Chapter 9 Auditing Revenue and Related Accounts Introduction

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Chapter 9 Auditing Revenue and Related Accounts

Chapter 9 Auditing Revenue and Related Accounts

Introduction Financial transactions processing cycles • Revenue • Acquisition/payment • Payroll • Financing •

Introduction Financial transactions processing cycles • Revenue • Acquisition/payment • Payroll • Financing • Cash and short-term investments

Overview of Revenue Cycle Internal Control Objectives The Revenue Accounting System • Receive a

Overview of Revenue Cycle Internal Control Objectives The Revenue Accounting System • Receive a customer purchase order • Check inventory stock status • Generate back order • Obtain credit approval • Prepare shipping and packing documents • Ship and verify shipment of goods • Prepare the invoice. • Send monthly statements to customers • Receive payments

Assessment of Environment Risk Audit steps: • update info on business risk • understanding

Assessment of Environment Risk Audit steps: • update info on business risk • understanding of internal controls • document accounting applications • preliminary assessment of environment risk • if control risk at maximum; determine types of likely misstatements • develop procedures to lower control risk • perform audit tests, and modify control risk if justified.

Inherent Risk Improper Revenue Recognition Schemes • Recognition of revenue on shipments that never

Inherent Risk Improper Revenue Recognition Schemes • Recognition of revenue on shipments that never occurred. • Hidden “side letters” allowing returns. • Consignment sales shown as final sales. • Shipment of unfinished products. • Shipment of product before customers agreed to delivery.

Inherent Risks: Sales Transactions Difficult Audit Issues ûWhen to recognize revenue. ûImpact of unusual

Inherent Risks: Sales Transactions Difficult Audit Issues ûWhen to recognize revenue. ûImpact of unusual terms of sale. ûAll goods sold were shipped. ûHandling of recourse sales.

The Control Environment: Effect on Sales Focus On: • Integrity of management • Financial

The Control Environment: Effect on Sales Focus On: • Integrity of management • Financial condition of the organization • Financial pressures facing the organization • Management incentives to achieve various financial goals

The Control Environment: Effect on Sales Sources of useful information in evaluating control environment:

The Control Environment: Effect on Sales Sources of useful information in evaluating control environment: • Financial press articles • Trade journal articles • Industry growth statistics • Preliminary analytical procedures

Understanding Internal Controls Walk-through of the processing. Inquiry. Observation. Review of the client’s system

Understanding Internal Controls Walk-through of the processing. Inquiry. Observation. Review of the client’s system documentation. MUST DOCUMENT IN WORKING PAPERS.

Developing an Understanding Existence/Occurrence Completeness Rights/Obligations Valuation Presentation and Disclosure Maintaining Accounting Integrity

Developing an Understanding Existence/Occurrence Completeness Rights/Obligations Valuation Presentation and Disclosure Maintaining Accounting Integrity

Evaluating Control Risk Monitoring Controls. Control Structure Regarding Returns, Allowances, and Warranties. Importance of

Evaluating Control Risk Monitoring Controls. Control Structure Regarding Returns, Allowances, and Warranties. Importance of Credit Policies Authorizing Sales.

Assessing & Documenting Environment Risk Testing for the Operating Effectiveness of Control Procedures. Reassessment

Assessing & Documenting Environment Risk Testing for the Operating Effectiveness of Control Procedures. Reassessment of Control Risk. Linking Environment Risk Assessment and Substantive Testing.

Substantive Testing in the Revenue Cycle Planning for Direct Tests of Account Balances. •

Substantive Testing in the Revenue Cycle Planning for Direct Tests of Account Balances. • Account balance relationships. • Risk of material misstatement. • Makeup of the account balance. • Persuasiveness of procedures. • Cost of the procedures. • Timing of procedures. • Determining optimal mix of audit procedures.

Audit Objectives and Assertions • Existence and Occurrence. • Completeness. • Valuation. • Rights

Audit Objectives and Assertions • Existence and Occurrence. • Completeness. • Valuation. • Rights and Obligations. • Presentation and Disclosure.

Standard Accounts Receivable Audit Procedures • Aging accounts receivable. • Confirming receivables with customers.

