Audit - Chapter 7 - Revenue and Collection cycle

Is there any such thing as a typical revenue and collection cycle?

No

What are the four basic activities in a revenue cycle?

1. Receiving and processing customer orders

2. Delivering goods and services

3. Billing customers and accounting for AR

4. Collecting and depositing cash

Are stores responsible for credit authorization if a customer uses a third party credit company such as a credit card?

No

Why are orders, shipping documents, and invoices assigned sequential numbers?

The sequence can be checked to confirm completeness and occurrence

What is a bill of lading?

A form that the carrier signs to confirm that the goods are shipped

What is a packing slip?

A slip that describes the goods being shipped

What is a sales invoice?

The bill sent to the customer that indicates the amount due and the payment terms.

Why might auditors test controls surrounding the pending order and back order master file?

To obtain evidence regarding the completeness of recorded sales and accounts receivable.

Why should the customer master file be regularly reviewed?

To ensure up to date credit information is being used.

Why is it so important for the price list master file to be correct?

If the prices are not updated in this file then all billings will be incorrect.

Detailed sales entries should correspond with

issuance of invoices to customers

Companies should compare daily credit sales totals to:

debits posted to accounts receivable

Sales classified by product lines provide more information about:

business segment disclosures

Sales classified by sales employee or region can show:

Unusually high or low volume that might bear further investigation if fraud or error is suspected

What three assertions are relevant to revenue?

1. Occurrence

2. Completeness

3. Cutoff

What three assertions are relevant to accounts receivable?

1. Existence

2. Completeness

3. Valuation

What is the core of the revenue recognition principle?

Revenue should be recognized when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services.

What assertions can the sales detail journal file test for?

occurrence and cutoff

What assertions can the A/R listing and aging file test for?

Existence, completeness, valuation

What are the five steps of the revenue recognition process?

1. Identify contracts

2. Identify performance obligations

3. Determine the transaction price

4. Allocate the transaction price to performance obligations

5. Recognize revenue as the performance obligations are met

In the revenue process, overall performance review by management can serve as

A strong entity level control

What must the owner of a company do to obtain reasonable assurance that financial controls are intact when duties are not appropriately separated?

Must have active involvement in the accounting process

What three documents must be present in a three way match in order for revenue to be recorded?

1. Customer sales order

2. Evidence of shipment

3. Customer invoice

Why should auditors perform tests of controls?

To ensure that controls are being performed properly and are actually in place

What 5 procedures are typically used in tests of controls?

1. Inquiry

2. Observation

3. Inspection of documents and records

4. Re-performance

5. Walkthroughs

How can occurrence of revenues be tested?

Vouch sales to sales documents such as invoices

How can completeness of revenues be tested?

Ensure all documents in a number sequence are recorded and trace them to the sales journal

How can the cutoff assertion in regard to revenues be tested?

Trace shipping date on documents with sales invoice date and check FOB terms.

How can the existence of accounts receivable be tested?

When payments are received, vouch checks listed on sample deposit slips to the customer credits listed on the day’s posting to the customers AR.

How can the completeness assertion be tested for A/R

Find evidence that the supervisor matches prenumbered shipping documents with entries in the sales journal

How can the valuation assertion be tested for A/R?

Inspect document for evidence that subsequent cash receipts from the customer are reviewed. Test customer credit.

What is a substantive procedure?

Audit processes designed to gather evidence on the assertions of account balances

True or false the auditor always performs substantive procedures for the revenue cycle?

True

What is a substantive analytical procedure?

The auditor substantiates an account or disclosure by developing and independent estimates of the amount and the estimate to the recorded balance.

What is a substantive test of details?

An auditor substantiates an account or disclosure by directly testing the transactions that make up the account or the items that constitute the balance for that account.

Is the use of confirmations in an audit a required procedure?

Yes

What are the three justifications for not using confirmations?

1. Receivables are not material

2. Confirmations would be ineffective

3. Analytical and substantive procedures provide enough evidence

What two assertions do confirmations provide evidence about?

Existence, rights and obligations

What is a positive confirmation?

The form asks the customer to responded to whether the balance listed is correct or not

What is a blank confirmation?

The customer must fill in the balance themselves

What is a negative confirmation?

The client only responds if the balance listed is incorrect

What is the most common type of confirmation used?

Positive

When is the positive confirmation used?

When the individual balances are relatively large or when accounts are in dispute

When is the negative confirmation form used?

When RMM is relatively low, when small balances are involved, and when the client’s customers can be expected to properly answer confirmations

What should auditors do if they do not receive back confirmations?

Auditors should then perform alternative procedures such as 1. examine subsequent cash receipts 2. examine sales orders, invoices, and shipping documents 3. examine correspondence for past-due accounts

Are confirmations returned as undeliverable always a red flag?

Yes, the address should be double checked and the auditors should verify the company actually exists.

Do confirmations of accounts, loans, and notes receivable always provide sufficient evidence of rights?

No

Is confirming a specific transaction more effective than a balance?

Yes, especially a large transaction

Is it possible for an auditor to obtain a verbal response to a confirmation?

Yes but they cannot use it unless they obtain a written response.