Modern Auditing:Assurance Services and the Integrity of Financial Reporting, 8th EditionWilliam C. BoyntonCalifornia Polytechnic State University at San Luis ObispoRaymond N. JohnsonPortland State UniversityChapter 14 Auditing the Revenue Cycle

Chapter Overview

The Revenue Cycle

Develop Audit Objectives

Inherent Risk, Including the Risk of FraudManagement Misstatement of RevenueOverstate revenuesOverstate cash and gross receivablesUnderstate allowance for doubtful accounts

Other Misstatement FactorsOpportunities for errorTimingMisclassificationAdjustment transactions

Analytical Procedures

Consideration of Internal Control ComponentsControl Environment

Risk Assessment

Information and Communication

Monitoring

Initial Assessments of Control Risk

Study BreakThe revenue cycle includes all of the following transactions, except:Credit SalesCash ReceiptInventory PurchaseSales Returns and Allowances

C. Inventory Purchase

Study BreakThis internal control component should provide management with feedback as to whether internal controls pertaining to revenue cycle transactions and balances are operating as intended.MonitoringInitial Assessments of Control RiskInformation and CommunicationControl Environment

A. Monitoring

Control Activities for Credit Sales TransactionsCredit Sales OrdersOver-the-CounterMail OrderInternet

Computerized Accounting SystemGeneral ControlsApplication Controls

Common Documents and RecordsCustomer Order

Sales Order

Shipping DocumentBill of LadingPacking Slip

Sales Invoice

Authorized Price List

Common Documents and RecordsSales Transactions File

Sales Journal

Customer Master File

Accounts Receivable Master FileAccounts receivable subsidiary ledger

Customer Monthly Statement

Function and Control ActivitiesAuthorizing SalesAccepting Customer OrdersApproving Credit

Delivery of Goods and ServicesFilling Sales OrdersShipping Sales Orders

Recording Sales

System Flowchart Credit Sales

System Flowchart Credit Sales

System Flowchart Credit Sales

Study BreakThis document is a journal listing of the completed sales transactions.Sales invoiceSales transactions filesAuthorized price listSales journal

D. Sales journal

Study BreakThis document shows the description, quantity, and other data pertaining to a customer order.Customer orderSales orderShipping documentSales invoice

B. Sales order

Cash Receipts Transactions Common Documents and RecordsRemittance Advice

Prelist

Cash Count Sheets

Daily Cash Summary

Validated Deposit Slip

Cash Receipts Transactions File

Cash Receipts Journal

Cash Receipts Transactions - FunctionsReceiving Cash ReceiptsOver-the-Counter ReceiptsMail Receipts

Depositing Cash in BankDeposited intact daily

Recording the Receipts

Sales Adjustment Transactions Common Documents and RecordsSales return authorization

Authorization for accounts receivable write-off

Receiving report

Credit memo

Journal entry

Cash Receipts journal

Sales Adjustment Functions and ControlsGranting Cash Discounts

Granting Sales Returns and Allowances

Determining Uncollectible Accounts

Other Controls

Tests of Controls

Study BreakThis cash receipts transaction document is a listing of cash receipts received through the mail.Remittance advicePrelistDaily cash summaryValidated deposit slip

B. Prelist

Study BreakAll of the following are sales adjustment functions, except:Granting cash discountsDetermining uncollectible accountsRecording the cash receiptsGranting sales returns and allowances

C. Recording the cash receipts

Substantive Tests of Accounts ReceivableDetermining Detection Risk for Tests of DetailsExistence and Occurrence

Completeness

Rights and Obligations

Valuation and Allocation

Presentation and Disclosure

Designing Substantive TestsInitial Procedures

Analytical Procedures

Designing Substantive TestsTests of Details of TransactionsVouch Revenue Transactions

Trace Revenue Transactions

Perform Cutoff TestsSales Cutoff TestsSales Return Cutoff Tests

Perform Cash Receipts Cutoff Test

Designing Substantive TestsTests of Details of BalancesConfirm Receivables

Forms of ConfirmationPositive ConfirmationNegative Confirmation

Timing and Extent of Requests

Controlling the Requests

Designing Substantive TestsTests of Details of BalancesDisposition of Exceptions

Alternative Procedures for Dealing with Nonresponses

Summarizing and Evaluating Results

Applicability to Assertions

Designing Substantive TestsTests of Details of Accounting EstimatesAllowance for Doubtful AccountsAged Trial Balance

Tests of Details of Disclosures

Study BreakThis type of confirmation requires a debtor to respond only when the amount shown is incorrect.Positive ConfirmationNegative ConfirmationAvoidanceExistence

B. Negative Confirmation

Study BreakThis cutoff test is designed to obtain reasonable assurance that cash receipts are recorded in the accounting period in which received.Sales cutoff testSales return cutoff testVouching revenue transactionsCash receipts cutoff test

D. Cash receipts cutoff test