Chapter Nine: Auditing Revenue and Related Accounts

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Chapter 9
Auditing Revenue and Related Accounts
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Introduction

• Financial transactions processing cycles
• Revenue
• Acquisition/payment
• Payroll
• Financing
• Cash and short-term investments

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Overview of Revenue Cycle

• Internal Control Objectives
• The Revenue Accounting System
• Receive a customer purchase order
• Check inventory stock status
• Generate back order
• Obtain credit approval
• Prepare shipping and packing documents
• Ship and verify shipment of goods
• Prepare the invoice.
• Send monthly statements to customers
• Receive payments

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Assessment of Environment Risk

• Audit steps
• update info on business risk
• understanding of internal controls
• document accounting applications
• preliminary assessment of environment risk
• if control risk at maximum determine types of
  likely misstatements
• develop procedures to lower control risk
• perform audit tests, and modify control risk if
  justified.

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Inherent Risk

• Improper Revenue Recognition Schemes
• Recognition of revenue on shipments that never
  occurred.
• Hidden side letters allowing returns.
• Consignment sales shown as final sales.
• Shipment of unfinished products.
• Shipment of product before customers agreed to
  delivery.

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Inherent Risks Sales Transactions

• Difficult Audit Issues
• When to recognize revenue.
• Impact of unusual terms of sale.
• All goods sold were shipped.
• Handling of recourse sales.

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The Control Environment Effect on Sales

• Focus On
• Integrity of management
• Financial condition of the organization
• Financial pressures facing the organization
• Management incentives to achieve various
  financial goals

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The Control Environment Effect on Sales
Sources of useful information in evaluating
control environment

• Financial press articles
• Trade journal articles
• Industry growth statistics
• Preliminary analytical procedures

9
Understanding Internal Controls
Walk-through of the processing. Inquiry.
Observation. Review of the clients system
documentation.
MUST DOCUMENT IN WORKING PAPERS.
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Developing an Understanding
Existence/Occurrence Completeness Rights/Obligatio
ns Valuation Presentation and Disclosure Maintaini
ng Accounting Integrity
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Evaluating Control Risk
Monitoring Controls. Control Structure Regarding
Returns, Allowances, and Warranties. Importance
of Credit Policies Authorizing Sales.
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Assessing Documenting Environment Risk
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Substantive Testing in the Revenue Cycle

• Planning for Direct Tests of Account Balances.
• Account balance relationships.
• Risk of material misstatement.
• Makeup of the account balance.
• Persuasiveness of procedures.
• Cost of the procedures.
• Timing of procedures.
• Determining optimal mix of audit procedures.

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Audit Objectives and Assertions

• Existence and Occurrence.
• Completeness.
• Valuation.
• Rights and Obligations.
• Presentation and Disclosure.

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Standard Accounts Receivable Audit Procedures

• Aging accounts receivable.
• Confirming receivables with customers.
• Related-party receivables
• Cutoff tests
• Non-current receivables
• Adjusting audit program to the environment.
• Confirmation of sales.

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Confirmations

• When required.
• Types of confirmations.
• As audit evidence.
• Accuracy and security of process.
• Sample selection.
• Sampling unit.
• Undeliverable confirmations.

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Confirmations (cont.)

• Follow-up to non-responses Positive
  confirmations
• Alternative Procedures
• Subsequent collection.
• Supporting documentation.

• Follow-up to non-responses.
• Follow-up procedures exceptions noted.
• Interim date confirmations.

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Confirmations (cont.)

• Summarizing Confirmation Work
• Related Party Receivables.
• Cutoff Tests.
• Noncurrent Receivables.
• Sold, Discounted, and Pledged Receivables.
• Adjusted Audit Program to the Environment.

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Allowance for Doubtful Accounts

• Review and test the process.
• Develop an independent model.
• Review subsequent events or transactions.
• Write-offs.

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Analytical Procedures

• Ratio Analysis

• Trend Analysis

• Reasonableness Tests

Notes Receivable