Revenue Cycle
the decisions and processes necessary for the transfer of the ownership of goods and services to customers after they are made available for sale; it begins with a request by a customer and ends with the conversion of material or service into an account receivable and ultimately into cashaka: revenue, receivables and receipts cycle
Classes of Transactions in the revenue cycle
the categories of transactions for the sales and collection cycle in a typical company: sales, cash receipts, sales returns and allowances, write-off of uncollectible accounts and bad-debt expense
What are the five classes of transactions in the revenue cycle
1. Sales (Cash and Sales on Account)2. Cash Receipts3. Sales returns and allowances4. Write-off uncollectible accounts5. Estimate of bad-debt expense
What are the two types of Processing Customer Orders
Customer Order and Sales Order
Customer Order
a request for merchandise by a customer
Sales Order
the document created during sales order entry listing the item numbers, quantities, prices, and terms of the sale
Approving Credit
If practice is weak it often leads to excessive bad debts and accounts receivable that may be uncollectible. An indication of credit approval on the sales order often serves as the approval to ship the goods
Shipping Goods
this critical function is the first point in the cycle at which the company gives up assets.
Shipping Document
This document generally serves as a bill of lading and contains information on the type of product shipped, the quantity shipped, and other relevant information.
Billing Customers and Recording Sales - important aspects
1. All shipments made have been billed (completeness)2. No shipment has been billed more than once (occurrence)3. Each shipment is billed for the proper amount (accuracy)
Sales Invoice
a document or electronic record indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data
Sales Transaction File
a computer generated file that includes all sales transactions processed by the accounting system for a period, which could be a day, week or a month.
Accounts Receivable Master File
computer file used to record individual sales, cash receipts, and sales returns and allowances for each customer and to maintain customer account balances
Accounts Receivable Trial Balance
this list or report shows the amount receivable from each customer at a point in time
Monthly Statement
this is a document sent electronically or by mail to each customer, indicating the beginning balance of the A/R, the amount and date of each sale, cash payments received, credit memos issued and the ending balance due.
Processing and Recording Cash Receipts
-remittance advice-prelisting of cash receipts-cash receipts transaction file-cash receipts journal or listing
Skimming
a common form of cash misappropriation in which the employees steal incoming funds prior to their being recorded in the accounting records
Remittance Advice
it is a document mailed to the customer and typically returned to the seller with the cash payments
Prelisting of Cash Receipts
list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash and who has no access to accounting records
Cash Receipts Transaction File
computer generated file that includes all cash receipts transactions processed by the accounting system for a period
Cash Receipts Journal or Listing
a listing or report generated from the cash receipts transaction file and includes all transactions for a time period
Processing and Recording Sales Returns and Allowances
when goods are returned the company prepared a receiving report for returned goods and returns them to storage. Returns and allowances are recorded in the sales returns and allowances transaction file, as well as the accounts receivable master file.
