ch14 Revenue Cycle

Modern
Modern Auditing:
Auditing:
Assurance
Assurance Services
Services and
and the
the Integrity
Integrity
of
of Financial Reporting, 8th Edition
Financial Reporting, 8 th
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
Chapter Overview
Overview
The
The Revenue
Revenue Cycle
Cycle
Develop
Develop Audit
Audit Objectives
Objectives
Inherent
Inherent Risk,
Risk, Including
Including the
the Risk
Risk
of
of Fraud
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
Analytical Procedures
Procedures
Consideration
Consideration of
of Internal
Internal Control
Control
Components
Components
• Control Environment
• Risk Assessment
• Information and Communication
• Monitoring
• Initial Assessments of Control Risk

Study
Study Break
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
Study Break
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
Control Activities
Activities for
for Credit
Credit
Sales
Sales Transactions
Transactions
• Credit Sales Orders
– Over-the-Counter
– Mail Order
– Internet
• Computerized Accounting System

– General Controls
– Application Controls
Common
Common Documents
Documents and
and
Records
Records
• Customer Order
• Sales Order
• Shipping Document
– Bill of Lading
– Packing Slip
• Sales Invoice
• Authorized Price List

Common
Common Documents
Documents and
and
Records
Records
• Sales Transactions File
• Sales Journal
• Customer Master File
• Accounts Receivable Master File

– Accounts receivable subsidiary ledger
• Customer Monthly Statement

Function
Function and
and Control
Control Activities
Activities
• Authorizing Sales
– Accepting Customer Orders
– Approving Credit
• Delivery of Goods and Services

– Filling Sales Orders
– Shipping Sales Orders
• Recording Sales
System
System Flowchart
Flowchart –– Credit
Credit Sales
Sales
System
System Flowchart
Credit Sales
Sales
System
System Flowchart
Credit Sales
Sales
Study
Study Break
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
Study Break
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
Cash Receipts
Receipts Transactions
Transactions ––
Common
Common Documents
Documents and
and Records
Records
• Remittance Advice
• Prelist
• Cash Count Sheets
• Daily Cash Summary
• Validated Deposit Slip
• Cash Receipts Transactions File
• Cash Receipts Journal

Cash
Cash Receipts
Receipts Transactions
Transactions --
Functions
Functions
• Receiving Cash Receipts
– Over-the-Counter Receipts
– Mail Receipts
• Depositing Cash in Bank

– Deposited intact daily
• Recording the Receipts

Sales
Sales Adjustment
Adjustment Transactions
Transactions ––
Common
Common Documents
Documents and
and Records
Records
• Sales return authorization
• Authorization for accounts receivable write-off
• Receiving report
• Credit memo
• Journal entry
• Cash Receipts journal

Sales
Sales Adjustment
Adjustment Functions
Functions and
and
Controls
Controls
• Granting Cash Discounts
• Granting Sales Returns and Allowances
• Determining Uncollectible Accounts
• Other Controls
• Tests of Controls
Study
Study Break
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
Study Break
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
Substantive Tests
Tests of
of Accounts
Accounts
Receivable
Receivable
• Determining Detection Risk for Tests of
Details
– Existence and Occurrence
– Completeness
– Rights and Obligations
– Valuation and Allocation
– Presentation and Disclosure

Designing
Designing Substantive
Substantive Tests
Tests
• Initial Procedures
• Analytical Procedures
Designing
Substantive Tests
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
• 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
• 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
• Tests of Details of Accounting
Estimates
– Allowance for Doubtful Accounts
– Aged Trial Balance
• Tests of Details of Disclosures

Study
Study Break
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
Study Break
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

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Modern

Chapter 14 – Auditing the Revenue Cycle

• Other Misstatement Factors

• Information and Communication

• Initial Assessments of Control Risk

• Computerized Accounting System

• Authorized Price List

• Customer Master File

• Accounts Receivable Master File

• Customer Monthly Statement

• Delivery of Goods and Services

• Cash Count Sheets

• Daily Cash Summary

• Validated Deposit Slip

• Cash Receipts Transactions File

• Cash Receipts Journal

• Depositing Cash in Bank

• Recording the Receipts

• Authorization for accounts receivable write-off

• Cash Receipts journal

• Granting Sales Returns and Allowances

• Determining Uncollectible Accounts

C. Recording the cash receipts

– Rights and Obligations

– Valuation and Allocation

– Presentation and Disclosure

– Trace Revenue Transactions

– Perform Cutoff Tests

– Perform Cash Receipts Cutoff Test

– Timing and Extent of Requests

– Controlling the Requests

– Alternative Procedures for Dealing

– Summarizing and Evaluating Results

• Tests of Details of Disclosures

D. Cash receipts cutoff test

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