UNIVERSITY OF NUEVA CACERES

City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
2020-2021
VARIAS, AIZEL ANN BELEN
BSA 3rd YEAR BLOCK –A FLEXI-KIT
2077 Auditing and Assurance: Concepts and Applications 1

Audit of Revenue and Collection Cycle

LEARNING ACTIVITY 2.2

Concept-review

To validate your understanding of the concepts learned from reading activity, answer the following:

1. Describe the nature of the Revenue and Collection Cycle

The revenue and collection cycle of an entity consist of the activeness relating to the exchange of
goods and services with customers and the collection of the revenue in cash. It also involves the
process of receiving a customer’s order, approving credit for a sale, determining whether the
goods available for shipment, the billings, collection of cash and recognition of the effect of the
process to the other related accounts such as accounts receivables, inventory, and sales
commission expense. Generally, the classes of transactions in the revenue and collection cycle
involves sales, sales adjustments, cash receipts, estimate of bad debt expense and charged-off of
uncollectible accounts.
2. What are the documents and accounting records in the Revenue and Collection Cycle and their
audit significance?
Customer’s purchase order – A written purchase order from a customer provides evidence that
a customer actually ordered the goods.
Sales order – This contains the seller’s outstanding of the sales term in order to account for the
numerical sequence to help ensure that shipments are made for sales order and sales are billed.
Shipping document of bill of lading – This signature of the carrier of the customer on the
shipping document provides externally created evidence that good have been shipped to ensure
that all shipments are recorded as sales.
Sales invoice – It indicates credit terms, shipping terms, and price charged for merchandise.
Credit memo – Provides evidence that a seller has reduced the amount previously billed to a
customer.
Remittance advice - Indicates the date and amount of payment and the invoices paid.
Uncollectible account authorization form – Sellers should account for the numerical sequence
to ensure that all written-offs are recorded.
Monthly statement – A statement mailed to a customer reporting a beginning balance and
transactions that occurred during the period.
3. What are the test of controls and substantive audit procedures related to Revenue and Collection
Cycle?
Test of Controls Over Sales and Receivables
A. Existence or Occurrence. Recorded sales are for shipments actually made to customers
Controls Test of Controls
1. Recording of sales is supported by customer 1. To test this control, the auditor examines,
orders, sales orders approved by the credit approved customer order, sales order, shipping
department and approved an executed shipping document and copy of sales invoice for sample
documents. of entries in the sales journal.
2. A clerk independent of accounts receivable 2. The auditor can observe whether a clerk
prepares and mails monthly statements to independent of the accounts receivable.
customer for all trade accounts receivable and Bookkeeper prepares and mails monthly
follows up on any complaints. statements and follows up any complaints.

B. Completeness. All sales transactions that occurred are recorded.

3. Prenumbered shipping documents are
accounted for to determine that a sales invoice performing the procedure or select a sample of
is prepared for all shipments.
4. Prenumbered sales invoices are accounted
for to determine that all sales are recorded.
5. Procedures to ensure timely recording if
sales and proper cut-off are established
3. The auditor can observe the client
shipping orders and examine the invoice that
bills the sale.
4. The auditor can observe the clerk recording
sales if he or she is accounting for the
numerical sequence of invoices and determines
why any missing invoices have not been
processed.
5. The auditor inquires how procedures are
followed, observe procedures being followed
and inspect report on the last shipments that
the shipping clerk sends to the billing clerk.

C. Rights and Obligations. Sales recorded represent only sales transactions

6. Clerk should check sales orders and sales 6. The auditor should observe that the control
invoices for terms to determine that transaction is being performed.
is a sale rather than a consignment.

D. Valuation and Allocation. Sales are correctly billed and recorded

7. For all goods shipped, goods are counted 7. The auditor observes that the control is
and descriptions and quantities are compared to being performed and examines a sample of
quantities and descriptions on sales orders and shipping orders for the signature on the
shipping documents prior to shipping. shipping documents.
8. Customer credit is approved by a responsible 8. The auditor examines a sample of sales
official prior to merchandise shipment. order for credit approval prior to shipment.
9. Sales invoices are checked for 9. To test this controls the auditor performs;
a. Inquiry about the updating and use of price
a. Proper pricing lists
b. Mathematical accuracy b. Examine a sample of invoice copies to
c. Terms determine that they contain a signature
indicating that the price, mathematical
accuracy and terms have been checked.
 10. The accounts receivable subsidiary ledger
is balanced to the general ledger control
account regularly.
10. To test this control, the auditor observes
that is being performed and may also foot the
accounts receivable subsidiary ledger and
compare the total with the balance appearing in
the general ledger control account.

E. Presentation and Disclosure. Sales and accounts receivables are recorded to result in
presentation and disclosure in accordance with PAS/PFRS.
11. Sales must be properly classified to 11. The auditor can test this control by
generate accurate segment reporting. determining that the invoice copy contains the
signature that indicates approval of account
classifications used.

Substantive Tests of Acquisition Transaction

1. Review the sales journal, general ledger and accounts receivable master file or trial balance for
large or unusual items.
2. Trace sales journal entries to copies of sales orders, sales invoices and shipping documents.
3. Trace shipping documents to entry of shipments perpetual inventory records.
4. Compare prices on sales invoices with unauthorized price lists or properly executed contracts.
5. Trace shipping documents to resultant sales invoices and entry into sales journal and accounts
receivable master file.
6. Compare dates of recorded sales transactions with dates on shipping records or perform sales
cut-off tests.
7. Recomputed information on sales invoices.
8. Trace entries in sales journal to sales invoices.
9. Trace details on sales invoices to shipping documents, price tests and customer’s orders.
10. Examine document supporting sales transactions for proper classification.

LEARNING ACTIVITY 2.2

Concept-application
Answer the multiple-choice items on pages 188-191

1. D
2. A
3. C
4. B
5. A
6. A
7. D
8. D
9. B
10. D
11. C
12. B
13. B
14. A
15. C