors just reviewed, evaluated on the shipping documents

Sending bill to buyers and writing transactions sales: If shipping

documents are documents evidencing the transfer of goods, sales invoice is the basis for accounting entries sales transactions, as well as revenue, income from the sale of goods Sales invoices indicate models, quantities and prices of goods including original price, transportation costs, insurance, taxes and value-added Auditors note the validity of the invoice, invoiced goods, unit price and total value

of shipments consistent with the signed contract or decision of the board of director

of sales…

Handling and recording cash receipts: If the customer pays in cash,

accountants conduct recording in receipt journal If the customer unpaid, the company reflected on accounts 131 and monitored details for each object and

liabilities over time In the process of handling and recording capability of omissions or hide special cash collected is high E.g sales staffs get the money and not pay for companies, use for self-interested purposes Therefore, auditors should particularly pay attention to the procedures for checking the integrity and timeliness

of the purchase paid transactions

Recording and handling returned sales and discount amounts: revenue

deductions occur when customers do not satisfy with the goods then the seller must get back or reduce prices Vouchers usually memos, bill of sales be returned these documents need to be approved before recording - the prudent principle in accounting Auditors need to perform more evaluation on the completeness of return transactions

Appraising and writing off non-collected receivables: The work is done in

case clients can not afford to pay Accountants need to make vouchers debt remission, putting these receivable debts out of balance sheet accounting, reflect the reality and capability of debt collection companies Auditors attend to valuation

Provision for doubtful debts: Before closing accounts and preparing the

report, accountant estimates the percentage of the ability and inability to recover in future liabilities according to Circular 13 about determining the provision for doubtful debts This is compulsory for all companies to make their financial situation to be transparent Auditors in this case considered if the basis and method

of provision was in accordance with the current regulations or not

2.2 Objectives in auditing the Sales and collection cycle of AVINA – IAFC

Although sales and collection of money have close relations, each transaction has its own requirements

Table 2.2 Auditing objectives for the sales and collection cycle specified by

Rationalization

The sales transactions have reasonable grounds, based on purchase orders accepted by customers

Money collection arises from goods payment of buyers

Other general objectiveValidity

(occurrence)

The transfer of goods or services from the seller to the buyer is genuine, there is a valid shipping documents accompanying

The receivables from customers is real, cash collection are recorded fact entered the fund The information reflected on vouchers, books and reports related to Transactions that is entirely true

Completeness All sale transactions occurred in

fact are recorded

All amounts collected and accounts receivable from customers are recorded If appearing receivables from buyers, all must be recorded in the accounting books at the item client debts receivable of the company

Rights and

obligations

Goods from warehouse sold to the customer are the goods owned by the company

The receivables prove enterprise may claim the money in the future of the unit against the debtor The receivables must detail for each object liabilities

Valuation Goods were shipped and

invoices clearly stating the quantity, type and price Selling

at invoice price is the selling price listed in the price list of the company or privately negotiated price between the seller and the buyer

The receivables are appreciated

on aging, repayment capacity, including the provision in case the buyer does not have capability to repay For transactions in foreign currency collection money, auditors need to consider exchange rate conversion

Classification Sales operations are classified

appropriately: by type of revenues (511, 512), by type of tax (0, 5, 10%)

The receivables are classified correctly The receivables are classified properly object liabilities

Accuracy The sales transactions are

correct; plus figures books and

The value of the receivables are accurately calculated and

moving books and reporting

All of the changes relating to the administration and collection of debts of the modalities, timing and procedures for payment for goods are allowed rightly.Timeliness Sales Transactions arise at any

time, the recorded at that time

Transactions receivables are recognized when there is sufficient evidence that recorded a receivable of the company and have been recorded on time

2.3 Sequence in auditing Sales and collection cycle in financial audits conducted by AVINA – IAFC

2.3.1 Audit planning

Audit planning is to collect the necessary information about their customers and has the following steps:

• Find out business activities customers

Find out business activities of our customers is an indispensable step while conducting audit planning, by exploring business activities of the customer allows the auditor to collect information about business activities of customer, accounting process and evaluate the accounting policies used in accounting and thereby assess potential risks

With annual customer in previous years, AVINA has conducted auditing, they will have this information on file audit, so you need to collect just find out about the changes of the client company this year by the board of directors of customer offer at a meeting with representatives AVINA- Hanoi

As for new customers, the need to fully implement the steps to collect as described in Part I

Company X is a new customer of AVINA – HANOI so auditors must perform collecting information about this client Through the deployment of facility according to economic contracts signed between the companies X and AVINA Hanoi on 12/09/2014 ,auditors perform collecting the following information:

On the formation and development of the company X: Company X is headquartered at 100B Cat Linh - Ha Noi, as a state enterprise established under Decision No 021 / BXD - TCLD day 2/1 / 1993 of the Minister of Construction.The company's capital X: capital by the State budget and additional equity 20,000 million VND Among them:

- Funds from the State budget: VND 13,000 million

- Additional Capital: VND 7,000 million

- Functions and duties: enterprise was established primarily done some work as follows:

 Business cement

 Coal Trading

 Business several additives for cement production

 Transporting goods

 Businesses are organized in the form of independent, directly

- Assets and funds

Asset and capital company X is performed on the balance sheet (Table

2.3.1.1.) and Income Statement (Table 2.3.1.2) of the audited year:

Table 2.3.1.1 Balance Sheet (31/12/2014)

4 Other current assets 860,454,610 1,360,521,868

II Fixed assets and short-term

2 Short-term securities investment 160,500,000 650,300,000

3 Cost of Construction in progress 120,450,456 84,366,450

Table 2.3.1.2 Income Statement (31/12/2014)

6 Profit from production and business

activities

(20 - 21 - 22)

Income from financial operations 31 2,368,034

7 Profit from financial operations 40 1,005,898

8 Extraordinary profits (41-42) 50 50,000,000

9 Total profit before tax (30 + 40 + 50) 60 7,496,491,030

10 Corporate income tax payable 70 2,248,974,309

• Understanding the system of internal control and assessment of control risk for the sales and collection cycle

Find out the system of internal control and assessment of control risk is indispensable step in every audit planning Auditors find out about the accounting system of internal control by collecting information about the control environment, accounting system and other control procedures Collecting information technique

in company X and company Y (1 joint venture company by AVINA regular auditing) is the same through meet and exchange with the board of directors, through the preliminary examination the books and documents.

