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CHAPTER 9 ∙ Auditing the Revenue Cycle

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Alternative procedures
Procedures used to obtain evidence about the existence and valuation
of accounts receivable when a positive confirmation is not returned,
including examining cash collected after the confirmation date and
vouching unpaid invoices to customers’ orders, sales orders, shipping
documents, and sales invoices.
Bill of lading
A shipping document that describes items being shipped, the shipping
terms, and delivery address; a formal legal document that conveys
responsibility for the safety and shipment of items to the shipper.
Exceptions
Differences between a customer’s records and the client’s records
reported on positive or negative confirmations.
Lapping
A technique used to cover up the embezzlement of cash whereby a
cash collection from one customer is stolen by an employee who takes
another customer’s payment and credits the first customer. This
process continues, and at any point in time at least one customer’s
account is overstated.
Negative confirmation
A request to customers asking them to respond directly to the auditor
only if they disagree with the indicated balance.
Positive confirmation
A request to customers asking them to respond directly to the auditor
if they agree or disagree with the indicated balance.
Revenue cycle
The process of receiving a customer’s order, approving credit for a
sale, determining whether the goods are available for shipment,
shipping the goods, billing the customers, collecting cash, and
recognizing the effect of this process on other related accounts.
Side letter
An agreement containing contract terms that are not part of the formal
contract (often involving rights of return). Side letters increase audit
risk because they enable key contract terms affecting revenue
recognition to be hidden from the auditor as part of a revenue
recognition fraud.
Timing difference
Confirmation exceptions caused by transactions that are in process at
the confirmation date, such as in-transit shipments or payments. These
are not misstatements.