You can’t effectively or efficiently audit your client’s revenue transactions unless you understand how the client handles them. Each client you audit will probably approach each of the business processes in a slightly different fashion. However, all businesses have a flow to their revenue process. Interview the client, learn about the revenue flow, and apply your knowledge to the audit.
In general, the customer orders process essentially boils down to four events:
The company receives a sales order.
In the case of a retail shop, the first step is pretty simple: The customer order takes place simultaneously with the purchase — at the cash register. No formal customer order exists beyond the cash register receipt.
Generally, most retail businesses don’t process wholesale and Internet sales through a cash register, as these are usually reserved for face-to-face customer transactions.
Wholesale orders: Most businesses use standard documents to record wholesale transactions. Usually, the originating document is the customer sales order. This document contains all the details of the products or services the customer orders — for example, how many of each item and at what price.
For wholesale orders, a sales rep prepares customer orders and faxes them to the main shop. New customers have the option of filling out a credit approval form or receiving orders COD (cash on delivery).
Internet orders: The processing of Internet orders varies among businesses based on their shopping cart software or other means of securing payment from customers.
All customer orders whose payment method is verified by the customer’s credit card company or PayPal account then download into a customer sales order form.
The company fulfills the order.
Audit clients generally forward all sales orders to the inventory department for order fulfillment. They’re also usually entered into the accounting system as open orders. Open orders exist in a sort of limbo until they’re converted to invoices. That is, they don’t affect any financial statement accounts until the business fulfills their end of the contract by shipping the merchandise to the customer.
The company sends an invoice to the customer.
Depending on the business, the billing department has different points of contact with customers. You find out how your client handles this task during your interview. The following transactions need to be defined:
Wholesale customers receiving invoices: Using the customer name on the bill of lading, the billing department pulls up the customer wholesale order in the accounting system. Info on the customer sales order is compared to the bill of lading. If the bill of lading reflects any changes in the customer order — for example, out-of-stock items that aren’t shipping — the billing clerk amends the customer order prior to preparing the customer invoice.
COD customers: Orders shipped COD are handled slightly differently because an invoice isn’t mailed to the customer.
Internet customers: Shopping cart software should interface with accounting software so all Internet orders automatically reflect in the accounting system as revenue.
The customer pays the invoice.
Your audit client will have two accounting journals related to the revenue process:
The cash receipts journal records sales of merchandise for cash and customer payments for merchandise that was originally sold on account.
The sales journal shows all sales on account.