Standard Accounts Receivable Audit Procedures • Aging accounts receivable. • Confirming receivables with customers. • Related-party receivables • Cutoff tests • Non-current receivables • Adjusting audit program to the environment. • Confirmation of sales.

Confirmations • When required. • Types of confirmations. • As audit evidence. • Accuracy

Confirmations • When required. • Types of confirmations. • As audit evidence. • Accuracy and security of process. • Sample selection. • Sampling unit. • Undeliverable confirmations.

Confirmations (cont. ) • Follow-up to non-responses: Positive confirmations • Alternative Procedures: Subsequent collection.

Confirmations (cont. ) • Follow-up to non-responses: Positive confirmations • Alternative Procedures: Subsequent collection. Supporting documentation. • Follow-up to non-responses. • Follow-up procedures: exceptions noted. • Interim date confirmations.

Confirmations (cont. ) • Summarizing Confirmation Work • Related Party Receivables. • Cutoff Tests.

Confirmations (cont. ) • Summarizing Confirmation Work • Related Party Receivables. • Cutoff Tests. • Noncurrent Receivables. • Sold, Discounted, and Pledged Receivables. • Adjusted Audit Program to the Environment.

Allowance for Doubtful Accounts • Review and test the process. • Develop an independent

Allowance for Doubtful Accounts • Review and test the process. • Develop an independent model. • Review subsequent events or transactions. • Write-offs.

Analytical Procedures • Ratio Analysis • Trend Analysis • Reasonableness Tests Notes Receivable

Analytical Procedures • Ratio Analysis • Trend Analysis • Reasonableness Tests Notes Receivable

Chapter 10 Auditing Revenue and Related Accounts RevenueChapter 10 Auditing Revenue and Related Accounts Revenue
Chapter 9 Auditing the Revenue Cycle IT AuditingChapter 9 Auditing the Revenue Cycle IT Auditing
AUDITING 10 1 Auditing AAAs Definition Auditing isAUDITING 10 1 Auditing AAAs Definition Auditing is
ETHICS IN AUDITING AUDITING FUNCTION Ethics in AuditingETHICS IN AUDITING AUDITING FUNCTION Ethics in Auditing
CHAPTER FOUR REVENUE AND EXPENSE ACCOUNTS 3 REVENUECHAPTER FOUR REVENUE AND EXPENSE ACCOUNTS 3 REVENUE
DEPARTMENTAL ACCOUNTS Introduction Departmental accounts are accounts relatingDEPARTMENTAL ACCOUNTS Introduction Departmental accounts are accounts relating
Business Revenues Total revenue Average revenue Marginal revenueBusiness Revenues Total revenue Average revenue Marginal revenue
PUBLIC REVENUE SOURCES OF PUBLIC REVENUE Public RevenuePUBLIC REVENUE SOURCES OF PUBLIC REVENUE Public Revenue
National accounts Environmental accounts Economywide Material Flow AccountsNational accounts Environmental accounts Economywide Material Flow Accounts
National accounts Environmental accounts Economywide Material Flow AccountsNational accounts Environmental accounts Economywide Material Flow Accounts
Company Accounts Final Accounts 1 Final Accounts OFCompany Accounts Final Accounts 1 Final Accounts OF
Chapter 11 THE REVENUE CYCLE Introduction Revenue cycleChapter 11 THE REVENUE CYCLE Introduction Revenue cycle
Chapter 1 Auditing and Internal Control IT AuditingChapter 1 Auditing and Internal Control IT Auditing
Chapter 16 Auditing Information Technology What is auditingChapter 16 Auditing Information Technology What is auditing
Chapter 10 Auditing the Expenditure Cycle IT AuditingChapter 10 Auditing the Expenditure Cycle IT Auditing
Chapter 1 Importance of Auditing Define Auditing AChapter 1 Importance of Auditing Define Auditing A
CHAPTER 11 Auditing ComputerBased Information Systems AUDITING ProsesCHAPTER 11 Auditing ComputerBased Information Systems AUDITING Proses
Chapter 21 Auditing Overview What is auditing WhatChapter 21 Auditing Overview What is auditing What
Chapter Auditing Information 2 Technology What is auditingChapter Auditing Information 2 Technology What is auditing