## Tests of Controls: Internal Controls over Sales (Debtors Audit)

### Why Tests of Controls Matter for Debtors

Trade receivables arise directly from sales transactions. Weak controls over sales can lead to:

Fictitious debtors (unauthorised sales)
Sales to uncreditworthy customers (bad debts)
Misstated debtor balances

Tests of Controls (ToC) assess whether controls are designed effectively and operating consistently throughout the year.

### Key Control Objectives for Sales → Debtors

Control Objective	Example Control
Only bona fide sales create trade receivables	Sales only processed against authorised purchase orders; goods despatched only with signed delivery notes
Sales made only to approved customers	Customer master file maintained by a separate function; credit limits approved by credit manager
All sales are accurately recorded	Sequential invoice numbering; sales invoice independently checked against despatch notes
Credit terms are appropriate	Periodic credit review for all active customers
Disputed amounts are flagged early	Reconciliation of customer accounts; timely follow-up on overdue accounts

### Performing Tests of Controls

Select a sample of sales transactions across the year (not just year-end)
For each, verify:
Was a customer purchase order present?
Was the customer on the approved customer list at the time of sale?
Was the credit limit respected?
Was the despatch note signed and matched to the invoice?
Was the invoice authorised?
Conclude on operating effectiveness and determine impact on substantive testing scope

Worked example

### Example 1

Tests of Controls – Sample Procedure:

Select a sample of 25 sales invoices from throughout the year.

For each invoice test:

1. Customer purchase order present and matches invoice → confirms bona fide sale.

2. Customer name exists in approved customer master as at invoice date → confirms approved customer.

3. Invoice value within customer's credit limit → confirms credit control operating.

4. Goods despatch note signed by customer/carrier, date matches invoice date → confirms occurrence and cut-off.

5. Invoice authorised by a person with appropriate authority level → confirms approval.

If controls found to be operating effectively across the sample → reduce extent of substantive procedures on debtors balance (e.g., smaller confirmation sample).

If controls found to have exceptions → increase substantive testing scope.

⚠️ Common exam mistakes

Sampling only from year-end transactions — tests of controls must cover the full period
Treating tests of controls as a substitute for substantive procedures — both are required in most audits
Not linking the conclusion from ToC to the extent of substantive testing on the debtors balance
Ignoring the 'approved customers only' control — sales to unapproved customers are a major fraud risk
Not distinguishing between design effectiveness and operating effectiveness in the control assessment

Reference:

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Tests of Controls over Sales for Debtors Audit

Worked example

⚠️ Common exam mistakes