Chapter 10: Auditing the Revenue Process Flashcards
Revenue
inflows or other enhancements of assets of an entity or settlements of its liabilities from delivery or producing goods, rendering services, or other activities
Fraud Risks in Revenue Recognition (4)
- Side agreements
- Channel Stuffing
- Related party transactions
- Bill and hold sales***
3 types of transactions that are typically processed through the revenue process
- The sale of goods or rendering services for cash or credit
- The receipt of cash from the customer in payment for goods or services
- The return of goods by the customer for credit or cash
Accts affected by sales transactions
accts receivable
sales
allowance for uncollectible accts
bad debt exp
Accounts affected by Cash receipts
cash
accts rec
cash discounts
Accounts affected by sales returns and allowances
sales returns
sales allowances
accts rec
Credit approval form
for credit sales, the entity must have a formal procedure for investigating the creditworthiness of the customer
Customer sales order
contains the details of the type and quantity of products or services ordered by the customer
Open order report
a report of all customer orders which are not filled yet
Shipping document
serves as a bill of lading and contains info on the type of product shipped, the quantity shipped, and other relevant info
sales invoice
used to bill the customer, contains info on the type of product or service, the quantity, the price, and terms of trade
Sales journal
used to record information about the sales transaction
Customer Statement
document that is mailed or emailed to the customer and contains details of all sales, cash receipts, and credit memorandum transactions
Accts rec Subsidiary Ledger
contains an acct and the details of transactions for each customer
Aged trial balance of accts rec
summarizes all customer balances in the AR sub ledg. Each acct is classified as current or placed into one of the past due categories
Remittance Advice
part of the customers bill that should be returned with the payment and states what invoices the customer paid for
Cash receipts Journal
used to record cash receipts of entity
Credit memo
used to record credits for the return of goods by a customer
Write off authorization
authorizes the write-off on an uncollectible AR, authorized by treasurer
Functions of the revenue process (7)
- order entry
- credit authorization
- shipping
- billing
- cash reciepts
- accts rec
- general ledger
order entry
acceptance of customer orders for goods and services into the system in accordance w/ management criteria
Credit authorization
Appropriate approval of customer orders for creditworthiness
Shipping
Shipping of goods that has been authorized
Billing
Issuance of sales invoices to customers for goods shipped or services provided; also, processing of billing adjustments for allowances, discounts, and returns
Cash receipts
processing of the receipt of cash from customers
Accounts Receivable
Recording of all sales invoices, collections, and credit memo in individual customer accounts
General Ledgers
Proper accumulation, classification, and summarization of revenues, collections, and receivables in the financial statement accounts
Inherent Risk factors that may affect the revenue process (4)
- Industry-related factors
- the complexity and contentiousness of revenue recognition issues
- the difficulty of auditing transactions and account balances
- misstatements detected in prior audits
Control Risk Assessment (3)
-understand and document the revenue process based on a reliance strategy
-plan and perform tests of controls on revenue transactions
-set and document the control risk for the revenue process
very few situations reliance strategy is not the right answer when auditing the revenue cycle
Control Environment
Understanding the control environment is generally completed on an overall entity basis
The entity’s risk assessment process
auditor must understand how mgmt considers risks that are relevant to the rev process
-auditor should estimate the significance of the risk and assess the likelihood of occurrence
Control Activities
auditor identifies what controls ensure that the assertions for transactions and events are being met
Tests to test controls over the revenue process
-Inquiry of client personnel
-Inspection of documents and records
-observations of the operation of the control
-walkthroughs
-reperformance of the control activities
Plan and perform tests of controls
auditor systimatically examines the entity’s rev process to identify relevant risks of material misstatement and controls that help to prevent, or detect and correct, those misstatements
Set and document the control risk
If the results of the tests of controls support the planned level of control risk, the auditor conducts the planned level of substantive procedures for the acct balances
the level of control risk for the revenue process con be set using either quantitative amounts or qualitative terms such as “low”, “medium” or “high”
Occurrence
all rev and cash receipt transactions and events that have been recorded or disclosed have occurred, and such transactions and events pertain to the entity
Completeness
all rev and cash receipt transactions and events that should have been recorded, and all related disclosures that should have been included in the financial statements have been included
Authorization
all revenue and cash receipt transactions and events have been properly authorized
Accuracy
Amnts and other data relating to recorded rev and cash receipt transactions and events have been recorded appropriately, and related disclosures have been appropriately measured and descibed
Cutoff
all rev and cash receipt transactions and events have been recorded in the proper accts
Classification
All rev and cash receipt transactions and events have been recorded in the proper accts
Presentation
all rev and cash receipt 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
Substantive analytical procedures
used to examine plausible relationships among revenue related accts
plausible relationships b/w financial and non financial data
Test of details
focuses on transactions, acct balances, or disclosures. concentrates on the ending balance for accts rec and related accts as well as related disclosures
Ratios used for comparative purposes (5)
- receivables turnover and days outstanding in accts receivables
- aging categories on aged trial balance of accts rec
- bad debt expense as a percent of revenue
- allowance for uncollectible accts as a percent of accts rec or credit sales
- large customer acct bals compared to last month
Confirmation of a/r
audit evidence that is a direct written response from third parties about the acct rec bal
good source of evidence about the existence of the a/r
confirmation process should be controlled by the auditor
Reasons for omitting confirmations (3)
-Accts rec bal is immaterial
-external conf would be ineffective (based on prior experience)
-auditors assessed level of risk of material misstatement at the relevant assertion level is low, and the other planned substantive procedures address the assessed risk
Types of confirmation requests (2)
- positive
- negative
Positive Confirmation Request
Must receive confirmation from customers regarding their acct balances
