Question

1. List the functions of audit documentation.

2. Explain the Concept of Audit Sampling?

3. Explain the major class of transactions in the Revenue process

Answer 1

ans 1) The following are the functions or puposes of audit documentation

• Assisting the engagement team to plan and perform the audit
• Assisting members of the engagement team to direct and supervise the audit work, and to discharge their review responsibilities
• Enabling the engagement team to be accountable for its work
• Retaining a record of matters of continuing significance to future audits
• Enabling the conduct of quality control reviews and inspections
• Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.   

2) Audit Sampling

Audit sampling refers to the application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.

The objective of the auditor when using audit sampling is to provide a reasonable basis for the auditor to draw conclusions about the population from which the sample is selected.

There are two approaches to sampling.

• Statistical Sampling
• Non-statistical sampling

Statistical sampling is an approach to sampling that has the random selection of the sample items; and the use of probability theory to evaluate sample results, including measurement of sampling risk characteristics. A sample approach that does not have above characteristics is considered as non- statistical sampling.

3) The sales and collection cycle , also known as the revenue , receivables , and receipts (RRR) , is comprised of various classes of transactions. The five classes of transactions includes:

• Sales (cash and sales on account)
• Cash receipts
• Sales returns and allowances
• Write off of uncollectible accounts
• Estimate of bad debt expenses

1.   The process usually begins when a customer approaches the company and files a customer purchase order.
2. The sales department receives the document and prepares a sales order that is then sent to the credit department for a credit check.
3. Once the credit department approves the customer and the order, the sales order is sent to the shipping department, which will generate a shipping document referred as bill of lading or a waybill.
4. The approved sales order and the shipping document are then sent to the accounts receivable clerk, who then generates a sales invoice and makes the necessary journal entry.
5. And finally , once the cash is received from the customer , accounting or treasury records the credit to cash debit the balance in accounts receivable.