Transcript Chapter 9: Auditing the Revenue Cycle

Chapter 9:
Auditing the Revenue Cycle
IT Auditing & Assurance, 2e, Hall &
IT Auditing & Assurance,
2e, Hall & Singleton
Singleton
MANUAL PROCEDURES
 Follow Figure 9-1
Obtaining & recording customers’
orders
 Document = SALES ORDER [Figure 9-2]
 One copy in “Open Order File”
 Approving credit
 One copy of sales order went to credit
dept.
 Returned authorized copy triggers
release of sales order into system
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MANUAL PROCEDURES
 Processing shipping orders
 4 copies of Sales Order to warehouse; packing slip,
shipping notice, stock release, file copy
 Locate and “pick” goods using Stock Release; package
them with packing slip
 Reconcile documents and goods, sign Shipping Notice,
prepare Bill of Lading – multiple copies [Figure 9-3]
 Transfer custody of goods (packing slip inside) and 2
copies of Bill of Lading to carrier
 Record shipment in shipping log
 Send shipping notice to Billing Dept.
 File: Stock Release, 1 BOL, File Copy
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LEGACY SYSTEM PROCEDURES
 Keypunch batch of shipping notices
 Edit run program, correct any errors
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Field checks
Limit tests
Range tests
Price times quantity extensions
 Sort run on batches by AR account number
 Legacy systems store records in sequential manner,
usually tape
 Next process is to “post” individual shipping notices to
appropriate individual AR accounts
 AR update & billing run [Figure 9-4]
Updates AR file becomes new AR file
 Billing would be printing invoices to be mailed
 Sales journal file or printout
 Journal voucher for AR [DR] and sales [CR]
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LEGACY SYSTEM PROCEDURES
 Re-sort by inventory item {why?}
 Same reason; but this process is to update Inventory
Items
 Inventory update run [Figure 9-5]
 Reduce quantity on hand for items shipped, generate a
new Inventory file
 Compare “On Hand” quantity with “Reorder Point” to
identify items needing replenishment; file or printout
 Journal voucher for Cost of Goods Sold [DR] and
Inventory [CR]
 Sort journal entries by GL #
 Run general ledger update
 Management reports
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BATCH CASH RECEIPTS SYSTEMS
WITH DIRECT ACCESS FILES
 See Figure 9-6
 Discrete events that naturally fit the batch
approach
 Update Procedures
 Mail Room
Receives checks and Remittance Advices.
Separates checks from Remittance Advices
Prepares a Remittance List – multiple copies
Copy of Remittance List and checks go to Cash
Receipts Dept.
Remittance Advices and copy of Remittance List go
to AR Dept.
Last copy of Remittance List to Controller’s Office
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BATCH CASH RECEIPTS SYSTEMS
WITH DIRECT ACCESS FILES
 Cash receipts dept.
 Reconciles checks and remittance list
 Prepares deposit slip – multiple copies
 Using terminal/IS, creates a journal
voucher of cash received; Cash [DR] and
AR [CR]
 End of day, deposit cash and Deposit
slips to the bank
 File copy of deposit slip
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BATCH CASH RECEIPTS SYSTEMS
WITH DIRECT ACCESS FILES
 AR Dept.
 Reconciles remittance advices and
remittance list
 Prepares batch for transactions
based on remittance advice data to
update AR subsidiary ledger
 Files remittance advices and
remittance list
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BATCH CASH RECEIPTS SYSTEMS
WITH DIRECT ACCESS FILES
 DP Dept.
 Accesses the two files created in cash receipts (journal
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voucher) and AR (batch transaction file of CR)
Reconciles the files
Updates AR-SUB accounts
Updates GL (AR, Cash)
Creates a cash receipts journal
System produces transaction listing that is sent to AR
dept. where AR clerk will reconcile against the
remittance list of file there
More management reports
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REAL-TIME SALES ORDER ENTRY
AND CASH RECEIPTS
 See Figure 9-7
 Sales procedures
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Transactions are processed as they occur, separately
Credit check is performed online by the system
If approved, system checks availability of inventory
If available, system:
Transmits electronic stock release to warehouse
dept
 Transmits electronic packing slip to shipping dept
 Updates inventory file records for depletion
 Records sale in open sales order computer file
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REAL-TIME SALES ORDER ENTRY
AND CASH RECEIPTS
 Warehouse procedures
 Produces hard copy of stock release
 Clerk picks goods, sends them with a copy of stock
release to shipping dept.
 Shipping procedures
 Reconciles goods, stock release, packing slip from
system.
 Online, IS prepares Bill of Lading for shipment, and
shipping notice for DP Dept.
