Internal Audit Checklist: Sales Planning and Target Setting

Sales Planning Audit
In general, the objective of an internal audit is to assess the risk of material misstatement in financial reporting. Material misstatements can arise from inadequacies in internal controls and from inaccurate management assertions. As such, testing the validity of various implicit managerial assertions is a key objective of an internal auditor.

While this applies to all financial cycles, this article is the second in a series focusing on the General Control Activities for the Sales, Invoicing and Credit Management (SICM) cycle. The most important general controls for SICM include:

  • Organization
  • Sales Planning and Target Setting
  • Customer Acquisition
  • Client Acceptance and Sales Agreements
  • Management Client Relationships
  • Order Processing
  • Invoicing
  • Sales Returns and Credit Notes
  • Credit Management
  • Customer Master Data

Sales Planning and Target Setting

When having a Sales Planning and Target Setting activity, there is one important goal for the business:

  • Sales forecasting is as accurate as possible to support purchasing and production planning / budgeting.

Not having these activities in place can cause the following risk:

  • Inaccurate sales forecasting due to inappropriate methodology or inaccurate or unreliable input data.
  • Over or under on stock holdings (ineffective working capital management).
  • Late delivery due to unavailable stock.
  • Low employee motivation due to unrealistic targets.
  • No alignment between sales, purchasing and production.

When conducting the audit look out for the following controls/best practices:

  • Sales planning and forecasting takes into account all relevant factors, including: historic sales, market information, existing clients’ business plans, potential clients, competitors, and business objectives.
  • Input for production/supply chain to ensure capacities not a restricting factor (demand planning).
  • Input from purchasing to ensure raw materials not a restricting factor.
  • Sales forecast reconciled to production plan and financials (may be difficult depending if financials are based on range or SKUs).
  • There is regular monitoring of sales planning accuracy, and lessons learned are fed back into the forecasting process.

Sales Performance Management

When having a Sales Performance Management activity, there is one important goal for the business:

  • Performance management system supports sales objective in setting both challenging but realistic performance measures.

When not having this activity, performance targets do not support business objectives; targets unrealistic leading to employee demotivation or manipulation of results, compensation schemes not linked to performance; too much / too little performance related pay, and performance related bonus places imbalance focus on short term.
When conducting the audit look out for the following controls/best practices:

  • Sufficiently accurate, detailed and timely management information exists for sales performance to be adequately assessed and monitored at all appropriate levels within the business.
  • Key performance indicators (KPIs) set for sales department and monitored on a regular basis via senior management team meetings and sales team meetings.
  • Sales compensation schemes are linked to department targets/KPIs/HR involved and approved by appropriate level of management.
  • Compensation schemes are transparent and an independent party calculates/approves the compensation/bonuses.
  • If sales are subsequently credited, an appropriate and corresponding deduction is made from sales staff commissions earned.
  • Factors such as AR collections, provision for doubtful debts and accuracy of sales forecast could be considered as a performance indicator.

In conclusion, auditing standards require that auditors test basic underlying management assertions implicit in the financial statements. Key objectives to these assertions are; Existence and Completeness, Rights and Obligations, Valuation or Allocation, and Presentation and Disclosure.