Accounting 408 Chapter 7 4
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
Accounting 408 Chapter 7 5
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
Accounting 408 Chapter 7 6
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
Chapter 1 7
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
Accounting 408 Chapter 7 8
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
Accounting 408 Chapter 7 10
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
Accounting 408 Chapter 7 11
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
Accounting 408 Chapter 7 13
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
Accounting 408 Chapter 7 14
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
Accounting 408 Chapter 7 15
3. Fraudulent Revenue Recognition Schemes
Obvious accounting violations Fictitious sales or fake customers Premature recording of sales Inflated sales
Accounting 408 Chapter 7 16
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
Accounting 408 Chapter 7 17
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
Accounting 408 Chapter 7 18
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
Accounting 408 Chapter 7 19
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
Accounting 408 Chapter 7 20
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
Accounting 408 Chapter 7 21
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