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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