Revenue cycle and Substantive procedures for revenue cycle Flashcards
Usually revenues are overstated or understated?
Overstated
What is the revenue cycle?
Decisions and processes necessary for the transfer of ownership of goods and services
What are the 5 classes of transactions in the revenue cycle?
- Sales
- Cash receipts
- Sales returns and allowances
- Write - off of uncollectible accounts
- Estimated of bad debt expense
Where will every transaction end up in?
Either A/R or allowance for uncollectible accounts
What are assertions related to revenue cycle?
- occurence
- Accuracy
- Cut off revenues
- Existence
Overview of processing sales transactions?
1.customer places the order
2. Sales department processes the order
3. Credit department approves the order
4. Good are shipped to the customer
5. A/R is established
6. Accounting for this transaction
Difference between customer order and sales order
- customer order is a request by a customer. it can received by phone, letter or other media.
- Sales order is the “document” that communicates the description, quantity and more.
What does sales order indicate?
- indicates that there was a credit approvement and it was authorized for shipment.
Why is approving credit important?
- if not, then excessive bad debt and uncollectible A/R
How is credit approval automated?
Computer approves based on preapproved credit limits maintained in a customer master file. The computer lets the order proceed only if it is under the limit.
Why does shipping goods plays a critical function?
it is the first point in the cycle at which the company gives up assets.
When are sales recognized?
mostly when shipped
What are the 2 types of shipping document?
packing slip and the bill of landing
What is packing slip?
Document that says what is being shipped
What is the bill of landing?
acknowledgment that the customer received the goods.
What are the 3 important aspects of billing customers?
- All shipments made have been billed (Completeness)
- No shipment has been filled more than once (occurrence)
- Each shipment is billed for the proper amount (accuracy)
What is the sales invoice?
it shows the amount of sale and the due date.
What is skimming theft?
Employees stealing incoming funds and recording it.
What is the remittance advice?
The buyer needs to confirm that the payments have been made.
What is issued in order to indicate that there was a return of product
Credit memo
What is a credit memo?
indicated a reduction in the amount due from the customer because of returned goods and allowances.
Why is some A/R uncollectible?
when companies file for bankrupty or the account is turned over to the collection agency, then company needs to write it off.
what form needs to be filled to write off the A/R?
Uncollectible account authorization form
How do companies record when they do not expect to collect the A/R?
They record this transaction at the end of each month or quarter.
What happens in the preliminary analytical review?
- auditor forms expectations of revenue and gross margins and net receivables after understanding the business environment
-from this the PAR, helps the auditor understand the assertions and potential misstatements.
what does ratio of returns and allowances to sales show?
- indicate unusual sale arrangements
What is the relevance assertion in ratio of returns and allowances to sales?
occurrence and completeness
what does comparing bad debt expense as gross percentage of gross sales with that of pervious year show?
Uncollectible accounts receivable that have not been provided for could indicate understatement of account receivable
What does comparing number of days that accounts receivable are outstanding with that of previous years show?
Overstatement or understatement of allowance for uncollectible accounts and bad-debt expense
What does comparing ging categories as a percentage of accounts receivable with those of previous years showcases?
Overstatement or understatement of allowance for uncollectible accounts and bad-debt expense; Valuation
What does comparing allowance for uncollectible accounts as a percentage of accounts receivable with that of previous years showcases?
Overstatement or understatement of allowance for uncollectible accounts ; Valuation
What does evaluating cash receipts collected after year-end to cash receipts during the year showcases?
If slow, may indicate special sales arrangements, and potential overstatement of revenue; Occurrence
What accounting principle is the most troublesome in the revenue cycle?
Revenue recognition principle
Revenue rec principle according to IFRS 15?
revenue is recognized when there is a transfer of control.
Revenue rec principle according to ASPE?
revenue is recognized when there is a transfer of risks and awards.
5 step model to recognize revenue according to IFRS 15?
- Identify the contract
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligation
- Revenue is rec when each performance obligation is satisfied.
which assetion does the businss model increase the RMM?
Occurence
what are two relevance assertion of revenue overstating it?
Occurance and Cutoff
what are 2 assertion risks for A/R
existence and valuation
What assertion is this? Long-term contracts increases the risk that receivables are misclassified?
Long-term contracts increases the risk that receivables are misclassified
What assertion is this? Receivables are pledged as collateral, assigned to someone else, factored, or sold (restrictions must be disclosed)?
Rights and obligations assertion.
What assertion is this? Payment is not required until the purchaser sells to its end customers?
Existence assertion
What assertion is this? Collection of the receivable is contingent upon future events (e.g., certain royalty arrangements)?
Existence assertion
What assertion is this? Sales are made to customers with high credit risk?
Existence assertion
Is overstatement of revenue required to looked at as risk under CAS?
