Chapter 10: Auditing the Revenue Process Flashcards
1
Q
Occurrence (Revenue & Cash Receipt Transactions & Events)
A
All revenue and cash receipts transactions and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity
2
Q
Completeness (Revenue & Cash Receipt Transactions & Events)
A
All revenue and cash receipts transactions and events that should have been recorded have been recorded, and all related disclosures that should have been included in the financial statements have been included
3
Q
Authorization (does not really count for assertion in regards to revenue but good to know) (Revenue & Cash Receipt Transactions & Events)
A
All revenue and cash receipts transactions and events have been properly authorized
4
Q
Accuracy (Revenue & Cash Receipt Transactions & Events)
A
Amounts and other data relating to recorded revenue and cash receipts transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and described
5
Q
Cutoff (Revenue & Cash Receipt Transactions & Events)
A
All revenue and cash receipts transactions and events have been recorded in the correct accounting period
6
Q
Classification (Revenue & Cash Receipt Transactions & Events)
A
All revenue and cash receipts transactions and events have been recorded in the proper accounts
7
Q
Presentation (Revenue & Cash Receipt Transactions & Events)
A
All revenue and cash receipts transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable in the context of the requirements of the applicable financial reporting framework
8
Q
Possible Misstatement Revenue Transactions: Occurrence
A
- Fictitious Revenue
- Revenue recorded, goods not shipped, or services not performed
9
Q
Possible Misstatement Revenue Transactions: Completeness
A
- Goods shipped or services performed, but revenue not recorded
10
Q
Possible Misstatement Revenue Transactions: Authorization
A
- A relevant and required disclosure is omitted by management
- Goods shipped or services performed for a customer who is a bad credit risk
- Shipments made or services performed at unauthorized prices or on unauthorized terms
11
Q
Possible Misstatement Revenue Transactions: Accuracy
A
- Revenue transaction recorded at an incorrect dollar amount
- Revenue transactions not posted correctly to the sales journal, customer accounts in accounts receivable subsidiary ledger or general journal
12
Q
Possible Misstatement Revenue Transactions: Cutoff
A
Revenue transactions recorded in the wrong period
13
Q
Possible Misstatement Revenue Transactions: Classification
A
Revenue transaction not properly classified
14
Q
Possible Misstatement Revenue Transactions: Presentation
A
Revenue transactions not properly presented and disclosed
15
Q
Example Control Activity Revenue Transactions: Occurrence
A
- Segregation of duties
- Sales recorded only with approved customer order and shipping document
- Accounting for numerical sequences of sales invoices
- Monthly customer statements; complaints handled independently
16
Q
Example Control Activity Revenue Transactions: Completeness
A
- Accounting for numerical sequences of shipping documents and sales invoices
- Shipping documents matched to sales invoices
- Sales invoices reconciled to daily sales report
- An open-order file that is maintained currently and reviewed periodically
17
Q
Example Control Activity Revenue Transactions: Authorization
A
- Disclosure checklist
- Proper procedures for authorizing credit and shipment of goods
- Authorized price list and specified terms of trade
18
Q
Example Control Activity Revenue Transactions: Accuracy
A
- Authorized price list and specified terms of trade
- Each sales invoice agreed to shipping document and customer order for product type and quantity; mathematical accuracy of sales invoice verified
- Sales invoices reconciled to daily sales report
- Daily postings to sales journal reconciled with posting to subsidiary ledger
- Subsidiary ledger reconciled to general ledger control account
19
Q
Example Control Activity Revenue Transactions: Cutoff
A
- All shipping documents forwarded to the billing function daily
- Daily billing of goods shipped
20
Q
Example Control Activity Revenue Transactions: Classification
A
- Chart of accounts
- Proper codes for different types of products or services
21
Q
Example Control Activity Revenue Transactions:
Presentation
A
- Chart of accounts
- Proper codes for different types of products and services
- Disclosures checklist
22
Q
Example Test of Controls Revenue Transactions: Occurrence
A
- Observation and evaluation of proper segregation of duties
- Testing a sample of sales invoices for the presence of authorized customer order and shipping document
- Review and testing of client procedures for accounting for numerical sequence of sales invoices
- Review and testing of client procedures for mailing and handling complaints about monthly statements
23
Q
Example Test of Controls Revenue Transactions: Completeness
A
- Review and testing of client procedures for accounting for numerical sequence of shipping documents and sales invoices
- Tracing of a sample of shipping documents to their respective sales invoices and to the sales journal
- Testing of a sample of daily reconciliations
- Examination of the open-order file for unfilled orders
24
Q
Example Test of Controls Revenue Transactions: Authorization
A
- Review financial statements disclosure checklist
- Review of client procedures for granting credit
- Examination of sales orders for evidence of proper credit approval
