AUD 4.1 - Revenue Cycle Flashcards
Auditing by transaction cycle enables the auditor to:
Gather evidence for related accents simultaneously making the audit process more efficient
Includes sales revenues, receivables, and cash receipts
Revenue cycle
Includes purchases, payables, and cash disbursements
Expenditure cycle
Includes cash receipts and cash disbursements
Cash cycle
Includes perpetual inventory, physical counts, and manufacturing costs
Inventory cycle
Includes investments in debt and equity and the income received from investments
Investment cycle
Includes cycles for property, plan and equipment; payroll and personnel; and financing
Other transactions cycles
Common revenue recognition fraud includes:
Early rev recognition
Holding the books open past the close
Fictitious sales
Failure to record sales returns
Side agreements
Channel stuffing
Overstatement of receivables
Under strong internal controls, segregation of the functions in a sales transaction should exist as follows:
- Preparation of the sales order
- Credit approval
- Shipment
- Billing
- Accounting
Who begins the sales transaction by obtaining the receipt of a customer purchase order?
The sales department
The sales department prepares what after obtaining a customer purchase order and sends it to who?
Prepares a serially numbered sales order and sends to the credit department for approval
Who decides if the customer who submitted a purchase order may receive goods on credit?
The credit department
If the credit department approves the sales order, what happens next?
A copy of the approved sales order is sent to the shipping department, billing department, and accounting department
Who gets a copy of the approved sales order from the credit department?
Th shipping department, the billing department, and the accounting department
Once the approved sales order is sent to the shipping department, what does the shipping department do?
They prepare a serially numbered bill of lading and send a copy to the customer
When goods are ready to be shipped in the shipping department, what happens from an accounting standpoint?
A receivable is created based on the invoice shipping terms
After a copy of the approved sales rider is sent to the billing department, what happens next in the billing department?
They prepare a serially numbered sales invoice and send it to the customer and the accounts receivable department after comparing the shipping documents, sales order, and invoice in a 3 way match
Once a copy of the approved sales order is sent to the accounting department and goods are shipped, what happens next in the accounting department?
the sale is entered into the sales journal and a receivable is recorded
Under strong internal control segregation of the functions in an accounts receivable transaction should exist as follows:
- Sales
- Collection of cash receipts
- Uncollectible receivables
- Sales returns
- Sales discounts
To start the accounts receivable transaction process, what happens?
A receivable is recorded in the accounts receivable account by the accounting department
After a receivable is recorded, what happens when a cash receipt is collected?
The receivable is removed from the account
In carrying out a company’s receivables collection program, the accounting department sends an aging schedule to who?
They send it to the credit department
Controls for writing off receivables include proper segregation of:
Authorization by the treasurer and record keeping within the accounting department
When a sales return occurs, what happens?
A serially numbered receiving report may be used as a sales return slip. Once the return is approved, the sales return is recorded and the related outstanding receivable is eliminated
Who is allowed to open mail in regards to cash receipts?
Incoming mail must be opened by a person who does not have access to the accounts receivable ledger
When receiving cash receipts in the mail, receipts should be listed and copies should be sent to:
The cashier
The accounts receivable department
The accounting department
What does the cashier do in the cash receipts process?
Receives actual receipts and prepares bank deposits
What does the accounts receivable department do in the cash receipts process?
They enter receipts into the accounts receivable subsidiary records
What does the accounting department do in the cash receipts process?
Enters receipts into accounts receivable control account
What does a treasurer do in the sales process?
Reviews and approves write-offs and sends to the billing and accounting department
What’s the most relevant assertion when auditing revenue cycle?
Existence
The risk that accounts receivables will be overstated is high, what assertion is this? While the risk that accounts receivable and sales will be understated is low, what assertion is this?
- Existence
- Completeness
When auditing for completeness in sales transactions, the auditor should do what?
Trace a sample of shipping documents to the corresponding sales invoices, sales journal and accounts receivable subledger
When auditing cutoff for sales transactions, what should an auditor do?
Compare a sample of sales invoices from before and after year-end with the shipment dates and with dates the sales were recorded in the sales journal
When auditing for valuation, allocation, and accuracy in for a sales transaction, the auditor should:
Compare prices on a sales invoice with authorized price lists
When auditing for existence and occurrence for a sales transaction, and auditor should:
Vouch a sample of sales transactions from the sales journal to the sales invoice, then to the customer order and shipping documents
When auditing for understandability and classification for a sales transaction, the auditor should:
Examine a sample of sales invoices for proper classification into the appropriate revenue accounts
When auditing for completeness for accounts receivable, the auditor should:
Obtain an aged trial balance of accounts receivable and trace the total to the general ledger
When auditing for valuation, allocation, and accuracy for accounts receivables, the auditor should:
Examine the results of confirmations for accuracy and test the adequacy of the allowance for doubtful accounts
When testing for existence and occurrence for accounts receivables, the auditor should:
Send confirms
When testing for rights and obligations for accounts receivables, the auditor should:
Review bank confirmations and debt agreements for liens on receivables AND inquire with management, review minutes, and debt agreements.
Type of confirm where customers are requested to return a statement to the auditor regardless of response
Positive confirmations
If there are large individual accounts, expected errors, and internal control is weak - what type of confirmation should be sent?
Positive confirmation
These type of confirms provide a greater degree of assurance but may also result in lower response rates due to greater effort needed by the client
Blank positive confirms
Confirmation provide evidence regarding what assertions? What don’t they provide evidence for?
Existence and rights and obligations
They do NOT cover valuation or completeness
Type of confirm where customers are requested to respond only if they disagree with what is stated:
Negative confirmation
If RMM is low, there are no big accounts, and there is no reason to expect that recipients will ignore the confirmations, what type of confirmation should be sent?
Negative confirmation
Which (positive or negative) confirmation is more effective?
Positive
For confirmation exceptions, the auditor should determine if the exception is due to:
Timing or misstatement
This occurs when there is a delay in the recording of the transaction by the client or the customer. For example, the client may correctly record a receivable on 12/31 when the goods are shipped, but the customer does not record the payable until the goods are received on 1/5:
Timing difference - NOT a misstatement
What’s the process for the auditor if a confirmation does not receive a response:
- Followed up with a 2nd or 3rd confirmation request
- Asks the client to help
- Perform alternative procedures such as inspecting shipping documents or subsequent cash receipts
What assertions are audited when testing sales transactions?
What assertions are audited when testing AR?
Sales: completeness; cutoff; valuation, allocation and accuracy; existence and occurrence; and understandability
AR: completes; valuation, allocation and accuracy; existence and occurrence; and rights and obligations
