Revenue and Collection Cycle Flashcards
What audit procedure tests: accounts receivable represent all amounts owed to the client company at the balance sheet date.
Perform sales, inventory, and COGS cutoff tests
What audit procedure tests: The client company has a legal right to all accounts receivable at the balance sheet date.
Review loan agreements for indications of whether accounts receivable have been factored or pledged.
What audit procedure tests: Accounts receivable are stated at net realizable value.
Review the aged trial balance for significant past due accounts to determine if they are realizable.
What audit procedure tests: Accounts receivable are properly described and presented in the financial statements.
Review the accounts receivable trial balance for amounts due from officers and employees.
Confirm a sample of receivables by direct communication with the debtors tests which management assertion?
existence of assets
Review confirmations of liabilities to determine if receivables have been sold tests which management assertion?
rights to assets
Select a sample of sales invoices in the subsequent period, and examine the related shipping documents for date of shipment to ascertain whether some of those shipments at the end of the period were inadvertently not recorded tests which management assertion?
completeness of assets
Vouch sales and cash receipt transactions occurring near period end tests which management assertion?
cutoff of transactions
Compare the amount of credits given to customers in the subsequent period to the amount estimated by management tests which management assertion?
valuation of assets
Provide a list of related parties to all members of the audit team to assist in identification of the transactions tests which management assertion?
F/S presentation and disclosure
Management may have fraudulently overstated revenue by making __________ journal entries.
inappropriate
Receivables that have been sold should not remain as a(n) _____ on the company’s books.
asset
Overstatement may occur when sales for the next period are recorded in the _______ period.
current
To test collectibility of receivables, auditors may consider credit ratings for debtors of _____receivables.
large
Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _________.
correctly
Many instances of misstatement are based on the inappropriate recognition of ______.
revenue
One way to avoid misstatement of revenue is to ensure the client has proper ________.
cutoff policies
Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.
accomplished
Side _________ can substantially alter the terms of a sale.
agreements
________ needs to be assured in order to recognize revenue.
Collectibility
to test whether a client’s internal controls were effective in preventing the failure to post sales invoices to the customers’ accounts ledger, the auditor should select a sample of transactions from the population represented by the
sales invoice file
tracing a sample of daily cash deposits from the client’s bank statement to the cash receipts journal is a test of controls primarily providing evidence related to which management transaction assertion?
completeness
selecting a sample of recorded cash receipts from the cash receipts journal and comparing the date of receipt to the recording date is a test of controls primarily providing evidence related to which management transaction assertion?
completeness
tracing a sample of cash receipts to postings in the correct customers’ subsidiary receivable account is a test of controls primarily providing evidence related to which management transaction assertion?
classification (correct customer account)
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s policy of granting credit to customers to support management’s financial statement assertion of
valuation and allocation (collectability = valuation of A/R)
4 basic activities in the revenue and collection cycle
- receiving and processing customer orders;
- delivering goods and services to customers;
- billing customers and accounting for accounts receivable; and
- collecting and depositing cash received from customers.
Audit Evidence that can be found in Management Reports and Data Files
- Pending order and back order master file
- Customer master file
- Price list master file
- Sales detail (journal) file
- Sales analysis report
- Accounts receivable listing and aging
- Cash receipts listing
- Customer Statements
3 inherent risks to revenue and collection cycle
- Improper Revenue Recognition (Cut-off, Bill and Hold, Channel Stuffing)
- Returns and Allowances
- Collectability of Receivables
3 relevant assertions of the revenue account
occurrence, completeness, cutoff
3 relevant assertions of A/R
existence, completeness, valuation
revenue can only be recognized if it’s blank and blank
realized/realizable and earned
SEC guidance (SAB 104) stipulates revenue recognition must be these 4 critera
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller’s price to the buyer is fixed or determinable; and
- Collectability is reasonably ensured.
FASB 5-step process for revenue recognition (ASC 606):
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
5 key control procedures for revenue and collection cycle
- separation of duties (recording, authorization, custody)
- authorization of transactions (write-offs, EDI, credit checks, pricing)
- access to assets
- adequate documents and records (pre-numbered, remittance advice)
- independent checks on performance (A/R sub reconciled to GL, monthly customer statement)
Verifying numerical sequence of pre-numbered invoices, shipping documents, and sales orders tests what assertion for which account
Completeness, revenue
Verifying invoices with shipping documents to the A/R ledger tests what assertion for which account
completeness, A/R
Vouching journal entry, sales summary, invoice, shipping documents and customer’s purchase orders tests what assertion for which account
occurrence, revenue
evaluating adequacy of returns allowance for the year and tracing returns to proper charging against allowance account tests what assertion for which account
occurrence, revenue
tracing shipping documents to sales invoices and journals tests what assertion for which account
completeness, revenue
confirming A/R relationship with sales to COGS relationship with inventory tests what assertion for which account
completeness, A/R
comparing A/R write-offs with estimates of doubtful accounts and inspecting aged trial balance with current write-offs and prior year’s allowance for bad debts tests what assertion for which account
valuation, A/R
if tests of controls reveal weaknesses in revenue and collection cycle, confirmation procedures may need to be schedule on the (blank) date for a (blank) sample of customers
year-end, large
the majority of audit clients have strong controls in the revenue cycle, thus tests of controls often support a reduction in (blank blank)
control risk
because revenue is a presumptive high-fraud risk and overall significant risk, auditors always perform (blank blank) in the revenue cycle
substantive procedures
when considering relevant assertions and obtaining evidence about A/R and other assets, auditors must emphasize the (blank) assertion
existence
confirmation of accounts and notes receivable provide evidence of which two assertions
existence, rights and obligations
a confirmation that asks the customer to respond to whether a balance is correct/incorrect is a (blank) confirmation
positive
a confirmation that asks for a response only if something is wrong with the balance is a (blank) confirmation
negative
True or false: There is no such thing as a typical revenue and collection cycle.
true
For current status, including up-to-date credit limit information, auditors may test a sample of the (blank blank) file
customer master
Access to accounts receivable records gives an individual (blank and blank)
authorization
recording responsibility
True or false: Auditing standards recommend but generally do not require the use of confirmations for accounts receivable.
false, recommended/not required for A/P
Tracing shipping documents before and after year-end to the sales journal and vouching credit memos for returns after year end to receiving reports are done to test the (blank) assertion
cutoff
Justifications for not using confirmations may include these three reasons
receivables are not material
confirmations would be ineffective
other procedures provide sufficient, competent evidence
Which three documents should be matched before recording revenue?
evidence of shipment
customer sales order
customer invoice