- Comparison of prices and terms on sales invoices to authorized price list and terms of trade
25
Example Test of Controls Revenue Transactions: Accuracy
- Review financial statements disclosure checklist
- Review of client procedures for granting credit
- Examination of sales orders for evidence of proper credit approval
- Comparison of prices and terms on sales invoices to authorized price list and terms of trade
- Examination of sales invoice for evidence that client personnel verified mathematical accuracy
- Recomputation of the information on a sample of sales invoices
- Examination of reconciliation of sales invoices to daily sales report
- Examination of reconciliation of entries to sales journal with entries to subsidiary ledger
- Review of reconciliation of subsidiary ledger to general ledger control account
26
Example Test of Controls Revenue Transactions: Cutoff
- Comparison of the dates on sales invoices with the dates of the relevant shipping documents
- Comparison of the dates on sales invoices with the dates they were recorded in the sales journal
27
Example Test of Controls Revenue Transactions: Classification
- Review of sales journal and general ledger for proper classification
- Examination of sales invoices for proper classification
28
Example Test of Controls Revenue Transactions: Presentation
- Review sales journal and general ledger for proper aggregation or disaggregation of revenue transactions and determine if disclosure is needed
- Examination of sales invoices for proper aggregation and disaggregation
- Review disclosure checklist and related disclosures for relevance and completeness
29
Possible Misstatement Cash Receipts: Occurrence
Cash receipts recorded but not received or deposited
30
Possible Misstatement Cash Receipts: Completeness
Cash receipts stolen or lost before recording
31
Possible Misstatement Cash Receipts: Authorization
Cash discounts not properly taken
32
Possible Misstatement Cash Receipts: Accuracy
- Cash receipts recorded at incorrect amount
- Cash receipts not properly posted to cash receipts journal, accounts receivable subsidiary ledger, and general ledger accounts
33
Possible Misstatement Cash Receipts: Cutoff
Cash receipts recorded in wrong period
34
Possible Misstatement Cash Receipts: Classification
Cash receipts recorded in wrong financial statement account
35
Possible Misstatement Cash Receipts: Presentation
Presentation would normally not be a relevant assertion for cash receipt transactions
36
Example Control Activity Cash Receipts: Occurrence
- Segregation of duties
- Use of lockbox system
- Monthly bank reconciliation prepared and independently reviewed
37
Example Control Activity Cash Receipts: Completeness
- Segregation of duties
- Use of lockbox system
- Monthly bank reconciliation prepared and independently reviewed
- Checks restrictively endorsed when received and daily cash list prepared
- Daily ash receipts reconciled with posting to accounts receivable subsidiary ledger
Customer statements prepared on a regular basis; complaints handled independently
38
Example Control Activity Cash Receipts: Authorization
Procedures specifying policies for cash discoutns
39
Example Control Activity Cash Receipts: Accuracy
- Daily remittance report reconciled to control listing of remittance advices
- Monthly bank statement reconciled and independently reviewed
- Daily remittance report reconciled daily with postings to cash receipts journal and accounts receivable subsidiary ledger
- Monthly cash receipts journal agreed to genral ledger posting
- Accounts receivable subsidiary ledger reconciled to general ledger control account
40
Example Control Activity Cash Receipts: Cutoff
- Use of a lockbox system or a control procedure to deposit cash receipts daily
41
Example Control Activity Cash Receipts: Classification
- Chart of accounts
42
Example Tests of Controls Cash Receipts: Occurrence
- Observation and evaluation of proper segregation of duties
- Inquiry of management about lockbox policy
- Review of monthly bank reconciliation for indication of independent review
43
Example Tests of Controls Cash Receipts: Completeness
- Observation and evaluation of proper segregation of duties
- Inquiry of management about lockbox policy
- Review of monthly bank reconciliation for indication of independent review
- Observation of the endorsement of checks
- Testing of the reconciliation of daily cash receipts with posting to accounts receivable subsidiary ledger
- Inquiry of client personnel about handling of monthly statements and examination of resolution of complaints
44
Example Tests of Controls Cash Receipts: Authorizaion
- Testing of a sample of cash receipts transactions for proper cash discounts
45
Example Tests of Controls Cash Receipts: Accuracy
- Review and testing of reconciliation
- Examination of monthly bank reconciliation for independent review
- Review and testing of reconciliation
- Review of posting from cash receipts journal to the general ledger
- Examination of reconciliation of accounts receivable subsidiary ledger to general ledger conrol account
46
Example Tests of Controls Cash Receipts: Cutoff
- Examination of cash receipts for daily deposit
47
Example Tests of Controls Cash Receipts: Classification
- Tracing of cash receipts from listing to cash receipts journal for proper classification
- Review of cash receipts journal for unusual items
48
What assertions are auditors primarily concerned with?
