Revenue recognition Flashcards
What entries related to revenue recognition?
Cash. AR, Revenue, AFDA
What are 4 fraud practices, that will increase the audit risk? (fraud risks)
Bill and hold arrangements
Side arrangements
Channel stuffing
Related parties transaction
What are the 13 types of documents related to Revenue recognition, that can help having a great idea!
- Credit approval form (related to AFDA)
- Customer sales order
- Open-order-report
4.Shipping document(bill of lading) - Sales invoice
6.Sales journal - Customer statement
- Accounts Receivable Subsidiary Ledger
- Aged Trial Balance of Accounts Receivable
- Remittance Advice
11.Cash Receipts Journal
12.Credit Memorandum - Write-Off Authorization
What is a credit approval form
Its a form, where that attests the investigation of the entity’s creditworthiness. (To avoid bad debt expense)
What is a customer sales order
Contains the details of the type and quantity of
products or services ordered by the customer.
Indicates Validity of customer and ‘real’ sale
What is an open order report
Report of all customer orders for which
processing has not been completed. Check if
Unmatched for Completeness!
Shipping document (bill of lading)
bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information. Proof of SALE! Critical Event! Useful for
Occurrence & Cutoff, Common carrier vs Company delivery
Sales invoices
The document is used to bill the customer. This document contains information on the type of product or service, the quantity, the price, and the terms of trade. Measurement in $
Sales Journal
Once a sales invoice has been issued, the sale needs to be recorded in the accounting records. The sales journal is used to record information about the sales transaction. Completeness
Customer statement
This document is mailed to the customer and
contains details of all sales, cash receipts, and
credit memorandum transactions. Reminder to Customer, Valuation
Accounts receivable subsidiary ledger
his ledger contains an account and the details of transactions for each customer. Tie-in to GL
Aged Trial Balance of Accounts Receivable
This report summarizes all the customer balances in the accounts receivable subsidiary ledger. Each account is classified as current or placed into one of several past due categories. Delinquencies & Valuation
Remittance Advice
This is usually the part of the customer’s bill that should be returned with the payment. Supports Cash Receipts Valuation
Cash Receipts Journal
This journal is used to record the cash receipts of the entity. Sources of Cash Collections
Credit Memorandum
This document is used to record credits for the return of goods by a customer. Negates a Sale!
Write-Off Authorization
This document authorizes the write-off of an
uncollectible account receivable. Final approval is generally authorized by the treasurer. Bad Debt Write-offs
Inherent risks factors of the revenue recognition process
- Industry related factors: regulation, demand, pricing
- Complexity and contentiousness of revenue recognition issues (Accounting standards)
- Difficulty of auditing transactions and account balances (Volume, RPTs, FX)
- Misstatements detected in prior audits
What steps an auditor needs to take, when he needs to do a control risk assessment?
- 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
What you plan a perform tests of controls, such tests includes…
- Inquiry of client personnel
- Inspection of documents and records
3.Observations of the operation of the control - Walkthrough
- Reperformance of the control activities
What types of major material misstatements, (issues) should an auditor be concerned about? (issues related to Occurrence)
- Sales to fictitious customers
- Recording revenue when goods have not been shipped or services have not been performed.
Needs assurance, that all recorded revenue transaction are valid.
The major assertions that need to be tested for revenue recognition related to revenue transaction:
- Occurrence
- Completeness
- Authorization
- Accuracy and accuracy
- Cutoff and classification
The auditor is looking, for when mentioning completeness.
Auditors are concerned about is goods are shipped or services are performed and nor revenue is recognized.
What test of controls concern completeness?
- Accounting for numerical sequence of shipping
documents and sales invoices, - Matching shipping documents with sales invoices,
- Reconciling sales invoices to daily sales reports, and
- Maintaining and reviewing the open-order file
What issues, are auditors concern about, while thinking at the authorization and accuracy assertion.
Possible misstatements due to improper authorization
include shipping goods to, or performing services for,
customers who are bad credit risks and making sales
at unauthorized prices or terms.
What test of control can be done for authorization and accuracy, of revenue transactions?
Why should an auditor worry about revenu, testing for cutoff and classification?
Sales may be recorded in the wrong accounting period unless proper controls are in place. All shipping documents should be forwarded to the billing department daily
What is a test of control, for revenue transactions concerning cutoff and classification?
