Adapted from case studies provided by EY Academic Resource Centre

Analytics mindset
Revenue Cycle Audit I

Note: This is a tutor-guided group assignment whereby students will work on the assignment
during the seminars. For the parts highlighted in blue, these are the take-home parts whereby
students are to develop their answers collectively outside the seminar time.

Part I:
Background:

TechWear is a privately owned business that began operations in March 2015. Its sole business is the
manufacture and sale of upper-end, high-tech sportswear. It only sells to large distribution outlets. Its
primary product is a line of lightweight exercise clothes that contain a new, long-range RFID chip that
captures the following information about the user based on personal data (age, weight, etc.) entered by
the user:
► Heart rate
► Perspiration rate
► Calories burned
► Exercise efficiency (percent of capacity)

The chip is able to continuously send this information to a host device as far away as 15 miles. The
clothes are also GPS enabled and able to track routes, distances and elevations. Management prides
itself on being on the cutting edge. The company expects to conduct an IPO within a year or two.

TechWear recently retained your firm as its auditors, largely because of your commitment to conduct a
highly efficient, technology-enabled audit.

Data
You are first responsible for performing a risk assessment of TechWear related to its order-to-cash
function. Therefore, you know that your focus needs to be on sales and cash transactions. Your first task
is to acquire the data for these transactions. You work with TechWear’s IT group to gain access to its
sales and cash receipts data for its start-up period of operations, March through December 2015. You
have been provided with an Excel file with this data
(Analytics_mindset_case_studies_Techwear_P1.xls) so you can begin your analysis. The data file
includes the following fields:
► Type: this is the type of transaction, which is either a sale (Sales) or a cash receipt (CashReceipt).
► TransactionNumber: this is the transaction number (beginning with 1001).
► AppliedToTransaction Number: this is the sales transaction number to which a cash receipt is applied.
► CustNum: this is a unique customer number used to identify each customer.

► CustName: this is the customer’s name.

► TransactionDate: this is the date of the sale or cash receipt.
► Amount: this is the amount of the sale or cash receipt. Cash receipts will show a negative amount.
► InvoiceDate: this is the date the sale was invoiced (billed).
► ShipDate: this is the date the goods were shipped.

Required

Task 1
Become familiar with your data file. Make certain that your data is complete and accurate before
performing any analysis. Complete the following using Excel:
1. You’ve been told that the accounts receivable balance on the general ledger at December 31, 2015,
is $684,491.19. You also know that as a start-up company, the beginning accounts receivable
balance is zero. You are also told that there are no returns or write-offs in 2015. Verify this balance.
2. You’ve also been told that TechWear only conducts business with the following 15 approved
customers. Validate that there are no other customer names and that no customer names are
misspelled.
– Bigmart
– Cool Threads
– Corner Runner
– Cross Country Mart
– Family Fit
– Fit N Fun
– Goodway
– Neighborhood Athletic Supply
– Northern Lites
– Runner's Market
– Southeast Regional
– Southern Runners
– Super Runners Mark
– ValueChoice
– Urban Runner

3. The sales transaction log shows that 230 sales were transacted this year, beginning with transaction
1001. Verify that the data for all of these invoices has been captured and that there are no additional
invoices or duplicates included in the file.

Part II:

Required:
Now that you have your data, you need to perform appropriate analytics techniques to inform your risk
assessment for the order-to-cash cycle for TechWear.
1. Develop an accounts receivable (AR) listing (by customer and by invoice) as of December 31, 2015.
 – Recall that beginning AR + sales – sales returns – cash receipts – bad debt write-offs = ending AR. As
mentioned in Part I, the beginning accounts receivable balance is zero and there are no returns or write-offs
in 2015.

Perform the following analyses relating to collectability risk (which is the risk that the company
won’t collect money for its sales) on December 31, 2015, accounts receivable balance. For each
procedure, provide a brief statement regarding your findings.

2. Display the year-to-date trend in sales and cash receipts by month for 2015. Use a visualization to
best highlight any concerns about potential collection issues.
3. Compute the year-to-date days-sales-outstanding (DSO) ratio for each month. Show the results
numerically and with a visualization. For the latter, use a column chart, also called a vertical bar chart
(with DSO as the y-axis and months as the x-axis), to best highlight any concerns about potential
collection issues.
– DSO = ending AR balance for the period / total sales for the period (year-to-date)) * number of days in the
period (year-to-date)

4. Develop an aging analysis by customer and invoice using 30-day increments (0–30 days, 31–60
days, 61–90 days and > 90 days). Display this at the customer level with the ability to drill down to the
transaction (invoice) level. Provide a visualization of the percentage of accounts receivable in each
aging category at the company level using a column chart (with percentage as the y-axis and aging
category as the x-axis).
Adapted from case studies provided by EY Academic Resource Centre

Analytics mindset
Revenue Cycle Audit II
Background:

One year has passed and it is now time to begin the 2016 audit. TechWear’s business has continued to
expand. Our initial analysis of 2016 data indicates a much greater risk in accounts receivable (compared
with 2015). When the audit team discussed this with company management, we were reminded that last
year’s accounts receivable proved to be fully collectible and we were assured that this year accounts
receivable would also prove to be fully collectible as well. Management indicated that, similar to 2015,
there have been no product returns or accounts written off in 2016.

