Modern Auditing:

Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 14 Auditing the Revenue Cycle

Chapter Overview
The Revenue Cycle
Develop Audit Objectives
Inherent Risk, Including the Risk
of Fraud
Management Misstatement of Revenue
Overstate revenues
Overstate cash and gross receivables
Understate allowance for doubtful accounts

Other Misstatement Factors

Opportunities for error
Timing
Misclassification
Adjustment transactions
Analytical Procedures
Consideration of Internal Control
Components
Control Environment

Risk Assessment

Information and Communication

Monitoring

Initial Assessments of Control Risk

 Study Break
1. The revenue cycle includes all of
the following transactions, except:
A. Credit Sales
B. Cash Receipt
C. Inventory Purchase
D. Sales Returns and Allowances

C. Inventory Purchase
 Study Break
2. This internal control component should
provide management with feedback as
to whether internal controls pertaining
to revenue cycle transactions and
balances are operating as intended.
A. Monitoring
B. Initial Assessments of Control Risk
C. Information and Communication
D. Control Environment

A. Monitoring
 Control Activities for Credit
Sales Transactions
Credit Sales Orders
Over-the-Counter
Mail Order
Internet

Computerized Accounting System

General Controls
Application Controls
 Common Documents and
Records
Customer Order

Sales Order

Shipping Document
Bill of Lading
Packing Slip

Sales Invoice

Authorized Price List

 Common Documents and
Records
Sales Transactions File

Sales Journal

Customer Master File

Accounts Receivable Master File

Accounts receivable subsidiary ledger

Customer Monthly Statement

 Function and Control Activities

Authorizing Sales
Accepting Customer Orders
Approving Credit

Delivery of Goods and Services

Filling Sales Orders
Shipping Sales Orders

Recording Sales
System Flowchart Credit Sales
System Flowchart Credit Sales
System Flowchart Credit Sales
 Study Break
3. This document is a journal listing
of the completed sales
transactions.
A. Sales invoice
B. Sales transactions files
C. Authorized price list
D. Sales journal

D. Sales journal
 Study Break
4. This document shows the
description, quantity, and other
data pertaining to a customer
order.
A. Customer order
B. Sales order
C. Shipping document
D. Sales invoice

B. Sales order
 Cash Receipts Transactions
Common Documents and Records
Remittance Advice

Prelist

Cash Count Sheets

Daily Cash Summary

Validated Deposit Slip

Cash Receipts Transactions File

Cash Receipts Journal

 Cash Receipts Transactions -
Functions
Receiving Cash Receipts
Over-the-Counter Receipts
Mail Receipts

Depositing Cash in Bank

Deposited intact daily

Recording the Receipts

 Sales Adjustment Transactions
Common Documents and Records
Sales return authorization

Authorization for accounts receivable write-off

Receiving report

Credit memo

Journal entry

Cash Receipts journal

Sales Adjustment Functions and
Controls
Granting Cash Discounts

Granting Sales Returns and Allowances

Determining Uncollectible Accounts

Other Controls

Tests of Controls
 Study Break
5. This cash receipts transaction
document is a listing of cash
receipts received through the
mail.
A. Remittance advice
B. Prelist
C. Daily cash summary
D. Validated deposit slip

B. Prelist
 Study Break
6. All of the following are sales
adjustment functions, except:
A. Granting cash discounts
B. Determining uncollectible accounts
C. Recording the cash receipts
D. Granting sales returns and allowances

C. Recording the cash receipts

 Substantive Tests of Accounts
Receivable
Determining Detection Risk for Tests of
Details
Existence and Occurrence

Completeness

Rights and Obligations

Valuation and Allocation

Presentation and Disclosure

 Designing Substantive Tests
Initial Procedures

Analytical Procedures
 Designing Substantive Tests
Tests of Details of Transactions
Vouch Revenue Transactions

Trace Revenue Transactions

Perform Cutoff Tests

Sales Cutoff Tests
Sales Return Cutoff Tests

Perform Cash Receipts Cutoff Test

 Designing Substantive Tests
Tests of Details of Balances
Confirm Receivables

Forms of Confirmation
Positive Confirmation
Negative Confirmation

Timing and Extent of Requests

Controlling the Requests

 Designing Substantive Tests
Tests of Details of Balances
Disposition of Exceptions

Alternative Procedures for Dealing

with Nonresponses

Summarizing and Evaluating Results

Applicability to Assertions
 Designing Substantive Tests
Tests of Details of Accounting
Estimates
Allowance for Doubtful Accounts
Aged Trial Balance

Tests of Details of Disclosures

 Study Break
7. This type of confirmation requires
a debtor to respond only when the
amount shown is incorrect.
A. Positive Confirmation
B. Negative Confirmation
C. Avoidance
D. Existence

B. Negative Confirmation
 Study Break
8. This cutoff test is designed to obtain
reasonable assurance that cash receipts
are recorded in the accounting period
in which received.
A. Sales cutoff test
B. Sales return cutoff test
C. Vouching revenue transactions
D. Cash receipts cutoff test

D. Cash receipts cutoff test