Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State

University at San Luis ObispoUniversity at San Luis Obispo

Raymond N. Raymond N. JohnsonJohnson

Portland State UniversityPortland State University

Chapter 14 – Auditing the Revenue Cycle

Chapter OverviewChapter OverviewChapter OverviewChapter Overview

The Revenue CycleThe Revenue CycleThe Revenue CycleThe Revenue Cycle

Develop Audit ObjectivesDevelop Audit ObjectivesDevelop Audit ObjectivesDevelop Audit Objectives

Inherent Risk, Including the Inherent Risk, Including the Risk of FraudRisk of Fraud

Inherent Risk, Including the Inherent Risk, Including the Risk of FraudRisk of 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 ProceduresAnalytical ProceduresAnalytical ProceduresAnalytical Procedures

Consideration of Internal Consideration of Internal Control ComponentsControl Components

Consideration of Internal Consideration of Internal Control ComponentsControl Components

• Control Environment

• Risk Assessment

• Information and Communication

• Monitoring

• Initial Assessments of Control Risk

Control Activities for Credit Control Activities for Credit Sales TransactionsSales Transactions

Control Activities for Credit Control Activities for Credit Sales TransactionsSales Transactions

• Credit Sales Orders– Over-the-Counter– Mail Order– Internet

• Computerized Accounting System– General Controls– Application Controls

Common Documents and Common Documents and RecordsRecords

Common Documents and Common Documents and RecordsRecords

• Customer Order

• Sales Order

• Shipping Document– Bill of Lading– Packing Slip

• Sales Invoice

• Authorized Price List

Common Documents and Common Documents and RecordsRecords

Common Documents and Common Documents and RecordsRecords

• Sales Transactions File

• Sales Journal

• Customer Master File

• Accounts Receivable Master File– Accounts receivable subsidiary ledger

• Customer Monthly Statement

Function and Control ActivitiesFunction and Control ActivitiesFunction and Control ActivitiesFunction and Control Activities

• Authorizing Sales– Accepting Customer Orders– Approving Credit

• Delivery of Goods and Services– Filling Sales Orders– Shipping Sales Orders

• Recording Sales

System Flowchart – Credit System Flowchart – Credit SalesSales

System Flowchart – Credit System Flowchart – Credit SalesSales

System Flowchart – Credit System Flowchart – Credit SalesSales

System Flowchart – Credit System Flowchart – Credit SalesSales

System Flowchart – Credit System Flowchart – Credit SalesSales

System Flowchart – Credit System Flowchart – Credit SalesSales

Cash Receipts Transactions – Cash Receipts Transactions – Common Documents and Common Documents and

RecordsRecords

Cash Receipts Transactions – Cash Receipts Transactions – Common Documents and Common Documents and

RecordsRecords• Remittance Advice

• Prelist

• Cash Count Sheets

• Daily Cash Summary

• Validated Deposit Slip

• Cash Receipts Transactions File

• Cash Receipts Journal

Cash Receipts Transactions - Cash Receipts Transactions - FunctionsFunctions

Cash Receipts Transactions - Cash Receipts Transactions - FunctionsFunctions

• Receiving Cash Receipts– Over-the-Counter Receipts– Mail Receipts

• Depositing Cash in Bank– Deposited intact daily

• Recording the Receipts

Sales Adjustment Transactions – Sales Adjustment Transactions – Common Documents and Common Documents and

RecordsRecords

Sales Adjustment Transactions – Sales Adjustment Transactions – Common Documents and Common Documents and

RecordsRecords• Sales return authorization

• Authorization for accounts receivable write-off

• Receiving report

• Credit memo

• Journal entry

• Cash Receipts journal

Sales Adjustment Functions Sales Adjustment Functions and Controlsand Controls

Sales Adjustment Functions Sales Adjustment Functions and Controlsand Controls

• Granting Cash Discounts

• Granting Sales Returns and Allowances

• Determining Uncollectible Accounts

• Other Controls

• Tests of Controls

Substantive Tests of Accounts Substantive Tests of Accounts ReceivableReceivable

Substantive Tests of Accounts Substantive Tests of Accounts ReceivableReceivable

• Determining Detection Risk for Tests of Details– Existence and Occurrence

– Completeness

– Rights and Obligations

– Valuation and Allocation

– Presentation and Disclosure

Designing Substantive Designing Substantive TestsTests

Designing Substantive Designing Substantive TestsTests

• Initial Procedures

• Analytical Procedures

Designing Substantive Designing Substantive TestsTests

Designing Substantive Designing Substantive TestsTests

• 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 Designing Substantive TestsTests

Designing Substantive Designing Substantive TestsTests

• Tests of Details of Balances– Confirm Receivables

– Forms of Confirmation•Positive Confirmation•Negative Confirmation

– Timing and Extent of Requests

– Controlling the Requests

Designing Substantive Designing Substantive TestsTests

Designing Substantive Designing Substantive TestsTests

• Tests of Details of Balances– Disposition of Exceptions

– Alternative Procedures for Dealing with Nonresponses

– Summarizing and Evaluating Results

– Applicability to Assertions

Designing Substantive Designing Substantive TestsTests

Designing Substantive Designing Substantive TestsTests

• Tests of Details of Accounting Estimates– Allowance for Doubtful Accounts– Aged Trial Balance

• Tests of Details of Disclosures