1 chapter 11 subtantive audit testing: revenue cycle

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CHAPTER 11SUBTANTIVE

AUDIT TESTING: Revenue Cycle

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What accounts are typically involved in What accounts are typically involved in the sales and collection cycle?the sales and collection cycle?

- sales- sales returns and allowances- bad debt expense- cash discounts taken- trade accounts receivable- allowance for uncollectible accounts- cash in the bank

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- sales (cash and credit)- cash receipts- sales returns and allowances- charge-off of uncollectible accounts- bad debt expense

What What classes of transactionsclasses of transactions occur occur in the sales and collection cycle?in the sales and collection cycle?

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How does an How does an auditor design auditor design

tests of controls tests of controls and substantive and substantive

tests of tests of transactions for transactions for

sales?sales?

Understand internal control as it relates

to sales

As discussedin chapter 9

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sales?sales?

Assess the plannedcontrol risk related

to sales


to sales

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to sales

In assessing control In assessing control risk, the auditor should risk, the auditor should

consider:consider:


to sales

?

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to sales

In assessing control In assessing control risk, the auditor should risk, the auditor should

consider:consider:- adequate separation of duties- proper authorization- adequate documents and records- use of prenumbered documents- mailing of monthly statements- internal verification procedures


to sales

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sales?sales?


to sales

Evaluatecost-benefit

of testingcontrols


to sales

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to sales


of testingcontrols

Will substantivetests be reduced

sufficiently to justify the cost ofperforming tests

of controls?


to sales

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of testingcontrols




sales?sales?


to sales

Design tests of controls and substantive tests of transactions for sales


to sales

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of testingcontrols


to sales

In designing sub- In designing substantive tests of stantive tests of transactions for transactions for

sales, the auditor sales, the auditor should consider:should consider:

Do recordedsales actually

exist?


to sales


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of testingcontrols


to sales



Are allexisting salestransactionsrecorded?


to sales


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of testingcontrols


to sales



Are salesaccuratelyrecorded?


to sales


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of testingcontrols


to sales



Are recordedsales properly

classified?


to sales


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of testingcontrols


to sales



Are salesrecorded onthe correct

dates?


to sales


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of testingcontrols


to sales



Are salestransactions

properly includedin the master file

and correctlysummarized?


to sales


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Determine whethercash received was

recorded.

The auditor should also perform The auditor should also perform procedures to detect procedures to detect fraudfraud

related to cash receipts:related to cash receipts:

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Prepare a proofof cash receipts.

?



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A proof ofcash receipts

reconciles cashreceipts record-ed in the cash

receipts journalwith actual bank

deposits.



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Test to discoverlapping of accounts

receivable.

?



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LappingLapping is a fraud is a fraudscheme that occurs scheme that occurs

because of because of inadequateinadequatesegregation of dutiessegregation of duties related to mail, cash related to mail, cash

receipts, andreceipts, andaccounting.accounting.

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a lapping examplea lapping example

On Monday, a check is received from Able Co. in payment of their a/r. Thecheck is stolen by the bookkeeper! Noentry is made and all evidence of thepayment receipt is destroyed.

A/R Able $1000

A/R Baker $1000

A/R Cain $1000

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On Tuesday, a check is received from Baker Co. in payment of their a/r. Thepayment, however, is credited to Able’saccount.

A/R Able $1000 -1000 0

A/R Baker $1000

A/R Cain $1000


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On Wednesday, a check is received from Cain Co. in payment of their a/r. The pay-ment, however, is credited to Baker’saccount.

A/R Able $1000 -1000 0

A/R Baker $1000

A/R Cain $1000

-1000 0


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What audit procedures What audit procedures may detect lapping?may detect lapping?

- a/r confirmations (disputed balances, disputed timing of payments)

client’s a/r customer

client32

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What audit procedures What audit procedures may detect lapping?may detect lapping?

- a/r confirmations (disputed balances, disputed timing of payments)

- comparison of deposit slips to cash receipts journal (different amounts, different timing)

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Other than adequate segregation of Other than adequate segregation of duties, what duties, what client internal control client internal control

may prevent or detect lapping?may prevent or detect lapping?

requiredvacations(and rotation ofduties during

vacations)

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Confirmation SequenceConfirmation Sequence

statistically and/or judgmentally determine whether the

extent of exceptions will affect internalcontrol evaluation and acceptability

of a/r balance

obtaina/r aging

selectspecific

a/r forconfirma-

tion

print confirmations and mail them

analyzeresults,

investigatedisputedamounts

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Receivables Audit ProceduresReceivables Audit Procedures- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales. Examine all sales invoices and related shipping documents and cash receipts for several days before and after the balance sheet date.

Determine when titleto the goods passed.

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- perform analytical procedures on receivables and related accounts- review year-end cutoff for sales.- after reviewing a/r aging, discuss possible a/r write-offs and the adequacy of the allowance with management- inspect notes receivable- vouch a sample of a/r to customer order, sales order, sales invoice, shipping documents, cash receipts

Receivables Audit Receivables Audit ProceduresProcedures

1 chapter 11 subtantive audit testing: revenue cycle

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