CH 7: Revenue and Collection Cycle

What are the significant accounts in the Revenue and Collection Cycle

Revenue
AR

What are the Relevant assertions for revenue

Occurrence
Completeness
Cutoff

What are the relevant assertions of AR

Existence
Completeness
Valuation

What are the basic activities in the revenue and collection cycle (for typical manufacturing company)? (4)

Receive and process customer order
Delivery
Bill
Collect and deposit cash

Rev should be recorded when:

goods shipped

3 way match for revenue and collection

PO
Shipping doc
Invoice

Revenue must be ___ and ___ to be appropriately recognized

realized/realizable and earned

What are the three main Risks OMM in the revenue and collection cycle (what could go wrong)

Revenue Recognition
Customer returns
AR collectability

What are the inherent risks (including fraud risk) for the rev and collection cycle

Improper rev recognition
Returns and allowances
Collectability of receivables

What are the types of improper rev recognition (3)?

Side agreements
Bill and hold sales
Channel Stuffing

arrangements used to alter the terms and conditions of recorded sales to entice customers to accept delivery of goods/services

side agreements

customer agrees to purchase, but seller retains physical possession until customer requests shipments

bill and hold sales

boost sales by inducing distributors to buy substantially more inventory than they can promptly resell; overstatement problem because sales didn’t actually occur (people will return them)

channel stuffing

What will auditors check to determine if channel stuffing is occurring?

Check the return rates

AS 2110 indicates that the auditor should presume that there is a fraud risk involving:

improper revenue risk

contains the details of the type and quantity of products or services ordered by customer

customer sales order

for credit sales, the entity must have a formal procedure for investigating the creditworthiness of the customer

credit approval form

a report of all customer orders for which processing has NOT been complete

open order report

document that generally serves as the BOL and contains the info on the type of product shipped, quantity shipped, and other relevant info

shipping document

document that is used to bill the customer; This document contains information on the type of product or service, the quantity, the price, and the terms of trade

sales invoice

Once a sales invoice has been issued, the sale needs to be recorded in the accounting records. The ___ is used to record information about the sales transaction

sales journal

This document is mailed to the customer and contains details of all sales, cash receipts, and credit memorandum transactions

customer statement

This ledger contains an account and the details of transactions for each customer.

AR Subsidiary Ledger

This report summarizes all the customer balances in the accounts receivable subsidiary ledger. Each account is classified as current or placed into one of several past due categories

Aged Trial Balance of AR

This is usually the part of the customer’s bill that should be returned with the payment. Types of Documents and Records

Remittance advice

This journal is used to record the cash receipts of the entity.

Cash receipts journal

document used to record credits for the return of goods by a customer

credit memorandum

document authorizes the write off of an uncollectible AR; final approval generally authorized by the treasurer

write off authorization

What are the 5 categories of key control procedures?

SOD
Reconciliations
Physical controls over security of assets
Info Processing
Performance reviews

What are the Info Processing Controls for rev and collection? (2)

Prenumbered sales orders, shiping docs, etc
Remittance advice

What are the Physical Controls over securities of assets for rev and collection?

shipping department (inventory) restriction

What are the three duties that must be separated?

Recording
Authorization
Custody

What are the 3 things that should be separate within authorization of transactions

Write Offs
Credit Checks
Pricing Guide and customer list

What are the reconciliation Controls for rev and collection?

Rec AR sub ledger and general ledger
Send monthly statement to customers

What test is very good for completeness assertions?

Prenumbered documents

End AR=

Beg AR + Credit sales - Cash Receipts - Sales Returns - Sales Discounts - Write offs - Factoring - recalls - write off reversals

ADA =

ADA beg + BDE - Write offs + write off reversals

What are the tests of details to perform on AR?

Confirm balances
Alt tests
Test AR aged trial balance and collectability
Test sales cutoff

What are the substantive analytical procedures for Sales rev

Compare sales with previous periods and industry

What are the substantive analytical procedures for ADA and BDE

BDE as % of Sales
ADA as % of Gross Receivables

What are the substantive analytical procedures for AR

Days sales in AR
AR Turnover

AR Confirmations are primarily used for verifying:

existence

What are the factors that affect the reliability of confirmations? (4)

Previous audit experience
Intended recipient
Type of info confirmed
Type of confirmation

What are the three types of confirmations?

Positive
Negative
Blank

Confirmations that ask whether a balance is correct or incorrect; most common type

positive confirmations

type of confirmation used when small number of accounts are involved or large number of errors is anticipated

positive confirmations

Confirmation that asks for a response only if something is wrong

negative confirmations

type of confirmation used when ALL of the following are present:
Level of RoMM is low
Large number of small balances involved
Client’s customers expected to consider confirmations properly

negative confirmations

Using negative confirmations can only be done when CR and IR are low because:

it increases DR

type of confirmation used when you want positive confirmation but the recipient is likely to return without verifying accuracy of information

blank confirmations

The trade off between positive and negative confirmations depends on ___ and ___ associated with the receivables portfolio and likelihood of responses

magnitude and risk

PCAOB encourages the auditor to be perform ___ to supplement the use of negative confirmations

other substantiative procedures

Responses to positive and blank confirmations are ___ reliable than negative non responses

more

What are the problems with AR confirmations (3)

Recipients might not report understatements
Non response (pos and blank)
Follow up exceptions

What are the three sets of circumstances that could justify the omission of the confirmation of a clients AR

Not material to F/S
Assessed ROMM is Low at relevant assertion level and has other planned sub procedures to address risk
Confirmations of AR expected to be ineffective

What do auditors do to audit uncollectible accounts (4)

Inspect customer files for collectability
Recalc ADA and BDE
Verify reasonableness of ADA and BDE
Inspect docs for appropriate WOs

When inspecting documents for appropriateness of accounts written off, what should auditors look for (2) (think- cant write your cousin off the books because…)

Additional collection procedures
Appropriate authorization

What are the Sales Cutoff Procedures (2)

Examine sales invoices and ship docs shortly prior to and after YE
Examine returns after YE

used to verify whether sales/revenue recorded in correct accounting period (holding the books open)

Sales Cutoff Procedures

What are the alternative procedures for AR? (4)

Vouch to subsequent cash collections
Inspect correspondence files for past due amounts
Subsequent cash receipts testing
Examine supporting documents (SO, Invoices, Shipping Documents)

Vouching AR to subsequent Cash Collections is usually sufficient evidence for which assertions?

Existence
Valuation