Inquire, about the use of a chard of accounts and proper codes for recording transactions. It should provide adequate assurance about the proper classification of revenue transactions.
Occurrence of cash receipts transactions
The possible misstatement that concerns the
auditor when considering the occurrence assertion is that cash receipts are recorded but not deposited in the entity’s bank account.
Completeness of cash receipts and authorization of discounts
- Cash or checks are stolen or
lost before being recorded in the cash receipts records. - Proper segregation of duties and a lockbox system are strong controls relating to completeness
- Controls in the accounting system and data analytics should ensure that management’s policies concerning cash discounts are followed
Accuracy of Cash Transactions
- Wrong amount of cash could be record from the remittance advice, receipt could be incorrectly processed during data entry.
- To minimize these types of errors, daily remittance reports should be reconciled to a control listing of remittance advices
- The use of monthly customer statements also provides a check on posting to the correct customer account
Cutoff and Classification of Cash
Receipts Transactions
- If the entity uses a lockbox system or if cash is deposited daily in the bank, there is a small possibility of cash being recorded in the wrong accounting period
- The auditor seldom has major concerns about cash receipts being recorded in the wrong financial statement account
Test and controls - sales returns and allowance
- Not a material amount, credit memoranda used to process sales returns can be used to cover an unauthorized shipment or conceal cash
- All credit memoranda should be authorized
- Credit for returned goods, should be supported by a receiving document
Auditing revenue, substantive procedures
- Substantive analytical procedures: used to examine plausible relationships among revenue related accounts.
- Tests of details: Focus on transactions, account balances, disclosures. Tests of details concentrate on the ending balance for AR and related accounts.
What are examples of substantive analytical procedures (5 ratios)
- Receivables turnover and days outstanding in accounts
receivable - Aging categories on aged trial balance of accounts
receivable - Bad-debts expense as a percent of revenue
- Allowance for uncollectible accounts as a percent of
accounts receivable or credit sales - Large customer account balances compared to last
period
What is the auditors main concern for the completeness assertion, and how to do it, for AR and related accounts?
The auditor’s primary concern is whether all accounts receivable have been included in the accounts receivable subsidiary ledger and the general ledger accounts receivable account
- Reconciliation of the aged trial balance to the general ledger account should detect an omission of a receivable from either the subsidiary or general ledger
Existence and rights and obligations for AR and related accounts
Existence is one of the more important assertions for accounts receivable because the auditor wants assurance that this account balance is not overstated through the inclusion of fictitious customer accounts or amounts. Confirmation is the major audit procedure used for testing this assertion
The auditor must determine that all accounts receivables are owned by the entity.
What does the auditor needs to verify related to accuracy, valuation and allocation for AR and related accounts?
- Accounts receivable should be shown on the
balance sheet at net realizable value (gross amount less allowance for uncollectible accounts). - The auditor must verify the adequacy of the allowance for uncollectible accounts. The first step is to prepare an aged trial balance and discuss results with the credit manager. Next, a comparison with last year’s results should be examined.
What does the auditor needs to verify related to classification for AR and related accounts?
- Identifying and reclassifying any material
credits contained in accounts receivable - Segregating short-term and long-term
receivables - Ensuring that different types of receivables are properly classified
What does the auditor needs to verify related to presentation for AR and related accounts?
- The auditor must ensure that all necessary
disclosures are made - Most public accounting firms use some type of financial statement reporting checklist to ensure that all necessary disclosures are made for each account
Explain the confirmation process - for accounts receivable
Confirmation is audit evidence that is a direct written response form from third parties about AR balance.
Why would you omit confirmation?
- AR is immaterial
- External confirmations would be ineffective
- level of risk low, other substantive procedures address the risk
What fctors Affecting the Reliability of
A/R Confirmations
Type of confirmation request (positive versus
negative)
* Prior experience with the client or similar
engagements (e.g., response rate, accuracy of
returned confirmations, misstatements
identified)
* The intended respondent (competence,
knowledge, ability, and objectivity
What is a positive confirmation vs a negative confirmation
Positive: Requests that customers indicate whether they agree with the amount due to the client. A response is expected whether the customer agrees or disagrees with the balance indicated
Negative: Requests that the customer respond only when they disagree with the amount due to the client. Negative confirmations are used when the client has many small account balances and control risk is assessed as low.
When should you send a confirmation?
At an interim date or at year-end. The confirmation request should be sent soon after the end of the accounting period in order to maximize the response rate.
