Chapter 10 Auditing The Revenue Process

Front 1

Sales transactions affect

Back 1

Trade accounts receivable

Sales

Allowance for uncollectible accounts

Bad debt expense

Front 2

Cash receipts transactions affect

Back 2

Cash

Trade accounts receivable

Cash discounts

Front 3

Sales return and allowances transactions affect

Back 3

Sales returns

Sales allowances

Trade accounts receivable

Front 4

Assertions for AR

Back 4

Existence

Valuation and Allocation

Accuracy

Front 5

Inherent RIsk Assestment:
4 inherent risk factors that may affect the revenue process

Back 5

1. Industry-related factors

2. Complexity and contentiousness of revenue recognition issues

3. The difficulty of auditing transactions and account balances

4. Misstatement detected in prior audits

Front 6

We should also be concerned about the risk of material misstatement due to fraud

Back 6

1. Side agreements (undisclosed agreements)

2. Channel stuffing

3. Related party transactions

4. Bill and hold sales

Front 7

Substantive Strategy

Back 7

1. Understand and document the revenue process and related controls.

2. Set control risk related to revenue transaction to maximum

Front 8

Reliance Strategy

Back 8

1. Understanding document the revenue process and related controls.

2. Plan perform test of controls related to revenue transactions.

3. Determine the achieved level of control risk related to revenue transactions

Front 9

5 Components to Control Enviornment

Back 9

Control enviornment

Risk Assesment

Control Activities

Information and Communication

Monitoring

Front 10

Control Enviornment

Back 10

Understanding the control environment is general completed on an overall basis

Front 11

The Entity's risk assessment process

Back 11

The auditor must understand how management considers risks that are relevant to the revenue process. The auditor should estimate the significance of the risk and assess the likelihood of occurrence.

Front 12

Control Activities

Back 12

1. Performance reviews

2. Information processing

3. Proper authorization of transactions and activities.

4. Adquate documents and records

5. Physical Controls

6. Segregation of duties

Front 13

Which duties should be segregated?

Back 13

Custody, Authorization, and Recording, and IT

Front 14

Occurence of Revenue Transactions: the auditor is concerned with

two major types of material misstatements related to occurrance.

Back 14

1. Sales of ficticious customers

2. Recording revenue when goods have been shipped or services not have been performed.

The auditor needs assurance that recorded Revenue transactions are valid.

Front 15

Completeness of Revenue Transactions:

Back 15

The major misstatement that concerns both management and auditor is that goods are shipped or services are performed and no revenue is recognized

Front 16

Controls concerning completeness include

Back 16

1. Accounting for numerical sequence of shipping documents and sales invoices

2. Matching shipping documents with sales invoices

3. Reconciling sales invoices to daily sales reports

4. Maintaining and review the open order.

Front 17

Cuttoff and Classification of Revenue Transactions concerns:

Back 17

Sales may be recorded in the wrong accounting period unless proper controls are in place. All shipping documents should be forwarded to the billing department daily

The use of a chart of accounts and proper codes for recording transactions should adequately assure the proper classification of revenue transactions

Front 18

Accounts Receivable confirmations

Types?

Back 18

Negative

Positive balance included

Positive blank

Front 19

Why are confirmations a reliable form of evidence?

Back 19

Evidence provided by an independent third party. The auditor controls the confirmation process.

Front 20

Type of confirm needed?

Accountrs Receivable Balance = 10M

Number of customers: 2000

100 Largest customers = 8M

Internal Controls = Very Strong

Back 20

Type: Positive Blank Confirm

Sample : 1) All of the 100 largest plus a sample (20) of the smaller ones.

2) Random sample of all 2000 such that we achieve 60% coverage

Timing: Confirm as of Sept 30th because internal controls are very strong

Front 21

Accounts Receivable Balance = 10M

Number of Customers = 2000

100 Largest customers = 5M

Internal Controls = Very strong

Front 22

Accounts Receivable Balance = 10M

Number of customers = 300

100 Largest customers = 5M

Internal Controls = weak

Back 22

Sent positive balance included confirms to the 100 largest customers plus a random sample of the other 200 such that we achieve 80% coverage (because controls are weak). Confirm the balances as of December 31st (bc controls weak)

OR Send positive balance included confirmations to all 300 customers as of Dec 31.

Front 23

How do you substantiate the balances when customers do not reply to confirmation requests?

Back 23

a) Send second requests ( and maybe thirds)

b) Obtain evidence of subsequent cash collections: must verify that collections are for ammounts due at the balance sheet date

c) Vouch to sales invoices, shipping documents, and customers orders****

Front 24

Test existence of Accounts Receivable

Back 24

Take samples from AR sub accounts, vouch to AR trial balance, to sales invoice, bill of lading, customer sales order.

Front 25

The credit function should be segregated from the billing function because:

Back 25

If one employee has the ability to Grant credit to a customer and also has the responsibility for billing that customer, it is possible for sales to be made to customers were not credit-worthy. This can result in bad debts.

Front 26

The accounts receivable function should be segregated from the general ledger function because:

Back 26

If one employee is responsible for the accounts receivable records and also the general ledger, it's possible for that employee to conceal unauthorized shipments this can result in unrecorded sales and theft of goods.

Front 27

The shipping function should be segregated from the billing function because:

Back 27

If one employee is responsible for shipping goods and involved in the billing function, it's possible for authorized shipments to be made and for the usual billing procedures to be circumvented. This can result in unrecorded sales transactions and theft of goods.

Front 28

The cash receipts function should be segregated from the accounts receivable function.

