TOPICSNature of revenue/receipt cycle
Flow of information
Auditor’s assessment of control riskAudit of internal2 control for sales,
cash receipts
Computer auditing, sampling, tests of controls
Assurance, consulting services
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NATURE OF REVENUE/RECEIPT CYCLE
Goods, services sold to customers in exchange for future promises to pay
Cash collected from customers
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R E V E N U E C Y C L E(S U B S Y S T E M )
S a les O rd e r
B illin g / A cco u n tsR ece iv ab le
C ash R ece ip ts /C o llec tio n s
S h ip p in g
1
6
4 /5
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C red it / C u s to m erS erv ice
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DFD of Sales Order Process
REVENUE/RECEIPT CYCLEFlow of Information
Customer order receivedSales order prepared
Price, quantity, goods, termsShipping document
Identifies goods shippedContract between seller, carrier
Sales invoice (bill)Customer remittance advice
Returned with payment from customer
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SELLER’S DOCUMENTSSales order
Identifies goods ordered, price, quantity, terms, etc.
Shipping document (bill of lading)Identifies good shipped
Contract between seller & carrierSales invoice
Formal notice to customer of amount & payment terms
Customer remittance adviceReturned with payment
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CONTROLS FOR CREDIT SALESMulticopy, prenumbered sales order
preparedCustomer credit reviewed, approvedAuthorized copy sales order accompanies
goods from Inventory Control to ShippingGoods received in Shipping compared with
sales order; shipping document preparedCommon carrier provides receipt for goods
shippedShipping document, approved sales order
sent to billing for preparation of invoice, daily sales summaries
Invoice copy sent to General Accounting for recording
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CASH COLLECTIONProcess
Checks by mail listed, endorsedList copy to Accounts Receivable with
remittance for postingList copy with checks to Cash Receipts Dept.
for daily depositSales returns separate from cash
collectionUncollected accounts
Reviewed for credit limits, aged, written off as necessary
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INTERNAL CONTROL & RISK
Controls Risks
Authorization
Prenumbered shipping documents Recording controls
Restricted access
Credit risk, uncollectible accountsShipment, billing not timely
Items recorded in improper amounts, accountsTheft
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ASSESSING CONTROL RISKObtain Understanding
Document the client’s systemFlowchart, questionnaire, narrative
Perform transaction walk-throughIdentify control activitiesTest controls to reduce control risk below
maximumAssess control risk
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TESTS OF CONTROLSSales, Collection
Provide a reasonable degree assurance that employees comply with management’s procedures
SalesProperly authorized, executed, recorded
Cash collectionsCash receipts recorded, deposited promptly
Returns, uncollectible accountsProper authorization, recording
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CONTROL RISKShipping
Major risksUnauthorized shipment
Fictitious or related partiesGoods properly shipped, not billed, recorded
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TESTING CONTROLS: Shipping
Select random sample shipping documentsExamine sample for authorized sales order &
agreement
Trace sample shipping documents to invoices (completeness)
Trace invoices to sales journal, A/R ledgers
Trace invoices to inventory records
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CONTROL RISKBilling
Major risksBills sent but goods not shippedBills not properly prepared, recorded
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TESTING CONTROLS: BillingSelect sample invoices from
Billing dept.Verify unit prices &
mathematical accuracyTrace invoices to shipping
documents (existence/occurrence)
Trace invoices to sales journal, A/R ledgers
Trace invoices to inventory records
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CONTROL RISKRecording
Periodic summaries not prepared or not prepared correctly
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TESTING CONTROLS: Recording
Review evidence of procedures forReconciliation daily sales summaries with sales
journal totalsPeriodic reconciliation A/R trial balance with
general ledger controlScan sales journal for unusual
transactions, large amountsVerify mathematical accuracy sales
journal for selected periods; trace postings to general ledger
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CONTROL RISKCash Collection, Deposit
Risk of embezzlement, deposit into improper accounts
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TESTING CONTROLS: Cash Collection & Deposit
Cash collectionSurprise basis: take control bank depositsCompare total checks to total deposit slipCompare check details to cash receipt
records & A/R ledgerDetermine timeliness
DepositsInterim: compare deposits CRJ with bank
statementsTrace CRJ to general ledger
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CONTROL RISKSales Returns, Allowances
Risk that credit memorandaNot approvedNot properly recorded
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TESTING CONTROLS:Sales Returns & Allowances
Test details random sample credit memorandaReceiving reportsPerpetual inventory recordsEntries A/R ledger & general ledger
Review credit register for unusual items
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CONTROL RISKUncollectible Accounts
Risk that account write-offsProperly authorizedProperly recorded
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TESTING CONTROLS:Uncollectible Accounts
For written-off entries:Select sampleTrace to authorizationTrace to posting
Review write-offs for unusual entries
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ASSESSING CONTROL RISK2 Questions
Are controls effective?Can controls be relied upon?
If answer is yes to bothAssess control risk below maximumAssess detection risk above minimumRestrict substantive tests of sales, receivables,
cash
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PRELIMINARY OPINION ON INTERNAL CONTROL
Auditor must form opinion on management’s assessment of internal control over financial reporting based on Reports of internal auditors Auditor’s tests of controls Substantive audit tests
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TESTS OF CONTROLSDeduction Management
3 Critical questionsDoes Accounts Receivable monitor deductions?Does Account Operations approve deduction
inquiriesDoes senior management review decisions
made by Accounts Receivable, Account Operations?
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TESTS OF BILLING CONTROLSAn Example
Randomly select sample sales invoicesVerify unit prices, clerical accuracyTrace details of invoices to shipping
documentsTrace sales invoices to inventory records
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