 Understanding about control environment

Finding out about the control environment is different among customers With annual customer, the control environment of the customer is updated from the previous year's auditing, the audit team should be appointed this year is also the group audit last year Therefore getting the preliminary information, audit team just reconsiders whether there are changes in leadership, personnel structure or not.With new clients like company X, the information will be collected through meetings with the management of client, which the client's board of directors will give auditors necessary information

Company X is the State enterprise, Director of the company is Vietnam's people who has credibility, experience, besides the director, the deputy director who

is qualified, skilled professionals in several fields to help executive director to manage business activities The chief accountant is the company who has the qualifications and experience, provide consultancy for directors in managing accounting work, financial situation of this company

About internal audit activities, the company X under the corporation M, internal audit of the Corporation conducts auditing of financial statements of X according to the Corporation's plans While auditing, auditors of AVINA - Hanoi allowed unlimitedly to access to relevant information as well as to consider and examine the books and documents is the company

On the other hand, auditing team of the AVINA - Hanoi obtains these documents, working papers by the internal auditor to conduct auditing This document is important and useful to the audit team to keep this evidence on file During the AVINA - Hanoi conducts auditing, they completely separate from the company's board of directors, is not under the direct administration of the company's board of directors X The audit report of the AVINA - Hanoi is considered independent objectivity

 Understanding about the accounting system Due to the accounting system in various businesses are not alike, through understanding the accounting system, it’s known that the accounting, recording violate the regulation of the internal audit whether or not Finding out about accounting systems are reviewed on the following aspects:

- The accounting system Accounting system of the company is shown through charts 10 (diagram accounting system)

Diagram 2.3.1 The company accounting system

• Understanding accounting procedures applicableGroup auditing learn applicable accounting regime of client companies by requiring chief accountant providing accounting systems and accounting scheme applied by the Ministry of Finance for approval and accounting 's reviewing every day in the accounting department stipulated by the Ministry of Finance with the company

Company X opens accounting book in the form of general journal The Company applies the enterprise accounting issued together with Decision No

1141 / QD / CDKT 11.01.1995 of the Ministry of Finance

The financial statements of the company X includes:

- Balance Sheet

- Report on business results

- Notes to the financial statements

The chief accountant

Cash, accounts receivab

le accountant

Account

s payable, revenue accountant

Cost and inventor

y accountant

Cashier

- Regarding the accounting policies

+ Fixed assets and depreciation: All fixed assets of the company are recorded

at cost, accumulated depreciation and remaining value

Depreciation is calculated according to the basic method of depreciation, is defined as registered Rates of depreciation of fixed assets average 3 years registered in the management department of the State capital and property in enterprises registered depreciation of matching decision No.1062 / QDCSTC of the Ministry of Finance

+ Fiscal year: accounting year starts on 1/1 ended annual 31/12+ monetary unit used: The monetary unit used in accounting is Vietnam dong Transactions in foreign currencies are translated at actual exchange rates due to Industrial and Commercial Bank announced at the time of the transaction.+ Inventories: inventories are accounted for using the perpetual method value of goods inventories is determined by the weighted average method of each item.+ On the control procedures: to see the control procedures of the company, the auditors review the principles division of responsibility, authorization, approval, storage documents and sufficient accounting books

With company X, in approving credit sales revenue, it authorized by the competent person who independently book sales In approving this deferred revenue, depending on the level of transaction incurred With credit account with an amount of 50 million VND and the deadline for payment within one month, the manager has to approve If it exceeds this number or billing period longer, it will be required by the director or deputy director

General assessment of Hanoi AVINA- for internal control sales and collection cycle: after receiving the information collected in the process of understanding customer and finding about the internal control system, auditor analysis and has materiality assessment of each item in the financial statement audit For sales cycle, revenues, debt receivable, write-off of doubtful receivables are considered materiality

In AVINA-Hanoi, when conducting an evaluation of the control risks, the auditors evaluated based on experience rather than originally estimation materiality

of the whole financial statements and allocations materiality for each item, auditors perform to make adjustments errors.

• Planning for specific audits After auditors have done this work and analysis procedures: Audit Team Leader will be assigned to the audit staff in the group and informed about the audit planning, the audit period, as well as suggestions to customers about vouchers and books needed for the auditing After giving plan established by the group leader that signed by the director or deputy director, audit team ended the first phase and conducted the audit

With the company Y (joint venture company) is an annual customer Hanoi AVINA- so the information of the situation of production and business, control environment accounting system is stored on an annual accounting records before that So in the planning stage at the company Y, auditors not perform as at company

X, just consider what changes in policy of management , then audit team leader plans, assigns auditors to perform auditing

1 Check the internal audit system

- Check the implementation of the regulations on documents transferring, usage and preservation

- Check the implementation of the regulations on warehouse organization,

materials and supplies purchasing process, cost of products

- Check the accounting record, usage and preservation

2 Financial Audit at 31/12/2014

- Check cash capital and the rationality of revenue and expenses by cash, checks

- Check inventory accounting: accounting methods, procedures of purchasing goods and materials, vouchers making, accounting records or the export –

import