Chapter 7

Revenue and Collection Cycle

Accounting 408 1Chapter 7

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Accounting 408 Chapter 7 3

1. Internal Control (cont’)

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1. Internal Control Internal control over sales

separate functions: receiving customer order, credit approval, filling and shipping sales order, billing customers, recording the sales

documents and records: customer order, sales order, shipping documents, sales invoice, approved customer list, authorized price list, sales journal, A/R subsidiary ledger, A/R general ledger account

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1. Internal Control (cont’) Internal control over cash receipts

general rules for handling cash separate functions: receiving cash, depositing

cash, recording the transactions controls over cash sales, payments received

through the mail documents and records: remittance advice,

cash receipts list, daily cash summary, deposit slip

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1. Internal Control (cont’) Internal control over sales adjustments

type of sales adjustments cash discounts sales returns and allowances writing off uncollectible accounts

separate functions: cash handling, cash recording, sales adjustments

documents and records: credit memos, write-off authorization memo

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10. Financial Statement Assertions (Con’t)Account Balances

Transactions Disclosures

Existence * Occurrence * Occurrence

Rights and obligations *

Rights and obligations

Completeness * Completeness Completeness

Valuation and allocation *

Accuracy Valuation and allocationAccuracy

Cutoff

Classification Classification* Understandability *ACCT-4080

* PCAOB Assertions

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1. Internal Control (cont’) Sales transactions audit objectives

Recorded sales transactions actually occurred Existing sales transactions are recorded Sales transactions are recorded accurately Sales transactions are classified correctly Sales transactions are recorded on correct

dates

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2. Substantive Tests Accounts receivable balance objectives

recorded A/R exist client has rights to A/R existing A/R are included A/R is stated at realizable value

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2. Substantive Tests Accounts Receivable

Confirmations - GAAPro controlling process requests not to confirm positive, negative, others balances, transactions effectiveness returned mail improving response rates disclaimers and other restrictions in confirmation responses

Examination of subsequent cash collections Inquiry of sales or factoring of A/R (evaluate client’s rights to A/R) Vouching and tracing transactions Cutoff tests - sales and cash Analytical procedures (often use SAP for revenue accounts) (examples) Evaluate adequacy of allow. for uncollectibles Search for related party receivables

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Positive Confirmation

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2. Substantive Tests Accounts Receivable

Existence and Occurrence confirmation, vouching, cut-off tests

Rights and Obligations vouching, confirmation, determine if factored or

assigned Completeness

analytical procedures, tracing, cut-off tests, confirmation

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2. Substantive Tests Accounts Receivable

Valuation evaluate adequacy of allowance, subsequent

cash collections, vouch recorded receivables Presentation and Disclosure

compare statement presentation to GAAP related party transactions, pledged, assigned,

or factored receivables

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3. Fraudulent Revenue Recognition Schemes

Obvious accounting violations Fictitious sales or fake customers Premature recording of sales Inflated sales

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3. Fraudulent Revenue Recognition Schemes

Earnings management - At what point does managing earnings become fraud? Pushing the limits of accounting standards Changing accounting policies and estimates

midstream with positive impact Exploitation of accounting methods to

distort actual performance of organization

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3. Fraudulent Revenue Recognition Schemes Transactions lacking integrity

Quality of earnings issues The following often have an element of

collusion Roundtrip transactions Channel stuffing Bill and hold transactions Related party transactions

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3. Fraudulent Revenue Recognition Schemes

Non-top line income sources methods Investments and related income Sales of investments or fixed assets Factoring receivables Sale of obsolete inventory Any other asset sales representing

unsustainable revenue sources

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3. Fraudulent Revenue Recognition Schemes Cover up methods

Backdating invoices, agreements Manipulation of dates shipped on docs Customer statements – hold, destroy, alter Falsify customer confirmations Delay recording credit memos Ship goods to third party warehouse Lapping receivable transactions

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3. Fraudulent Revenue Recognition Schemes Detection methods

Vouch supporting documents Review cutoff of large sales near YE Perform analytical tests Review transactions after YE (returns,

cancelled orders) Determine methods and consistency of

reserves, contras

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3. Fraudulent Revenue Recognition Schemes

Detection methods Confirm customers Review shipments to warehouses Examine shipping document signatures Compare ship dates to customer order

and requested delivery date Review customer complaints

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Review Questions for Discussion Chapter

77.27.37.57.87.167.17

ACCT-4080

7.187.197.217.22