Auditing standards require the auditor to obtain an understanding of the entity and its environment as a basis for assessing the risks of material misstatements. Business models differ across organizations and industries leading to unique business processes needed to account for transactions. While the core business functions for the sales and collection cycle discussed in this chapter are generally relevant to all organizations, the underlying business processes and related documents and records are often unique to each organization. Below are four descriptions of different businesses.
1. The Starbucks Coffee Company sells regular and specialty coffees and teas in over 15,000 stores spanning more than 50 countries. Customers use cash, debit or credit cards, and pre-paid Starbucks cards to purchase individual drinks that are served to them within minutes.
2. Amazon.com is one of the world's largest online retailers of all kinsd of products. While consumers can find a wide variety of products available at Amazon.com, the company is known for its huge selection of new and used books that can be purchased on its web site.
3. Most people have a person physician who provides medical care when needed, including annual physicals and other medical services. Patients make appointments to be seen by their physician, who examines the patient and prescribes treatments and medications when needed. Insured patients often pay a co-payment with the balance paid by the insurance company.
4. The majority of universities generate a significant portion of their revenue from tuition. Universities bill students in advance for classes that will be taken in an upcoming term. For full-time students, most universities charge a set tuition amount after students enroll in a minimum number of courses per term.
Use the four business scenarios above to answer portions a-c below:
A. What documents of other source evidence would you use to test the occurrence transaction-related audit objective for sales for each of the four scenarios above?
B. For which of the four scenarios would the sales returns and allowances business function not be applicable?
C. For which of the four scenarios would the write-off of uncollectible accounts and bad debt expense business functions not be applicable?