Transcript AUDITING THE REVENUE PROCESS - UAH

AUDITING
THE REVENUE PROCESS
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Major Processes in the
Sales & Collections Cycle
• Sale of goods and services (Revenue)
• Payments received for goods and services
(Collection)
• Goods returned by and claims received from
customers (Returns)
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Steps in the Revenue Process
1. Receiving customer orders
2. Authorizing credit terms and shipment
3. Confirming orders
4. Executing orders
5. Recording the shipments or services
performed
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Steps in the Revenue Process (Cont.)
1.Receiving customer orders
• Computer controls:
• Customer checks
• Valid customer number
• Self-check algorithm
• Field checks
• Key characteristics
• Completeness of required fields
• Reasonableness checks
• Order quantities
• Product combinations
• Clear procedures for resolving computer red flags
• Periodic reports on Open Orders
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Steps in the Revenue Process (Cont.)
2. Authorizing credit terms and shipment
• Computer controls
• Credit check for repeat customers
• Inventory availability
• Credit review for new customers
• Credit worthiness
• Existence
• Separation of Credit & Sales Departments
• When approved a Sales Order is produced
• Prenumbered and controlled
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Steps in the Revenue Process (Cont.)
3. Confirming orders
• Customer verification of sales order accuracy
• Items
• Quantities
• Price
• Confirm shipping date
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Steps in the Revenue Process (Cont.)
4.
Executing orders
•
Assembling goods for shipment
• Picking list (sales order)
• Verify items picked and update inventory
• Move items to shipping dock
•
Ship ordered goods
• Packing slip (sales order)
• Verify items packed (agree picking & sales order)
• Shipping report and bill of lading
• Prenumbered and controlled
• Periodic reports on Open Shipments
•
Separation of Warehousing & Shipping
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Steps in the Revenue Process (Cont.)
5. Bill the customer and record the sale
• Agree information on and existence of
customer order, sales order, and shipping
report.
• Prepare a Sales Invoice
• Prenumbered and controlled
• Computer controls
• Send sales invoice to customer
• Investigation of missing or repeated document
numbers
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Understanding the Entity & Its Environment
1. Develop an expectation concerning total revenues and
gross margin based on general economy, competitive
environment, and market position.
2. Identify and understand difficult revenue recognition
issues:
• Long-term construction/contracts
• Bundled services/revenues
• Potential for unearned revenue and collection
difficulties
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Inherent Risks
1. General incentive to overstate revenues and
receivables
2. High volume of transactions
3. Efforts to increase customer value, may increase
accounting complexity:
• Bundled services
• Rights of return
• Financing options
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Entity-Level Controls
Control Environment:
1. Integrity & Ethical Values
2. Management Aggression
• Revenue and profit centered incentives
• Revenue recognition policies
3. Competence and Commitment
• Various control responsibilities
• Accounting personnel
• Audit committee/BOD
Risk Assessment:
1. What has been identified and what actions have been taken?
• Changes to the environment (Competition, Regulation, Reporting Req.)?
• Additional monitoring, training, incentives, or reports?
Monitoring:
1. Verify that monitoring activities are operating effectively.
2. Consider any problems uncovered that could impact the audit of revenues:
• Billing errors
• Regulatory inquiry
• Actions to address previous auditor concerns
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Auditor Objectives
Transaction Objectives
• Occurrence: Recorded sales represent goods shipped during the period.
• Completeness: All sales made during the period were recorded.
• Accuracy: All sales are accurately valued using GAAP and correctly journalized, summarized,
and posted.
• Cutoff: All sales have been recorded in the correct accounting period.
• Classification: All sales have been recorded in the proper accounts.
Balance Objectives:
• Existence: Accounts receivable represents amounts owed by customers on the balance sheet
date.
• Completeness: Accounts receivable includes all claims on customers at the balance sheet date.
• Rights & Obligations: Accounts receivable at the balance sheet date represents legal claims of
the entity on customers for payment.
• Valuation & Allocation: Accounts receivable represent gross claims on customers at the balance
sheet date, and agrees with the sum of the accounts receivable subsidiary ledger.
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Potential Misstatements
Transaction Objectives
Occurrence: (Overstatement)
A single sales invoice recorded twice or a cancelled sales invoice recorded.
Fictitious customer and sale recorded.
Shipments without the consent and agreement of the customer.
The earnings process is not complete:
• Recording a sale before shipment or other prerequisites of being earned.
• Unearned revenue recorded as earned.
– The amount may not be realizable:
• Substantial uncertainty exists about collectibility.
• Customer obligations are contingent on other actions (financing, resale, etc.).
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• Completeness: (Understatement)
– Shipped orders have not been billed and recorded.
• Accuracy:
– Transactions are recorded for incorrect amounts (Over- and Understatements).
• Cutoff:
– Books left open too long (Overstatement) or closed too early (Understatement).
• Classification:
– Transactions are recorded in incorrect accounts (Over- and Understatements).
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Objectives & Controls Activities
Transaction Objectives
• Occurrence:
– Sales invoice sequencing (double entry)
– Customer validity check (not fictitious)
– Authorized customer order and shipping document (not fictitious & earning process complete)
– Credit check (collectibility)
• Completeness:
– Prenumbered and controlled documents
• Accuracy:
– Computer input controls
– Authorized customer order and shipping document (independent agreement)
• Are there any special financing arrangements or rights of return?
– Posting and updating of accounts done automatically through computer technology
• What are the control procedures for cancelled orders?
• Cutoff:
– Prenumbered
and are
controlled
documents
• How likely
unearned
revenues, and what are the client’s control
– Periodic
review of Open
files liabilities?
procedures
for these
• Classification:
– Computer input controls
What did we miss?
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Tests of Controls & Tests of Transactions
Transaction
Objective
Test of Control
Substantive Tests
Occurrence
Computer-assisted auditing techniques
(CAATs)
Examine Sales Invoice packets for
supporting documentation
Review sequence of sales invoices
Review journal for unusual transactions
Vouch from the sales journal to the
supporting documents
Completeness
Account for sequence of shipping
documents
Observe and review evidence for
document control
Trace from the shipping documents to the
sales journal
Accuracy
CAATs
Confirm agreement between supporting
documentation sources
Recalculate prices and extensions on sales
invoice
Trace a few transactions from inception to
completion
Cutoff
Account for sequence of supporting
documents.
Confirm period reviews of open files
Analyze Sales Invoices and Shipping
Documents close to year end to confirm
appropriate recording
CAATs
Trace transactions from Sales Invoice to the
Sales Journal, verifying appropriate
classification
Classification
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Analytical Procedures & Tests of Balances
Transaction
Objective
Existence
Analytical Procedures
• Compare gross margins w/ prior years
• Consider monthly sales over time
• Compare A/R turnover w/prior years
Substantive Tests
• Review subsidiary ledger for unusual
amounts
• Confirm receivables
• Alternative procedures
Completeness
• Trace from the A/R master to the aging
schedule
Rights &
Obligations
N/A
• Review BOD minutes for A/R pledging or
factoring
• Review material sales contracts for terms
and conditions
• Inquire of management
Valuation &
Allocation
• Compare bad debts to prior years
• Compare allowance account to prior
years
• Compare A/R turnover w/ prior years
• Compare amounts in aging categories w/
prior years
• Inquire as to likelihood of collection for
older accounts
• Assess appropriateness based on
independent estimates and other
knowledge obtained regarding collection
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Questions?
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