The senior has asked you to assist with planning the 2016 audit, beginning with the order-to-cash cycle,
by focusing on accounts receivable and sales. In particular, she has provided you with the following key
audit assertions that need to be addressed:
Accounts receivable – account balance Sales – class of transactions

Existence Occurrence

Completeness Completeness

Valuation and allocation Accuracy

Classification and understandability Cutoff

Classification

Your senior has already interviewed a number of key personnel (Director of Marketing and Sales,
Shipping Supervisor, Business Office Director (responsible for billing and collections), Accounting
Supervisor and the IT Director) and taken notes during these interviews, as follows:
General notes

TechWear has some very aggressive growth goals (targeting $38 million in global sales for calendar year
2016). The excitement on social media has been very encouraging, resulting in very positive trends in
the number and size of orders from existing customers, as well as some prominent new customers.
However, sales personnel continue to be under a significant amount of pressure to meet their monthly
targets.
The production department is barely able to keep up with the orders. Some have expressed concern that
product quality may be impacted in the future unless changes are made to improve the manufacturing
infrastructure.
Management is planning a major renovation in early 2017 that will greatly expand its production capacity.
One individual involved with R&D expressed concern that the product may not function as designed in
some less technologically developed environments with sporadic connectivity and slower transmission
speeds.
Like many start-up companies, TechWear has operated with a very limited staff, resulting in an
inadequate segregation of duties. At least two key employees are related, including the Director of IT and
a top sales representative.
Director of Marketing and Sales
The Director oversees a small team of salespeople that market TechWear’s products to distribution
outlets. Most of the sales orders are based on FOB shipping term except for two small orders from Great
Run that are based on FOB destination term.
An order cannot be entered into the system unless the customer has been set up in the customer master
file, which reflects data such as the customer’s name, identification number (assigned by TechWear),
billing information and credit limits. Historically, the process to set up a new customer involved running an
extensive background and credit check, which could take up to 30 days. However, due to complaints from
sales personnel, management decided to create a “provisional status” that would enable immediate order
fulfillment while the credit check is in process.
TechWear uses an order-entry system that enables sales personnel to generate an order. Once an order
is entered, the system automatically generates a shipping order that appears on the shipping
department’s order fulfillment log.
Shipping Supervisor
TechWear’s goal is to fulfill an order within 24 hours of its receipt. Orders entered near the end of the day
(after the FedEx pickup time) are marked as “pending” and cleared out the following business day.

At the time of shipment, TechWear’s shipping clerk enters the shipping number into the system and the
FedEx identification number (all shipments for the same day have the same FedEx identification number),
which then releases the order, resulting in the sales transaction being posted (with a transaction number
that matches the shipping number) and an invoice being generated. The invoice is sent either
electronically or via mail to the customer. At the same time, the cost of inventory relieved for items sold is
automatically generated and recorded based on the shipping number. Typically, the cost of sales ranges
between 35% and 45%.
The ERP system automatically logs the date of shipment.
A listing of unfilled (pending) orders can be generated from the system based on orders entered that do
not list a shipping number, FedEx identification number and shipping weight. One is rarely produced
because the company historically has not had a problem with orders being unfulfilled beyond 24 hours.
The system allows an order entered late one day (noted as pending) to be overridden and released by the
Director of IT as if the order had been fulfilled. The ERP system leaves no trail when this occurs, and
simply removes the pending flag.
TechWear strongly believes in its products and has an unlimited 90-day return policy that allows a
customer to return any product for any reason within 90 days of purchase. Additionally, it warrants its
products against manufacturing defects for two years.
If a product is returned (which has not happened yet) the Shipping Department issues a credit memo to
the customer, which results in a reversal of the sale.
Business Office Director (responsible for billing and collections)
Cash is collected either via checks received through the mail or a bank lockbox (which is the preferred
method, given the size of its customers), whereby payments are posted by the bank directly into
TechWear’s depository account.
Customer billing disputes, which management says have been rare, are resolved by the Business Office.
Thus far, there have been no bad debt write-offs, which management credits to the quality of its products
and its extensive background checks. On a quarterly basis, the Business Office reviews an “Aged AR”
listing of old accounts warranting further attention. If necessary, an allowance for “bad debts” would be
recorded in the general ledger. Actual bad debts would be charged against the allowance.
Accounting Supervisor
The Accounting Office is responsible for making the bank deposit. It also reconciles the depository bank
account at month-end, ensuring that all cash receipts have been accounted for.
The main responsibility of the Accounting Office is to monitor daily sales and produce action reports for
management. These are system-generated reports that are reviewed by an accounting analyst who flags
adverse sales trends. The focus is on meeting company targets.
Director of IT

The IT Department (consisting of two individuals) is responsible for ensuring that TechWear’s website is
running efficiently and is protected from internal and external threats. The Director has “super user” rights
and can access any system. His assistant has full read-only rights and can only make changes to test
files. The assistant has been charged with monitoring sales activity and ensuring continuity and security.

