IT auditing chapter 9: Auditing the Revenue Cycle

Batch System Sales Order Procedure: Receive Order

• Begins in the sales department with the customer’s

• vital customer and order information is gathered and raw order is turned into a sales order

• copies are sent to different departments based on operational needs and one copy is filed future reference which helps in addressing customer queries

Batch System Sales Order Procedure: Credit Check

• involves verifying the customer’s creditworthiness

• Credit authorization is sent for approval and the approved sales order triggers release to other departments

Batch System Sales Order Procedure: Pick up Goods

• Stock release copy is sent to the warehouse

• items identified for picking and authorizes release of inventory

• warehouse clerk adjusts stock records to reflect inventory reduction after the sale

Batch System Sales Order Procedure: Ship Goods

• Shipping department receives verified documents: stock release, packing slip, shipping notice

• packing slip sent to customer detailing order contents

• shipping notice informs billing department about order completion and shipment details

Batch System Sales Order Procedure: Bill customer

Billing function in sales department performs tasks:

• bills customer

• records saes in the sales journal

• updates inventory records

• updates accounts receivable

• posts transaction to the general ledger

Batch System Sales Order Procedure: Record the transaction (accounting)

• Data processing and records keeping is done by computers

• Each program manages a batch of sales orders before passing it to the next

• Once the final program finishes the last transaction in a batch, the process ends, freeing up computer resources until the next batch is due for processing

Data Entry…

Clerk coverts hardcopy shipping notices to a file. Calculates batch control data

Edit Run

Test of the existence of clerical or logical errors

• include field checks, limit checks, range tests, and price times quantity extensions

• the edit program also recalculates the catch control totals after removing error reports

Sort Run

reorders files by their pre-determined orders (e.g account numbers)

AR update and billing

run matches sales orders to their corresponding AR master files. Provides back automatically (GFS update)

Inventory update run

updates inventory with a destructive write approach

General Ledger (GL) update run

updates GL accounts through journal voucher file. May be updated after each batch or at the end of day

Integrated Real-Time Sales Order System: Integration Objective

• advanced technologies allows systems designers to integrate accounting functions through a common information system

• aims to enhance operations and cut costs by streamlining tasks

Integrated Real-Time Sales Order System: Sales Order Processing

• credit checks are automated

• digital documents replaces hard copies

Integrated Real-Time Sales Order System: Sales Clerk Tasks

Clerks receive orders and:

• confirm inventory and conduct credit checks

• if approved, the system updates sales records and send digital instructions to the warehouse and shipping

• warehouse prepares goods and send them to shipping

Integrated Real-Time Sales Order System: Shipping and Transaction Completion

Shipping verifies, ships, and signals transaction completion digitally

Integrated Real-Time Sales Order System: Automated Accounting Tasks Upon Receipt

Upon receiving the shipping notice, the system:

• updates credit history

• adjusts inventory

• processes reorders if necessary

• updates sales records with shipping dates

• updates general ledger accounts and generates management reports

Batch System Cash Receipts Procedures: Mailroom

separates the checks and remittance advices and prepared a remittance list as a control documents

Batch System Cash Receipts Procedures: Cash Receipts Department

cash receipts clerk reconciles the checks and the remittance list and prepares deposit slips. Clerks send the cask and deposit slip to the bank

Batch System Cash Receipts Procedures: AR Department

AR clerk receives a listing of all transactions processed, reconciles this list with batch summary report and files them

Batch System Cash Receipts Procedures: Data-Processing Department

first runs a Master File update in the AR Voucher file and then run a GL Update

Batch System Cash Receipts Procedures: Controller’s office

conducts periodic reviews of deposit slips returned from the bank and remittance lists prepared in the mailroom to reconcile final deposit with original receipt

Integrated Real-Time Cash Receipts System: Mailroom Processing

• opens and checks remittance advices

• endorses checks as “For Deposit Only”

• prepares copies of the remittance list

• sends copies of the list and checks to Cash receipts

Integrated Real-Time Cash Receipts System: Cash Receipts Handling

• reconciles checks and remittance advices with the list

• prepares deposit slips

• creates a record in the remittance file (cash receipts journal)

• files the documents

Integrated Real-Time Cash Receipts System: Automatic data-processing procedures

• closes sales invoices by adding customer check number and payment date to the invoice record

• posts information to the general ledger

• prepares and distributes management reports

Integrated Real-Time Cash Receipts System: Controller’s Office

performs periodic reconciliations

Integrated Real-Time Cash Receipts System: Electronic Funds Transfer (EFT) System

allows the company to receive cash payments electronically from customers

Revenue Cycle Audit Objective

aims to test management assertions related to revenue cycle

• existence/occurence

• completeness

• accuracy

• rights and obligations

• valuation or allocation

• presentation and disclosure

Input controls

ensure transactions are valid, accurate and complete

Input controls: Credit Authorization Procedures

establish creditworthiness of the customer.

Testing credit procedures

• valuation/allocation/accuracy

• determine the effective procedures exist to establish appropriate customer credit limits; communicate this information adequately to the credit policy decision

Input controls: Data Validation Controls

intended to detect transcription errors in transaction data before they are processed

Testing Validation Controls

• accuracy

• audit checks if data editing system validation is consistent and effective over time

• verifying program logic can be tricky; auditors might trust other controls’ quality

• weak system development controls might make testing program logic more efficient than detailed tests

• testing error lists/logs offers some assurance, focusing on detected errors only

Input controls: Batch Controls

used to reconcile output produced by the system with the input originally entered into the system

Testing Batch Controls

• Completeness and accuracy

• involves reviewing transmittal records of batches processed and reconciling them to the batch control log (batch transmittal sheet)

• the auditor needs to investigate out of balance conditions to determine the cause (batch control logs)

Process controls: Run-to-run controls

• ensure each run in the system processes the batch correctly and completely

• after each major operation in the process, key fields such as invoice amount and record counts are accumulated and compared to the corresponding values stored in the control record

Process controls: Transaction code controls

• for each type of records, a transaction code will be assigned to determine which tasks to be performed

• transaction code errors can cause incorrect processing resulting in materially misstated sales and AR

Process controls: Sequence check controls

when system uses sequential master files, the batch must be re-stored in the order of master file used

Access controls

• prevent and detect unauthorized and illegal access to firm’s systems and/or assets

• controlling access to accounting records also important

Physical controls: Segregation of duties

ensures no single individual or department processes and entire transaction

Rule 1: transaction authorization separate from transaction processing

Rule 2: Asset custody separate from record-keeping tasks

Rule 3: organization structured so that fraud requires collusion between two or more people

Physical controls: Supervision

• compensates for inherent exposure when employees must perform incompatible functions

• supplement when duties are properly segregated

• can be an effective preventive control

Physical controls: Independent verification

reviews work performed by others at key points to identify and correct errors

Output controls

designed to ensure information is not lost, misdirected, or corrupted and system processes functions properly

• reconciling GL to subsidiary ledgers

• maintenance of an audit trail

Substantive Test of Revenue Cycle Accounts

auditors need to determine the nature, timing and extent of substantive tests based on the audit risks, materiality and efficiency

• concern is potential overstatement or revenues and AR

• focus on large, unusual transactions near period-end