Credit Memo
indicates a reduction in the amount due from a customer because of returned goods or an allowance
Sales Returns and Allowances Journal
journal used to record sales returns and allowances
Writing Off Uncollectible Accounts
Writing off of an individual bad debt is recorded through a journal entry.Allowance for doubtful accounts xxx Accounts Receivables xxx
Uncollectible Account Authorization Form
document used internally to indicate authority to write an account receivable off as uncollectible
Providing for Bad Debts
because companies cannot expect to collect on 100% of their sales, accounting principle require them to record bad-debt expense for the amount they do not expect to collect
An overview of processing sales transactions
Customer > Sales Department (processing customer orders) > Credit Department (Approving Credit) > Shipping (Shipping Goods) > Accounts Receivables > Accounting (Billing customers and recording sales)
Identifying Inherent Risks and Determine Significant Risks
the auditor would perform preliminary analytical procedures to highlight potential misstatements
What is the five step model of revenue recognition
1. Identify the contract2. Identidy the performance obligations3. Determine the transaction price4. Allocate the transaction price to the performance obligation5. Recognize revenue when each performance obligation is satisfied
Inherent risk factors affecting accounts receivable:
1. long term receivables are classified as current2. receivables are pledged as collateral, assigned to someone else, factored, or sold (restrictions must be disclosed)3. payment is not required until the purchaser sells to its end customers4. collection of the receivable is contingent upon future events 5. sales are made to customers with high credit risk
More indicators than an entity may be engaged in fraudulent financial reporting
- management is placing more emphasis on the need for a particular accounting treatment- transactions that involve nonconsolidated related parties have not been properly reviewed or approved- the transactions involve nonconsolidated related parties have not been properly reviewed or approved- the transactions involve previously unidentified related parties that do not have the substance or financial strength to support the transaction
Lapping of accounts receivable
the postponement of entries for the collection of receivables to conceal an existing cash shortage; a common type of defalcation
Separation of Duties
separation of entry of sales data from entry of cash receipts, credit limit approval from sales, independent verification of key data, such as credit limits and other master file data, control totals and journal entries such as bad-debt write-offs
Proper Authorization
authorization by management or independent individuals should be provided and documented for:1. credit prior to sale2. removal of goods for shipment3. sales price, terms and chargers, to ensure that only authorized goods are shipped at appropriate prices to customers who are good credit risks.
Adequate documents and record
accurate, complete transactions that cannot be alters should be retained in paper or electronic format that documents the sales-related business events (orders, shipments, sales, returns, credits, adjustments, and master file changes) and can be traced from origin to the general ledger accounts
Sequentially numbered document
squential number that is accounted for an dmonitored
Mailing of statements
the entry of sales or cash receipts should be two independent processes
Independent verification processes
involves checking numerical continuity , matching of orders to shipments to invoices and production of exception reports for independent follow-up
Substantive Analytical Procedures
are designed to provide assurance, in combiantion with tests of controls and substantive tests of details, about particular assertions for classes of transactions, account balances and disclosures
What do auditors need to do at the completion of the test of controls?
it is essential to analyze each control test exception to determine its cause and the implication of the exception on assessed control risk, which may affect the supported detection risk and thereby the substantive procedures
Direction of Tests for Completeness and Occurrence
When tracing from source shipping documents to the journals, the purpose of the test is for omitted transactions In contrast, when vouching from the journals back to supporting documents, the purpose is to test for nonexistent transactions (Occurrence)
Design Substantive Tests - Revenue: Occurrence Assertion
sales being included in journals for which no shipment was amdesales recorded more than once (duplicate transactions)Fictitious sales - shipments made to no customers
Completeness Assertion
all revenues are recorded
Accuracy Assertion
shipping the correct amount of goods ordered, using the correct price when billing for the amount of goods shipped and accurately recording the amount billed in the accounting records
Cutoff Assertion
performing cutoff tests with sales transactions before and after year-end provides assurance of both the completeness and occurrence of sales transactions
Classification Assertion
not always clear whether the company is the seller with a primary obligation to the customer or the company is seller acting as an agent
Aged accounts receivable trial balance
a key source of information used to:- agree the accuracy between subledge and general ledger, including allocation to correct accounts- select samples for confirmation- identify unusual transactions using the auditor's criteria- evaluate classification of A/R with related parties- identify credit balances, which if significant should be reclassified as A/P
What is the most reliable evidence from confirmations?
the most reliable evidence is obtained when they are sent as close to the balance sheet date as possible as opposed to confirming the accounts several months before year-end
Rights and Obligations
for those companies who sell their receivables with or without recourse or have pledged the receivables as collateral, the details need to be disclosed in the notes to the financial statements
Proof of cash receipts
an audit procedure to test whether all recorded cash receipts have been deposited in the bank account by reconciling the total cash receipts recorded in the cash receipts journal for a given period with the actual deposits made to the bank