- Occurrence/Existence
- Completeness
- Accuracy
49
How to test for sales cutoff
1. Auditor first identifies the number of the last shipping documents issued in the current period.
2. Then a sample of sales invoices and their related shipping documents is selected for a few days just prior to, subsequent to, and at the end of the period
3. FOB shipping point: Sales invoices representing goods shipped prior to year-end should be recorded in the current period and invoices for goods shipped to subsequent to year-end should be recorded as sales in the next period
(Shipping point is very useful in determining when cutoff should be)
50
Examples of Substantive Analytical Procedures: Revenue
- Comparison of gross profit percentage by product line with previous years and industry data
- Comparison of reported revenue to budgeted revenue
- Analysis of the ratio of sales in the last month or week to total sales for the quarter or year
- Comparison of revenues recorded daily for periods shortly before and after the end of the audit period for unusual fluctuations such as an increase just before and a decrease just after the end of the period
- Comparison of details of units shipped with revenues and production records and consideration of whether revenues are reasonable compared to levels of production and average sales price
- Comparison of the number of weeks of inventory in distribution channels with prior periods for unusual increases that may indicate channel stuffing
- Comparison of percentages and trends of sales into the distributor channel with industry and competitors' sales trends
51
Examples of Substantive Analytical Procedures: Accounts Receivable, Allowance for Uncollectible Accounts, and Bad Debt Expense
- Comparison of receivables turnover and days outstanding in accounts receivable to previous years and/or industry data
- Comparison of aging categories on aged trial balance of accounts receivable to previous years
- Comparison of bad-debt expense as a percentage of accounts receivable or credit sales to previous years and/or industry data
- Examination of large customer accounts individually and comparison to previous year
52
Examples of Substantive Analytical Procedures: Sales Returns and Allowances and Sales Commission
- Comparison of sales returns as a percentage of revenue to previous years and/or industry data
- Comparison of sales discounts as a percentage of revenue to previous years and/or industry data
- Estimation of sales commission expense by multiplying net revenue by average commission rate and comparison of recorded sales commission expense
53
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Substantive Test of Transactions: Occurrence
(Classes of Transactions)
For a sample of sales transactions recorded in the sales journal, vouch the sales invoices back to the customer orders and shipping documents. If reliable data are maintained electronically and controls are found to be effective, use audit data analytics to match important data from population of sales invoices with related customer orders and shipping documents
54
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Substantive Test of Transactions: Completeness
(Classes of Transactions)
Trace a sample of shipping documents to the details of the sales invoices and to the sales journal and customer accounts receivable subsidiary ledger
55
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Substantive Test of Transactions: Authorization and accuracy
(Classes of Transactions)
Compare prices and terms on a sample of sales invoices wiht authorized price list and terms of trade
56
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Substantive Test of Transactions: Cutoff
(Classes of Transactions)
Compare dates on a sample of sales invoices with the dates of shipment and with the dates they were recorded in the sales journal
57
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Substantive Test of Transactions: Classification
(Classes of Transactions)
Examine a sample of sales invoices for proper classification into revenue accounts
58
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Substantive Test of Transactions: Presentation
(Classes of Transactions)
Review disclosure checklist and related disclosures for relevance and completeness
59
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Test of Details of Account Balances:
Existence
- Confirm selected accounts receivable
- Perform alternative procedures for accounts receivable confirmation exceptions and nonresponses
60
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Test of Details of Account Balances: Rights and obligations
- Review bank confirmations for any liens on receivables
- Ask management, review any loan agreements, and review board of directions minutes for any indication that the accounts receivable have been sold
61
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Test of Details of Account Balances: Completeness
- Obtain an afed trial balance of accounts receivable and agree the total to general ledger control accounts
- Review results of testing the completeness assertion for assessing control risk; trace shipping documents into sales journal and to accounts receivable subsidiary ledger if such testing was not performed as a test of controls
62
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Test of Details of Account Balances: Accuracy, valuation, and allocation
- Examine the results of confirmations of selected accounts receivable
- Examine the adequacy of the allowance for uncollectible accounts
63
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Test of Details of Account Balances: Classification
Review accounts receivable accounts to ensure that different types of receivables are properly classified
64
Revenue, AR, Allowance for Uncollectible Accounts, Bad Debt Expense Test of Details of Account Balances: Presentation
- Review disclosure checklist and related disclosures for relevance and completeness
- Read the financial statements and evaluate that disclosures are relevant and understandable
65
What kind of responses might we expect from customers regarding AR confirmations?
1. Positive Response (Yes, this matches)
2. Negative Response (No, this does not match)
3. Non-error response (no response at all)
66
Do blank forms count as a positive response or negative response or nonresponse?
Positive
67
Do blank forms count as a positive response or negative response or nonresponse?
Positive