Task 2 :
Background:

It is now February 6, 2017, and you are ready to begin the year-end audit procedures for the 2016 audit.
The client has provided the 2016 data that you requested
(Analytics_mindset_case_studies_Techwear_P4.xls) so you can begin your work. Procedures have
already been performed by your team to ensure that the data you received is complete and accurate.
The data file includes data on two tabs — 2016 AR data and 2016 inventory relief data.
2016 AR data tab

The data fields are the same as what you received for 2015, with the exclusion of the ship date.
Additionally, the “Type” field includes transaction information for the opening balance (Opening Balance),
which reconciles with the 2015 ending balance of $684,491.19 and the unapplied cash receipts
(Unapplied Receipts).
2016 inventory relief data tab

This data includes the following fields:

► ShipNum: this is the shipping number. This number becomes the sales transaction number when the
invoice is created, which is the transaction number field on the 2016 AR data tab.
► FedExID: this is the FedEx identification number. All items shipped on a given day will have the same
number.
► CustNum: this is a unique customer number to identify the customer (same field that is on the 2016 AR
data tab).
► CustName: this is the customer name (same field that is on the 2016 AR data tab).
► InvoiceDate: this is the date the sale was invoiced (billed) (same field that is on the 2016 AR data tab).
► ShipDate: this is the date the goods were shipped.
► InvCostReliefAmount: this is the inventory cost relief amount, or the cost of sales.

The December 31, 2016, working trial balance shows the following:
Accounts receivable $18,114,802.50 (no allowances have been recorded)
Sales $37,333,890.86
Cost of sales $14,269,387.17
Required:

1. You have been asked to perform each of the following select work steps that are based on the
auditing procedures documented in the audit data analysis template from Part III. Perform your
analysis in Tableau.
Audit work steps

i. Verify that every sales transaction has a shipping number and FedEx identification number.
Identify and quantify any sales that have not been shipped (including names of customers and
transaction numbers). Propose any necessary audit adjustment and show your journal entries
clearly. What is your concern? What further actions should you take?
ii. Verify that every shipping number has a recorded sales transaction. Identify and quantify the cost
of sales for products shipped without a sale being recorded (including names of customers and
transaction numbers). The Director of Marketing and Sales has asserted that all sales that have
occurred have been recorded. What further procedures should be performed to either dispel or
confirm the assertion made by the director? In wat way the director is likely to be correct? iii.
Identify shipments that occurred in 2017 for 2016 sales. Identify and quantify any sales and the
cost of sales for amounts recorded in the improper period (including names of customers and
transaction numbers). Propose any necessary audit adjustment and show your journal entries
clearly. What is your concern? What further actions should you take?

2. As you perform each work step, document your findings in detail and propose any audit adjustment
using the summary of auditing findings document on the following page. On this document, add or
remove “audit findings” rows as needed based on your work.

Summary of audit findings

Accounts
receivable
Sales Cost of sales Inventory
As of December 31, 2016 $37,333,890.86 $14,269,387.17 $18,114,802.50

Audit finding e.g. Audit

adjustment for …

Audit finding

Audit finding

Adjusted as of
December 31, 2016
 Analytics mindset Revenue
Cycle Audit III
Task 3:

Required:
1. You have been asked to perform each of the following select work steps that are based on the
auditing procedures documented in the audit data analysis template from Part III. Perform your
analysis in Tableau. Before you perform the next work step, make certain to remove the
corresponding data from your analysis Part IV.A work steps 1i to 1iii so you can gain the best
insights from the work step.
Audit work steps
i. Analyze gross margin percentages by month and by customer, reporting results in a tabular and
graphical form, after considering your previous findings. Identify any percentages that are outside
the range of expectations.
ii. Develop a trial balance of accounts receivable at December 31, 2016, after reflecting about any
proposed audit adjustments. Display this at the customer level with the ability to drill down to the
transaction (invoice) level.
iii. Develop an aging analysis of accounts receivable at December 31, 2016, after reflecting about
any proposed audit adjustments. Use the following aging categories (0–30 days, 31–60 days, 61–
90 days, > 90 days and unapplied cash). Display this at the customer level with the ability to drill
down to the transaction (invoice) level. Provide a visualization of the amount of accounts
receivable in each aging category.

2. Prepare a brief, one-page summary of your overall findings for discussion with the audit committee
that includes your summary table and any relevant visualizations.