AUDITING AND ASSURANCE SERVICES

IN MALAYSIA

TOPIC 8: AUDIT OF REVENUE AND RECEIPTS

CYCLE + ACCOUNT RECEIVABLES

References: Chapter 9

AUD390 2011

LEARNING OUTCOMES

Overview of the accounts & classes of transactions

Business functions & documents Financial report assertions Major internal control and related

audit procedures Substantive tests for accounts

receivable

AUD390 2011

OVERVIEW OF REVENUE & RECEIPTS CYCLE

Accounts in the Cycle Classes of Transactions Business functions Documents & records

AUD390 AUDITING DIA

ACCOUNTS IN THE CYCLE

Cash Sales: Cash/Bank Acc vs. Sales Acc Credit Sales: Acc Receivable vs. Sales Acc Sales Return & Allowance: Sales Return Acc

vs. Acc receivable vs. Cash/Bank Acc Charge of for bad debts: Bad Debt Expense

Acc vs. Acc Receivable

AUD390 AUDITING DIA

CLASSES OF TRANSACTIONS

1. Sales (cash and sales on account)2. Cash receipts3. Sales returns & allowances4. Charge-off of uncollectible accounts5. Estimate of bad debt expense

AUD390 AUDITING DIA

AUD390 AUDITING DIA

CLASSES OF TRANSACTIONS

ACCOUNTS BUSINESS FUNCTIONS

DOCUMENTS & RECORDS

1.Sales SalesAcc Receivable

i. Processing customer orderii. Granting creditiii. Shipping goodsiv. Billing customers & recording sales

Customer orderSales orderCustomer order or sales orderShipping documentSales invoiceSales transaction fileSales journal or listingAccount receivable master fileAccounts receivable trial balanceMonthly statement

AUD390 AUDITING DIA

CLASSES OF TRANSACTIONS

ACCOUNTS BUSINESS FUNCTIONS

DOCUMENTS & RECORDS

2. Cash Receipts BankAccount Receivable

v. Processing & recording cash receipts

Remittance advicePrelisting of cash receiptsCash receipts transaction fileCash receipts journal or listing

3. Sales returns & Allowances

Sales Returns & AllowancesAccount Receivable

vi. Processing & recording sales returns & allowances

Credit memoSales returns & allowances journal

4. Charge-off of uncollectible accounts

Account ReceivableAllowance for uncollectible accounts

vii. Charging off uncollectible accounts receivable

Uncollectible account authorization formGeneral journal

5. Bad Debt Expense Bad debt expenseAllowance for uncollectible accounts

viii. Providing for bad debts

General journal

KEY CONTROL ACTIVITIES

1. Adequate separation of duties2. Proper authorization3. Adequate documents & records4. Prenumbered documents5. Monthly statements6. Internal verification procedures

AUD390 AUDITING DIA

Adequate Separation Of Duties

Important to prevent various types of intentional & unintentional type of misstatements

General example guidelines:Anyone responsible for inputting sales and

cash receipts transaction information into the computer being denied to access to cash

To separate credit-granting function from the sales function because credit checks are intended to influence sales personnel to optimize volume of sales even at the expense of high bad debt written off

AUD390 AUDITING DIA

Proper Authorization

Authorization at three key points1. Credit must be properly

authorized before a sale take places

2. Goods should be shipped only after proper authorization

3. Price, including basic terms, freight, & discount must be authorized

AUD390 AUDITING DIA

To prevent the loss of company assets by

shipping to fictitious customers or those

who fail to pay for the goods

To ensure that the sale is billed at the

price set by company policy

Adequate Documents & Records General example guidelines:

Prepare a multicopy prenumbered sales invoice at the time a customer order is received. Copies are used for different purpose: Approve credit Authorize shipment Record the number of unit shipped Billed customers

AUD390 AUDITING DIA

Prenumbered Documents Use of prenumbering, to prevent:

the failure to bill or record sales The occurrence of duplicate billings and

recordings E.g.

A billing clerk filed a copy of all shipping documents in sequential order after each shipment is billed

To program the computer to prepare a listing of unused numbers at month’s end with follow-up by appropriate personnel

AUD390 AUDITING DIA

Monthly Statements

It is sending monthly to customer either generated by computer or by someone who has no direct relationship in handling cash or preparing sales & account receivables

It encourage a response from customers if the balance is improperly stated

AUD390 AUDITING DIA

Internal Verification Procedures Use of computer programs or independent

persons for checking the processing and recording of sales transactions

E.g.Accounting for the numerical sequence of

prenumbered documentsChecking the accuracy of document

preparationReceiving reports for unusual or incorrect

items

AUD390 AUDITING DIA

AUDIT OF ACCOUNT RECEIVABLES

Using Tests of Details of Balance1. Recorded Acc Receivables exist2. Existing Acc Receivables are included3. Acc Receivables are accurate4. Acc Receivables are properly classified5. Cutoff for Acc Receivables is correct6. Acc Receivables is stated at realizable value7. The client has rights to Acc Receivable8. Acc Receivable presentation & disclosure are

proper

AUD390 AUDITING DIA

Recorded Account Receivables Exist

Determine the existence of A.R. amount through confirmation with customers

ISA505 External Confirmation provides guideline to auditors in using confirmation letter as a method to obtain audit evidence

In using confirmation, auditor must decideType of confirmation (positive, negative or blank confirmation)

Timing of the procedures (when to request the information)

Sample size Individual items to select

AUD390 AUDITING DIA

Existing Account Receivables Are Included

By footing the A.R. trial balance & reconciling the balance with the control account in the general ledger

AUD390 AUDITING DIA

Account Receivables Are Accurate

Tests of the debit & credit to individual customers’ balances are done by examining supporting documentation for shipments & cash receipts

AUD390 AUDITING DIA

Account Receivables Are Properly Classified

Review aged trial balance to ensure A.R. is properly classifies under current assets

AUD390 AUDITING DIA

Cutoff For Account Receivables Is Correct

To verify whether transactions near the end of accounting period are recorded in the proper period

Example: checking the intentional or unintentional inclusion of several large and subsequent period sales in the current period

AUD390 AUDITING DIA

Account Receivables Is Stated At Realizable Value

To evaluate the account allowance for uncollectible accounts

AUD390 AUDITING DIA

The Client Has Rights To Account Receivable

Not the issue since A.R. usually belong to the customer

Audit procedures involved: Review of minutes Discussion with the client Confirmation with bank Examination of debts contract for evidence of

AR pledged as collateral

AUD390 AUDITING DIA

Account Receivable Presentation & Disclosure Are Proper

According to generally accepted accounting principles & presentation and disclosure requirements

AUD390 AUDITING DIA

GROUP DISCUSSION

AUD390 AUDITING DIA