Essay Audit Ch

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AUDITING
A RISK-BASED APPROACH TO
CONDUCTING A QUALITY AUDIT
9th Edition
Karla M. Johnstone | Audrey A. Gramling | Larry E. Rittenberg

CHAPTER 9
AUDITING THE REVENUE CYCLE

Copyright © 2014 South-Western/Cengage Learning

LEARNING OBJECTIVES
Understand the audit of:

1.
•
•
•

Sales/Revenue
A/R
AfDA

9-2
Copyright © 2014 South-Western/Cengage Learning

REVENUE CYCLE
• Process of:
•
•
•
•
•
•
•

Receiving a customer’s order
Approving credit for a sale
Determining whether goods are available for shipment
Shipping the goods
Billing the customers
Collecting cash
Recognizing effect of this process on other related accounts 9-3
Copyright © 2014 South-Western/Cengage Learning

REVENUE CYCLE
• Significant accounts include sales (revenue) and accounts receivable
• Other accounts in the cycle include:
•
•
•
•

Cash
Allowance for doubtful accounts
Bad debt expense
Sales discounts / returns / allowances

9-4
Copyright © 2014 South-Western/Cengage Learning

AUDIT OF SALES
• Assertions:
• Occurrence
• Presentation and Disclosure

• Risk of Misstatement: Moderate to High
• Always a fraud risk factor
•
•
•
•

Fictitious Sales
Cutoff
Bill and Hold
Channel Stuffing
9-5
Copyright © 2014 South-Western/Cengage Learning

AUDIT OF SALES (CONT.)
• Activities:
• Obtain orders, Fulfill orders, Invoice orders

• You cannot audit sales until you know how and when your client should record sales/revenue

9-6
Copyright © 2014 South-Western/Cengage Learning

CRITERIA FOR REVENUE RECOGNITION
• As per SEC (SAB 101/104) following criteria should be met in applying the concept
• Persuasive evidence of an arrangement exists
• Delivery has occurred or services have been rendered
• Takes title of ownership
• Assumes risks and rewards of ownership
• The seller’s price to the buyer is fixed or determinable
• Collectibility is reasonably assured

9-7
Copyright © 2014 South-Western/Cengage Learning

CONTROLS OVER SALES
• Key Controls:
• 3-way Match
• Sales order, shipping documents, invoice

•
•
•
•
•
•

Pre-numbered documents
Separation of duties
Restrict access to invoice generation
Proper dating
Sales made from authorized price lists
Policies and procedures for identifying and recording returned goods
9-8
Copyright © 2014 South-Western/Cengage Learning

EXHIBIT 9.8 - PANEL B: APPROACHES TO OBTAINING
AUDIT EVIDENCE FOR COMPLETENESS OF REVENUE

9-9
Copyright © 2014 South-Western/Cengage Learning

OBTAINING SUBSTANTIVE EVIDENCE
OVER SALES/REVENUE
• Substantive tests are performed to provide evidence that: •
•
•
•
•

Substantive Analytical Procedure
Sales cutoff testwork
Vouch sales transactions
A/R testwork
Review after year-end returns / allowances

9-10
Copyright © 2014 South-Western/Cengage Learning

REVENUE - SUBSTANTIVE ANALYTICAL
PROCEDURES
• Perform reasonableness test or regression analysis
• If expectations
• Differ significantly - Follow up with sufficient appropriate tests of details
• Typically consisting of selecting a sample of sales transactions and vouching to appropriate source documents • Do not differ significantly - Reduce tests of details

9-11
Copyright © 2014 South-Western/Cengage Learning

REVENUE - CUTOFF ISSUES
• Additional audit attention given to sales transactions recorded before and after year end
• Whether a recorded revenue transaction actually occurred before end of accounting period

9-12
Copyright © 2014 South-Western/Cengage Learning

REVENUE - CUTOFF ISSUES
• Following items examined to determine whether proper cutoff of sales and sales returns has been achieved 9-13
Copyright © 2014 South-Western/Cengage Learning

SALES CUTOFF TESTWORK
• Consists of obtaining the sales journals for the months of
December (current year audit) and January (next year); presuming calendar year-end.
• Select a random sample of sales transactions from each sales journal • Focusing on the sales made on the last 15 days of the current year and the first 15 days of next year

• Tie sales to detail (Order, Shipment, and Shipping terms)
•
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