OVERVIEW OF REVENUE AND RECEIPT CYCLE

TOPIC 8: AUDIT REVENUE AND RECEIPTS CYCLE + ACCOUNT RECEIVABLES

OVERVIEW OF REVENUE AND RECEIPT CYCLE

ACCOUNTS IN THE CYCLE

• Cash sales : cash / bank account vs sales account
• Credit sales : Account receivable vs sales account
• Sales return and allowance : Sales return account vs account receivable vs cash / bank account
• Charge of bad debt : Bad debt expense account vs account receivable

CLASSES OF TRANSACTION

1. Sales

5. Bad Debts Expense

ACCOUNT

DOCUMENTS & RECORDS

BUSINESS

FUNCTION

ACCOUNTS

BUSINESS

FUNCTION

DOCUMENTS & RECORDS

Sales

Acc receivable

• Customer order
• Sales order

• Customer order or sales order

General journal

Providing for bad

debt

• Processing customer order
• Granting credit
• Shipping goods
• Billing customers & recording sales

• Bad debt expense
• Allowance for uncollectible acc

• Shipping document
• sales invoice
• Sales transaction file

• sales journal or listing
• Acc receivable master file
• Acc receivable trial balance
• Monthly balance

3. Sales returns & Allowances

ACCOUNTS

DOCUMENTS & RECORD

BUSINESS

FUNCTION

2. Cash Receipts

• Sales return & allowances
• Acc receivables

• Processing & recording sales return & allowances

4. Charge-off of uncollectible accounts

• Credit memo
• Sales return & allowances

ACCOUNTS

DOCUMENTS & RECORD

BUSINESS

FUNCTION

ACCOUNTS

DOCUMENTS & RECORD

BUSINESS

FUNCTION

• Bank
• Acc receivable

Processing and recording cash receipt

Charging off uncollectible

acc receivable

• Acc receivable
• Allowance for uncollectible acc

• Uncollectible acc amortization form
• General journal

• Remittance advice
• Prelisting of cash receipt
• Cash receipt transaction file
• cash receipt journal or listing

PERFORMING PRELIMINARY ANALYTICAL PROCEDURES

• Help identify areas of potential misstatement
• Require developing expectations for account balances, ratios, and trends
• Possible expected relationships in revenue cycle include the following :

-Absence of unusual year- end sales activity

-Account receivable growth

• Large increases in revenue occur near end of the quarter or year
• Revenue has grown and net income has increased, but there is negative cash flow from operations

is consistent with revenue growth

• Revenue growth, receivables growth and gross margin are consistent with activity in industry
• No unusual concentration of sales made to customers
• Accounts receivable turnover is significantly different from prior year
• Ratio of allowance for doubtful accounts total receivables or to credit sales is similar to the prior year

• Auditor compares unaudited financial statements with both past results and industry trends
• Following relationships might suggest a heightened risk of fraud

-Revenue increases eventhough there is strong competition

-Revenue increases are not consistent with industry or economy

-Gross margins are higher than average, or there is an unexpected change in gross margins

Rights and Obligations

• Through both positive and negative request confirmation, this will provides evidence of an entity's right to the acount receivable

Completeness

• To ensure completeness, auditor should verify the accuracy of the subsidiary receivables ledger and compare the total with general ledger control

SUBSTANTIVE TEST OF ACCOUNT RECEIVABLES

• Because of the problem of verifying the existence and value of receivables , this is generally an area of high inherent risk .
• The audit of receivables is best accomplished through :

Existence

Confirmation of acc receivable provide the primary source of evidence concerning its existence. ISA 505, external confirmation exist to guide auditor in the use of confirmation of receivables procedure during the audit process.

i. Preliminary assesment of control risk .

ii. Tests of controls .

iii. Review of the preliminary assesment of control risk.

Credit sales transaction

Valuation and Allocation

ISA 505 PARA A23 (NEGATIVE EXTERNAL CONFIRMATION)

ISA 505 PARA A5

(POSITIVE EXTERNAL CONFIRMATION)

By asking to the respondent to reply to the auditor in all cases either by indicating the respondent's agreement with the given information, or by asking respondent to fill in information

By asking the respondent to reply only in the event of disagreement with the information provided in the request.

• From the confirmation of account receivable, the gross value of account receivables can be ascertaned. Which meets the valuation objetive

Internal Control Objectives and Specific Control Strategies

Disclosure

• Evidence can be obtained by scanning the aged trial for large and unsual items that may represent transactions other than sales
• These items should be segregated and seperately disclosed

Cash receipt

KEY CONTROL ACTIVITIES

Adequate separation of duties

Proper authorization

Adequate documents & records

Prenumbered documents

Monthly statements

Internal verification procedures