You are on page 1of 4

Revenues and the related receivables account should be presumed to be high risk for most audits because these

accounts are highly susceptible to misstatement Cycle or process refer to the processing of related transactions and tier effect of account balanes associated with the transactions. Revenue cycle transactions include the processes randing from the initiation of a sales transaction to shopping a product, billing the customer and collecting the cash for sale or writing off uncollectible receivables. 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 gathers evidence 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.

customer purchase order- back order confirmation

packing slip/pick ticket

bill of lading

Sales invoice

monthly statement

Turnaround document

The sales order document should contain elements that provide a basis for determining that all transactions are properly authorized and completely recorded: prenumbered authorization, formal approval for credit, a description of part number, sales price, and shipping terms of the products ordered and an authorized billing address.

Backorder confirmation- likely delivery date and potential back order Obtain credit approval- risk of not being paid: dissatisfaction, financial distress; credit risk mitigated by evaluation of credit worthiness and update the credit worthiness. Shipping and packing documents- picking tickets: sequence in which to pick items for shipment and the location of all item to be shipped. Bill of lading: is a formal legal document that conveys responsibility to the shipper. The shipping department confirms the shipment by: (1) completing the packing slip and returning it to the billing department (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 receipt Inherent risk- sales: Must understand the following 1. 2. 3. 4. 5. What is the client’s business? Earning process and the nature of the obligation The right of the customer to return a product. Complex transaction with unual rights of return. Combination of leases and sales.

Inherent risk- accounts receivables: net amount shown is not collectible either because the receivables recorded do not represent bona fide claims or there is an insufficient allowance for uncollectible accounts. 1. Sales of receivables made with recourse and recorded as sales transactions than financing transactions 2. Receivables pledged as collateral against specific loans with restricted use 3. Receivables incorrectly classified as current when likelihood of collection during the next year is low. 4. Collection of receivable contingent on specific events currently cannot be estimated. 5. Payment is not required until the purchaser sells the product to its end customer. The preliminary analysis does not identify any unexpected relationships and does not identify any additional 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. 2. 3. 4. Credit authorization and consistency of credit policies. Updates to and access of the computerized price list for goods sold Checking of accuracy of quantities and prices for items shipped and billed. Daily reconciliation of items shipped and items billed.

The auditor should ordinarily presume there is a risk of material misstatement caused by fraud relating to revenue recognition* P524 Identifying and adjusting the audit to address these risk factors involves the following: 1. Examining motivation to enhance revenue because of either internal or external pressures 2. Examining the financial statements through preliminary analytical procedures to identify account 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 has occurred and the primary revenue-producing activity has passed and the company has received cash or a 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 arise in 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 control being 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, sales contract.

Completeness- prenumbered shipping and billing documents. Design substantive tests to determine that receivables exist, belong to the client, are complete are properly valued and are appropriately presented and disclosed. Existence is necessary for correct valuation, it does not, however, necessarily assure correct valuation. Valuation: correct amount and collectability Auditors should confirm unless one of the following conditions exists: 1. Accounts receivable are not material 2. The use of confirmation would be ineffective 3. The auditor assessment of the risk of material misstatement is low and other substantive test can provide sufficient evidence. Confirmation is generally regarded as strong evidence about the existence of receivables and the completeness of collections. When customer do not respond to the positive confirmation requires, the auditor should perform alternative procedures. Evidence obtained from testing subsequent collection is often believed to be a stronger indicator of the validity of the customer’s balance than obtained from confirmation Lapping is best detected through confirmation.