YES
Give me 7 fraud schemes
- fictious revenues or sham sales
- Premature revenue recognition
- Round tripping or recording loans as sales
- Improper cutoff sales
- Bills and holds
- side arrangement that change the orginial terms of sales.
- manipulation of adjustments and estimates.
What is lapping of account receivable?
the postponement of entries for the collection of receivables in order to conceal the embezzlement of cash.
What are the 2 controls that affect multiple transaction cycle?
entity level and general controls
What are the 6 controls relevant to classes of transaction for assertions?
- Separation of duties
- Proper authorization
- adequate documents and records
4.Sequentially numbered documents - Mailing of statements (entry of sales vs cash)
- Independent verification process.
How can auditors rely on the controls?
They need to have atleast one or more test of control to rely on the control
How can test data be used to perform test of controls? Explain?
If the system is supposed to reject a non-existent customer, then the auditor can ask one of the staffs to enter a fake name, to test the validity of the system. The system should reject the fake customer, if not, auditor cannot rely on the system.
How can ADAs test can be applied interms of test of controls?
When testing for the continuity of sale invoices, then the auditor may conduct a gap test by scanning the entire transaction history file, and find any gaps.
What is the risk assertion that pertains to cash receipts?
Completeness or has all cash been recorded in the accounts and not been stolen?
What is the essential part of the auditor in auditing cash receipts?
Identify control weaknesses that increases the risk of fraud.
What are the controls related to accuracy/valuation and rights and obligations that give arise to material misstatements?
- auditor must assess the controls in place that will affect the timing and the amounts of the revenue recognition.
Why does net reliazable value objective (valuation assertions) for A/R often has the high inherent risk?
Because it is an estimate that requires considerable judgment/
What are the 3 ways clients reduce the liklihood of uncollectible accounts?
- Credit approval by an appropriate person.
- Preparing of periodic aged A/R trial balance for review and follow up by the appropriate management personnel.
- A policy of writing off uncollectible amounts when they are no longer likely to be collected
Can write offs used conceal theft of cash?
Yes, if the controls in place are weak.
How will an auditor write test of controls for management authorizing the write-off of uncollectible A/R?
Select sample of accounts charged off
examine the documentation of apporvals
and ensure that it is the right person
What substantive test that will verify the uncollectibilty of the acconts ?
- Examine correspondence in the client’s files to assess reasonableness of write offs.
- Obtain credit repots - such as from Dun & Bradstreet Canada.
How do auditors simultaneously test the control of uncollectible account write offs??
- was there proper authorization?
- is the amount of the write off reasonable?
What is substantive analytical procedures?
It uses data
Which assertions in the revenue cycle uses the SAP?
only for completness of revenue or resonablness of the allowance for doubtful accounts.
SAP: What does comparing gross margin percentage with that of previous years (by product line) shows?
Overstatment of sales and a/r
understatement of sales and A/R
SAP: what does comparing sales by month over time shows?
Overstatment or understatement of sales and A/R
SAP: What does comparing inventory in a distribution channel with amounts for prior periods show?
Indicator of channel staffing
SAP: What does comparing discounts to previous periods shows?
could indicate unusual sales arrangement
SAP: what does examining relationships between sales and cost of sales shows?
understatement or overstatement of sales and a/r.
SAP: How does comparing sales credit, returns and allowances as percentage of gorss sales with that off previous years show?
Understatement or overstatement of sales returns and allowances, and accounts receivable (timing errors)
SAP: how does comparing individual customer balances over a stated amount with that of previous years shows?
Misstatements in accounts receivable and related income statement accounts (inadequate bad-debt allowance or overstated sales)
Is SAP alone enough for revenues? if not, what other tests should be performed?
Substantive tests of details.
When desinging test for occurence, what are the RMM auditors care about?
- Sales being included in journal entries for which no shipment was made
- Sales recorded more than once
- Shipments made to non- existent customers and recorded fictious sales.
How can auditors test the AFDA?
They can review and test the process used by managment to develop estimates or develop independent model to estimate
What questions should an auditor ask to test the AFDA accounts?
is it consistent with prior year?
is it consistent with the industry
are there any subsequent payments?
are there any write offs (approved)?
How do we confirm A/R to verify existence, accuracy and cut off?
- Controlling the sending of confirmations
- Procedures for those accounts the client does not want confirmed
- Handling returned confirmations
- Timing of alternative procedures and second requests
Can we send out samples of confirmations?
YES
what are two forms of AR confirmations?
Negative and positive
What contains in the positive AR confirmations?
- Individual item
- Balance owning
What are the characteristics of positive confirmations?
- more reliable
- possible to conduct follow up if not answered.
What are characteristics of negative confirmations?
- Failure to reply must be regarded as a correct response
- Less expensive
When should positive confirmation used?
- when the balances are large
- fewer debtors
- evidence or suspicion of fraud or serious errors
When should negative confirmation used?
- many homogenous balances
- small amount of owing
- internal controls strong
- no evidence/suspicion of fraud or serious error.
