AUDITING AND ASSURANCE SERVICES IN MALAYSIA

TOPIC 8: AUDIT OF REVENUE AND RECEIPTS CYCLE + ACCOUNT RECEIVABLES

References: Chapter 14 & 16AUD390 2014AUDITING AND ASSURANCE SERVICESIN MALAYSIA

LEARNING OUTCOMESAUD390 2014OVERVIEW OF THE ACCOUNTS & CLASSES OF TRANSACTIONSBUSINESS FUNCTIONS & DOCUMENTSFINANCIAL REPORT ASSERTIONSMAJOR INTERNAL CONTROL AND RELATED AUDIT PROCEDURESSUBSTANTIVE TESTS FOR ACCOUNTS RECEIVABLE

OVERVIEW OF REVENUE & RECEIPTS CYCLEAUD390 2014Accounts in the CycleClasses of TransactionsBusiness functions Documents & records

Accounts In The CycleAUD390 2014Cash Sales: Cash/Bank Acc vs. Sales AccCredit Sales: Acc Receivable vs. Sales AccSales Return & Allowance: Sales Return Acc vs. Acc receivable vs. Cash/Bank AccCharge of for bad debts: Bad Debt Expense Acc vs. Acc Receivable

Classes of TransactionsAUD390 2014Sales (cash and sales on account)Cash receiptsSales returns & allowancesCharge-off of uncollectible accountsEstimate of bad debt expense

AUD390 2014CLASSES OF TRANSACTIONSACCOUNTSBUSINESS FUNCTIONSDOCUMENTS & RECORDS1.SalesSalesAcc Receivablei. Processing customer orderii. Granting creditiii. Shipping goodsiv. Billing customers & recording salesCustomer orderSales orderCustomer order or sales orderShipping documentSales invoiceSales transaction fileSales journal or listingAccount receivable master fileAccounts receivable trial balanceMonthly statement

AUD390 2014CLASSES OF TRANSACTIONSACCOUNTSBUSINESS FUNCTIONSDOCUMENTS & RECORDS2. Cash ReceiptsBankAccount Receivablev. Processing & recording cash receiptsRemittance advicePrelisting of cash receiptsCash receipts transaction fileCash receipts journal or listing3. Sales returns & AllowancesSales Returns & AllowancesAccount Receivablevi. Processing & recording sales returns & allowancesCredit memoSales returns & allowances journal4. Charge-off of uncollectible accountsAccount ReceivableAllowance for uncollectible accountsvii. Charging off uncollectible accounts receivableUncollectible account authorization formGeneral journal5. Bad Debt ExpenseBad debt expenseAllowance for uncollectible accountsviii. Providing for bad debtsGeneral journal

KEY CONTROL ACTIVITIESAUD390 2014Adequate separation of dutiesProper authorizationAdequate documents & recordsPrenumbered documentsMonthly statementsInternal verification procedures

Adequate Separation Of DutiesAUD390 2014Important to prevent various types of intentional & unintentional type of misstatementsGeneral example guidelines:Anyone responsible for inputting sales and cash receipts transaction information into the computer being denied to access to cashTo separate credit-granting function from the sales function because credit checks are intended to influence sales personnel to optimize volume of sales even at the expense of high bad debt written off

Proper AuthorizationAUD390 2014Authorization at three key pointsCredit must be properly authorized before a sale take placesGoods should be shipped only after proper authorization

Price, including basic terms, freight, & discount must be authorizedTo prevent the loss of company assets by shipping to fictitious customers or those who fail to pay for the goodsTo ensure that the sale is billed at the price set by company policy

Adequate Documents & RecordsAUD390 2014General example guidelines:Prepare a multicopy prenumbered sales invoice at the time a customer order is received. Copies are used for different purpose:Approve creditAuthorize shipmentRecord the number of unit shippedBilled customers

Pre-numbered DocumentsAUD390 2014Use of prenumbering, to prevent:the failure to bill or record sales The occurrence of duplicate billings and recordingsE.g.A billing clerk filed a copy of all shipping documents in sequential order after each shipment is billedTo program the computer to prepare a listing of unused numbers at months end with follow-up by appropriate personnel

Monthly StatementsAUD390 2014It is sending monthly to customer either generated by computer or by someone who has no direct relationship in handling cash or preparing sales & account receivablesIt encourage a response from customers if the balance is improperly stated

Internal Verification ProceduresAUD390 2014Use of computer programs or independent persons for checking the processing and recording of sales transactionsE.g.Accounting for the numerical sequence of prenumbered documentsChecking the accuracy of document preparationReceiving reports for unusual or incorrect items

AUDIT OF ACCOUNT RECEIVABLESAUD390 2014Using Tests of Details of BalanceRecorded Acc Receivables existExisting Acc Receivables are includedAcc Receivables are accurateAcc Receivables are properly classifiedCutoff for Acc Receivables is correctAcc Receivables is stated at realizable valueThe client has rights to Acc ReceivableAcc Receivable presentation & disclosure are proper

Recorded Account Receivables ExistAUD390 2014Determine the existence of A.R. amount through confirmation with customersISA505 External Confirmation provides guideline to auditors in using confirmation letter as a method to obtain audit evidenceIn using confirmation, auditor must decideType of confirmation (positive, negative or blank confirmation)Timing of the procedures (when to request the information)Sample size Individual items to select

Existing Account Receivables Are IncludedAUD390 2014By footing the A.R. trial balance & reconciling the balance with the control account in the general ledger

Account Receivables Are AccurateAUD390 2014Tests of the debit & credit to individual customers balances are done by examining supporting documentation for shipments & cash receipts

Account Receivables Are Properly ClassifiedAUD390 2014Review aged trial balance to ensure A.R. is properly classifies under current assets

Cutoff For Account Receivables Is CorrectAUD390 2014To verify whether transactions near the end of accounting period are recorded in the proper periodExample: checking the intentional or unintentional inclusion of several large and subsequent period sales in the current period

Account Receivables Is Stated At Realizable ValueAUD390 2014To evaluate the account allowance for uncollectible accounts

The Client Has Rights To Account ReceivableAUD390 2014Not the issue since A.R. usually belong to the customerAudit procedures involved:Review of minutesDiscussion with the clientConfirmation with bankExamination of debts contract for evidence of AR pledged as collateral

Account Receivable Presentation & Disclosure Are ProperAUD390 2014According to generally accepted accounting principles & presentation and disclosure requirements