A4 M1 Revenue Cycle

Transaction Cycles Types

• Revenue

• Expenditures

• Cash

• Inventory

• Investments

• Other Transaction Cycles

Fraud Risk Related to the Revenue Cycle

Key revenue cycle fraud risks include early revenue recognition holding books open past period-end fictitious sales improper asset valuation failure to record sales returns side agreements with altered terms and overstating receivables by understating allowance for credit losses

Sales Department

Receives customer orders and prepares serially numbered sales orders

Credit Department

Approves credit terms and sends approved sales orders to shipping billing and accounting

Shipping Department

Prepares prenumbered bills of lading ships goods and creates receivable based on shipping terms

Billing Department

Prepares prenumbered sales invoices matches invoices to shipping documents and sales orders applies prices and discounts computes footings and extensions and sends invoices to customers and accounts receivable

Accounting (Sales)

Records sales in the sales journal and updates accounts receivable

Accounts Receivable Control & Ledger

Records receivables in general ledger control account and accounts receivable subsidiary ledger which should be reconciled periodically by an independent person

Cash Collections (AR)

Eliminates receivable upon receiving customer payment

Uncollectible Receivables

Prepares aging schedule for collection efforts and requires treasurer authorization and proper record keeping for write-offs

Sales Returns

Inspects returned goods uses serially numbered receiving reports as return slips approves returns and eliminates outstanding receivables without credit memo preparation by cash collection personnel

Sales Discounts

Reviews procedures (gross versus net) to ensure correct recording and prevent receivable overstatement

Mailroom

Opens mail without access to accounts receivable ledger and lists receipts in detail with three copies distributed to cashier accounts receivable and accounting

Cashier

Receives actual receipts and prepares bank deposit

Accounts Receivable Department (Cash)

Enters receipts into accounts receivable subsidiary records and matches bank deposit tickets with remittance advices

Accounting Department (Cash)

Enters receipts into accounts receivable control account

Cash Safeguards

Utilizes restrictive endorsements daily bank deposits cash registers and lock boxes

Segregation Summary

Divides duties among Authorization (Sales Order Credit Treasurer) Record Keeping (Billing Accounts Receivable Accounting) and Custody (Warehouse Shipping Mailroom Cashier)

Testing Controls (Sales and Credit)

Inquires about procedures inspects samples for credit checks and observes write-off controls

Testing Controls (Warehouse and Shipping)

Observes physical inventory controls matches bills of lading to sales orders and accounts for prenumbering

Testing Controls (Billing and Accounts Receivable)

Vouches sales invoices to shipping or order documents traces shipping documents to journals or ledgers and inspects customer exception files

Testing Controls (Accounting)

Observes and reperforms control procedures and classification reviews

Testing Controls (Cash Receipts)

Observes procedures inspects bank deposits and reconciliations and reperforms listing matching

Auditing Sales Transactions Primary Assertion

Focuses on existence or occurrence as the primary relevance over completeness due to overstatement risks

Auditing Sales Transactions Completeness

Traces sample of shipping documents to invoices sales journal and accounts receivable subsidiary ledger

Auditing Sales Transactions Cutoff

Compares sales invoices shortly before and after year-end with shipment and recording dates and analyzes post-year-end returns

Auditing Sales Transactions Valuation Allocation and Accuracy

Compares prices and terms on sales invoices with authorized price lists

Auditing Sales Transactions Existence and Occurrence

Vouches sales transactions from sales journal to invoices customer orders and shipping documents and uses external confirmations

Auditing Sales Transactions Understandability of Presentation and Classification

Examines sample of sales invoices for proper revenue account classification

Auditing Accounts Receivable Completeness

Obtains aged trial balance of accounts receivable and traces total to general ledger control account

Auditing Accounts Receivable Valuation Allocation and Accuracy

Examines confirmation results and tests allowance for credit losses adequacy

Auditing Accounts Receivable Existence and Occurrence

Confirms a sample of accounts receivable

Auditing Accounts Receivable Rights and Obligations

Reviews bank confirmations debt agreements board minutes and management inquiries for liens factoring or sales of receivables

Accounts Receivable Confirmations Requirement

Mandatory auditing procedure unless receivables are immaterial confirmation would be ineffective or combined inherent and control risks are very low with sufficient alternative evidence

PCAOB Issuer Confirmation Requirement

Directly communicates with the audit committee if external confirmations for significant accounts receivable or cash risks cannot be performed

Accounts Receivable Confirmations Evidence Provided

Provides primary evidence for existence and rights and obligations while remaining unreliable for valuation or completeness

Confirmation Exceptions Timing Differences

Delays in transaction recording between client and customer that do not constitute misstatements

Confirmation Exceptions Misstatements

Discrepancies due to fictitious sales goods or invoices sent to wrong customers or incorrect pricing or quantities

Alternative Procedures for Nonresponses

Performs alternative procedures such as inspecting subsequent cash receipts shipping documents or sales orders when confirmation responses are missing

Auditing Presentation and Disclosure Completeness

Ensures required disclosures are included such as revenue recognition methods pledged receivables credit risk concentrations allowance policies and related party transactions

Auditing Presentation and Disclosure Valuation Allocation and Accuracy

Evaluates accuracy of disclosed financial details and allowance valuations

Auditing Presentation and Disclosure Rights Obligations and Occurrence

Verifies pledged or factored receivables disclosures and underlying transactions actually occurred

Auditing Presentation and Disclosure Understandability of Presentation and Classification

Ensures financial statement disclosures and accounts receivable account classifications (trade versus non-trade and current versus non-current) are clearly presented in conformity with GAAP