Back 28

If one employee has access to both the cash receipts and the accounts receivable records, it is possible for cash to be diverted and the shortage of cash in the accounting records to be covered this can result in the theft of the entities cash.

Front 29

Claims to cash are usually referred to as

Back 29

Trade accounts receivable

Front 30

The SEC in SAB No. 101 provides the following criteria for Revenue recognition

Back 30

- Persuasive evidence of an arrangement exist.

- delivery has occurred or Services have been rendered.

- the seller's price to the buyer is fixable or determinable.

- collectability is reasonably assured.

Front 31

Three types of transactions and the financial statement accounts affected

Back 31

-Sales transactions

-Cash receipts transactions

-Sales returns and allowances transactions

Front 32

Management Assertions for Transactions/Events

Back 32

1. Occurance

2. Completeness

3. Authorization

4. Accuracy

5. Cutoff

6. Classificstion

Hint 32

OCAACC

Front 33

Management Assertions for Account Balances

Back 33

1. Existence

2. Rights and Obligations

3. Completeness

4. Valuation and Allocation

5. Accuracy

6. Cutoff

Hint 33

E R/O C V/A A C

Front 34

Presentation and Disclosure Assertions

Back 34

1. Occurance

2. Rights and Obligations

3. Classification and Understandibility

4. Accuracy and Valuation

Hint 34

ORClA.V

Front 35

If a AR confirm is sent out and no response is given, what can you do?

Back 35

You can check subsequent cash receipts

Front 36

Perform variance analysis on sales accounts:

a) Compare sales and sales returns balances between years

Assertions?

Back 36

Existence and Occurrence

- Completeness

-Valuation

Hint 36

E.O , C , V

Front 37

Perform variance analysis on sales accounts:

b) compare sales and sales returns balances with industry.

Assertions?

Back 37

Existence and Occurrence

- Completeness

-Valuation

Hint 37

E.O , C , V

Front 38

Select a sample of 50 sales transactions from the sales journal. Vouch each sales transaction to the sales invoice, bill of lading, and customer order comparing the description, amounts and date of shipment for agreement. Check for authorization of sale

Back 38

E.O

- Accuracy

- Cut off

-Authorization

Front 39

Select a sample of 25 bill of lading. Trace each bill of lading to the sales invoice, sales journal, sales order and customer order comparing descriptuion, amounts, and date of shipment for agreement. Check for authorization of sale

Back 39

Completeness

- Accuracy

Authorization

- Cutt off

Front 40

Select the last 10 bills of lading for the current fiscal year and the first 10 bills of lading for the next fiscal year. Compare dates, description, and amounts on the bill of lading (through the sales invoice) to what is recorded in the sales journal. Check for authorization of the sale

Back 40

Completeness

- Accuracy

Authorization

- Cut off

Front 41

Review the 25 largest credit memos issued the month after year end. Identify the reason for the return, and when the orginal sale was made of the goods. Determine the impact on the current year.

Front 42

Perform variance analysis on accounts receivable

a) Compare accounts receivable and allowance for uncollectable accounts balances between years

Back 42

E/O

- Completeness

Valuation

Front 43

AR Confirms test what Assetions

Back 43

Existence/Occurance

- Accuracy

Front 44

Key segregation of duties for revenue and accounts receivable functions:

Back 44

1. Receiving and preparing customer order

2. Approving credit.

3. Shipping Goods to customer and completing shipping document.

4. Preparing customer invoice.

5. Updating accounts receivable records for sale.

6. Receiving customer remittances.

7. Updating accounts receivable for remittances.

8. Preparing accounts receivable aged trial balance.

9. Authorization of accounts receivable write-off.

Front 45

Test occurrence of sales transactions

Back 45

Take sample from sales Journal, vouch to sales invoice, BOL, and customer order.

Front 46

Test completeness of sales transactions:

Back 46

Take sample from customer order and vouch to BOL, sales invoice, sales Journal, G / L

Front 47

Test completeness of accounts receivable transactions

Back 47

Take sample from bill of lading, vouch to sales invoice, to AR trial balance, to G / L

Front 48

What is a negative type of confirmation?

Back 48

?

Front 49

What is a positive balance included type of confirmation?

Back 49

?

Front 50

What is a positive blank type confirmation?

Back 50

?

Front 51

Valuation of accounts receivable:

Back 51

1. Consider relevant analytical procedures.

2. Perform test on the AR trial balance, including testing the categories, occurrence and cut off through samples of shipping documents verifying dates, inquire management, evaluate Management's estimations.

3. Consider the effect of subsequent cash collections received while performing on at work

4. Consider evidence about collectability obtained during the confirmation process.

Front 52

Occurrence of cash receipts transactions concern

Back 52

The possible misstatement when cash receipts are recorded but not deposited in the clients bank account.

Front 53

Completeness of cash receipts and authorization of discounts concerns

Back 53

The possibility that cash or checks are stolen or lost before being recorded in the cash receipts records, which is lapping of accounts receivable. Proper segregation of duties or strong controls for completeness.

Front 54

Test occurrence for receipt of payment of accounts receivable

Back 54

Take sample from bank statement and Reconciliation, Fouch to cash receipts Journal, to cash pre-list, then remittance advices.

Front 55

Test completeness of receipt of payments for accounts receivable

Back 55

Take sample from remittance advice is, vouch to cash pre-list, then to cash receipts Journal, then to deposit slip.

Front 56

What type of test and assertion is this?Examine a sample of sales invoices to determine whether each has a shipping document number included on it.

Back 56

Test of control

Occurrence