Assertion - Execution - Audit of Revenue, Receivable & Revenue Cycle

Question 1

Explain what the credit cycle system is

Answer 1

Phase 1 - Credit Application is reviewed
Phase 2 - Customer places order
Phase 3 - Order is fulfilled
Phase 4 - Customer is invoice, receivable is created
Phase 5 - Payment is processed, receivables is settled

Question 2

What is the risk with A/R and sales

Answer 2

• The risk is that overstatement can occur when the entity is profit-oriented. Incentive to show higher income
• Audit of sales is helped by looking at A/R balance
  Ex. Manufacturing/ distribution would have a higher A/R balance
• Risk relates to the oversight of A/R, the uncertainty of valuation

Question 3

What are some assertions for A/R and sales

Answer 3

A/R - Existence - A/R does not exist
Completeness - A/R balance owed is not recorded
Rights and Obligation - Entity does not have right to A/R balance, not controlled by entity
Accuracy, valuation, allocation - A/R balance are not recorded at the correct $ amount, or credit losses are not recorded
Classification - A/R balances are not classified in the appropriate B/S account
Presentation - The appropriate disclosure for A/R has not been made

Sales - Occurrence - Sales recorded did not occur
Completeness - Sales have occurred but have not been recorded
Accuracy - Sales transactions recorded but not of the correct amount
Cut-off - Sales transactions not recorded in the same period
Classification - Sales are not classified in appropriate I/S statement
Presentation - Appropriate disclosure for sales is not been made

Question 4

What are 5 general procedures for revenue, receivables, and receipt

Answer 4

1. Select a sample of delivery notes for goods shipped immediately before and after the year-end and compare the shipment dates to GL to ensure that transactions are recorded to the correct period
2. Investigate A/R confirmation replies that do not agree with the A/R sub-ledger identify reasons for the difference and determine whether any amount needs to be adjusted for error
3. Investigate any unrelated confirmation and determine whether customers are still in business to determine whether provisions for bad debt are required (Accuracy, valuation, allocation)
4. Investigate customer who did not reply to the confirmation and verify the balance with cash received after year-end and sales invoices (existence, accuracy, valuation, allocation)
5. For a sample invoice, agree the invoice value to the price list to ensure that it has been calculated correctly (Sales - accuracy)

Question 5

Provide 3 examples of risks that can occur with revenue, receivable, and receipt

Answer 5

1. Sales have increased over the prior year by significantly % or there are other considerations that sale may be recorded prematurely - Sales - occurrence/ cutoff - Select a sample of GL entries and voucher them back to the related shipping document and sales date to determine whether sales were recorded to the proper period
2. The client has a manual sales system - Accuracy of sales and sales may be recorded at the wrong amount due to clerical error - Sample GL entries, vouch them back to related sales invoices, and determine whether sales transactions were recorded at the correct amount
3. A/R balance as increased over prior period year A/R ratio has decreased compared to the prior year - Existence, accuracy, allocation, valuation - Select a sample of A/R at balance year-end, list review customer for payment received after year-end