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rittenberg summary

rittenberg summary

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Published by kevinlim186
rittenberg summary
rittenberg summary

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Published by: kevinlim186 on Jan 19, 2013
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Revenues and the related receivables account should be presumed to be high risk for most auditsbecause these accounts are highly susceptible to misstatementCycle or process refer to the processing of related transactions and tier effect of account balanesassociated with the transactions.Revenue cycle transactions include the processes randing from the initiation of a sales transaction toshopping a product, billing the customer and collecting the cash for sale or writing off uncollectiblereceivables.For many clients, the existence assertion related to revenue may be one of the most relevant assertion,especially if the client has incentives to overstate revenues.For accounts receivables, the most relevant assertion would be existence and valuation.When examining sales transactions and internal controsl over sales processing, the auditor also gathersevidence on creadit authorization and valuation of the recorded transactions.The auditor should consider the nature of the document to determine the specific controls and types of audit procedures.
The sales order document
should contain elements that provide a basis for determining that alltransactions are properly authorized and completely recorded: prenumbered authorization, formalapproval for credit, a description of part number, sales price, and shipping terms of the productsordered and an authorized billing address.
customerpurchaseorder- backorderconfirmationpackingslip/pickticketbill of lading Sales invoicemonthlystatementTurnarounddocument
Backorder confirmation-
likely delivery date and potential back order
Obtain credit approval
- risk of not being paid: dissatisfaction, financial distress; credit risk mitigated byevaluation of credit worthiness and update the credit worthiness.
Shipping and packing documents-
picking tickets: sequence in which to pick items for shipment and thelocation of all item to be shipped.
Bill of lading:
is a formal legal document that conveys responsibility to the shipper. The shippingdepartment confirms the shipment by: (1) completing the packing slip and returning it to the billingdepartment (2) electronically recording everything shipped and transmitting it to the billing department(3) preparing independent shipping documents
Sales invoice:
invoices are normally prepared when notice is received that good were shipped.
Monthly statement:
monthly statements provide a detailed list
of the customer’s activity for the
previous month and a statement of all open items.
Receive payments
: Completeness and accuracy of cash receiptInherent risk- sales: Must understand the following1.
What is the client’s business?
Earning process and the nature of the obligation3.
The right of the customer to return a product.4.
Complex transaction with unual rights of return.5.
Combination of leases and sales.Inherent risk- accounts receivables: net amount shown is not collectible either because the receivablesrecorded do not represent bona fide claims or there is an insufficient allowance for uncollectibleaccounts.1.
Sales of receivables made with recourse and recorded as sales transactionsthan financing transactions2.
Receivables pledged as collateral against specific loans with restricted use3.
Receivables incorrectly classified as current when likelihood of collectionduring the next year is low.4.
Collection of receivable contingent on specific events currently cannot beestimated.5.
Payment is not required until the purchaser sells the product to its endcustomer.The preliminary analysis does not identify any unexpected relationships and does not identify anyadditional risk.
Understanding internal control is normally gained by means of a walkthrough of the process, inquiry,
observation and review of the client’s systems documentation and the understanding must be
documented.Key controls for testing:1.
Credit authorization and consistency of credit policies.2.
Updates to and access of the computerized price list for goods sold3.
Checking of accuracy of quantities and prices for items shipped and billed.4.
Daily reconciliation of items shipped and items billed.The auditor should ordinarily presume there is a risk of material misstatement caused by fraud relatingto revenue recognition* P524Identifying and adjusting the audit to address these risk factors involves the following:1.
Examining motivation to enhance revenue because of either internal or external pressures2.
Examining the financial statements through preliminary analytical procedures to identifyaccount balances that differ from expectations or general trans in the economy.3.
Recognizing that not all of the fraud will be instigated by management.
Test of control
Controls for existence should provide assurance that a sale is recorded only when shipment hasoccurred and the primary revenue-producing activity has passed and the company has received cash ora collectible receivable. (monthly statement made independently)Completeness control procedures assure that all valid sales transactions are recorded.Valuation- sales should be made from authorized computer price lists. Valuation issues most often arisein connection with unuasual or uncertain sales terms.Internal control can be documented in a flowchart, narrative and or questionnaire.Typical test of controls include inquiry of personnel performing the control, observation of the controlbeing performed, examination of documentation and reperformance of control.
Substantive testing
Existence/ occurrence and valuation- vouching and comparing quantities billed with quanitite sshipped.Cutoff issues- (to assure existence and occurrence)- checking shipping terms and shipment dates, salescontract.

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