 Select carrier and prepare goods for shipment, along
with packing slip and Bill of Lading
 Stock release form is filed
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REAL-TIME SALES ORDER ENTRY
AND CASH RECEIPTS
 Billing procedures
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Record sales invoice and shipment in IS
Print invoice to be sent to customer
Update shipping log and sale invoice files
Delete shipment from open sales order file
 Cash receipts procedures
 Keypunch cash receipts using the remittance advice
into IS,matching it with the specific record in the sales
invoice file
 Keypunch any credit memos using similar process
 Generate a remittance file of posted transactions
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FEATURES OF REAL-TIME
PROCESSING
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Events Database
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Traditional accounting does not have to exist in per se (in
traditional form)
General Ledger can be derived at any time from a compilation from
the events database
Advantages
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Greatly shortens the cash cycle of the firm
Can give a firm a competitive advantage (e.g., managing inventory
better)
Real-time editing permits the identification of many kinds of errors
as they occur, greatly reducing the efficiency and effectiveness of
business processes
Reduces the amount of paper documents
Electronic audit trails are possible in real-time computer-based
systems
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MANAGEMENT ASSERTIONS AND
REVENUE CYCLE AUDIT OBJECTIVES
 Existence / Occurrence
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VERIFY AR balance represents amounts actually owed as of Balance Sheet date
Establish sales represents goods shipped and/or services rendered during period of
financials
 Completeness
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Determine all amounts owed organization are included in AR
VERIFY shipped goods, services rendered, and/or returns and allowances for period
are included in financials
 Accuracy
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VERIFY revenue transactions are accurately computed, based on correct prices and
quantities
 Ensure AR subsidiary ledger, sales invoice file, remittance file are mathematically
correct .. And agree with GL accounts
 Rights & Obligations
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Determine organization has legal right to AR
VERIFY accounts sold or factored have been removed from AR
 Valuation or Allocation
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Determine AR balance stated in net realizable value
Establish allocation for uncollectible accounts is appropriate
 Presentation and Disclosure
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VERIFY AR and revenues for period are properly described and classified
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INPUT CONTROLS
 Purpose
 Ensure creditworthiness of customers
 Control techniques vary considerably between batch systems and
real-time systems
 Credit authorization procedures
 Credit worthiness of customer
 Batch and manual systems use credit dept.
 Real-time systems use programmed decision rules
 Testing credit procedures
 Verify effective procedures exist
 Verify information is adequately communicated
 Verify effectiveness of programmed decision rules (test data, ITF)
 Verify that authority for making credit decisions is limited to authorized
credit personnel/procedures
 Perform Substantive Tests of Detail
 Review credit policy periodically and revise as necessary
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INPUT CONTROLS
 Data Validation Controls
 To detect transcription errors in data as it is processed
 Batch: after shipment of goods
• Error logs
• Error correction computer processes
• Transaction resubmission procedures
 Real-Time: Errors handled as they occur
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Missing data checks – presence of blank fields
Numeric-Alphabetic data checks – correct form of data
Limit checks – value does not exceed max for the field
Range checks – data is within upper and lower limits
Validity checks – compare actual values against known acceptable values
Check digit – identify keystroke errors by testing internal validity
 Testing Data Validation Controls
 Verify controls exist and are functioning effectively
 Validation of program logic can be difficult
 If Controls over system development and maintenance are NOT weak, testing
data editing/programming logic more efficient than substantive tests of details
(test data, ITF)
 Some assurance can be gained through the testing of error lists and error logs
(detected errors only)
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INPUT CONTROLS
 Batch controls
 Manage high volumes of similar transactions
 Purpose: Reconcile output produced by system with the original
input
 Controls continue through all computer (data) processes
 Batch transmittal sheet:
 Unique batch number
 Batch date
 Transaction code
 Record count
 Batch control total (amount)
 Hast totals (e.g., account numbers)
 Testing data validation controls
 Failures of batch controls indicates data errors
 Involves reviewing transmittal records of batches processed and
reconcile them to the batch control log (batch transmittal sheet)
 Examine out-of-balance conditions and other errors to determine
cause of error
 Review and reconcile transaction listings, error logs, etc.
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PROCESS CONTROLS
 Computerized procedures for file updating
 Restricting access to data
 Techniques:
 File update controls -- Run-to-run batch control data to monitor
data processing steps
 Transaction code controls – to process different transactions using
different programming logic (e.g., transaction types)
 Sequence check controls – sequential files, proper sorting of
transaction files required
 Testing file update controls – results in errors
Testing data that contains errors (incorrect transaction codes, out
of sequence)
Can be performed in ITF or test data
CAATTs requires careful planning
Single audit procedure can be devised that performs all tests in
one operation.
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ACCESS CONTROLS
 Prevent and detect unauthorized and illegal access to
firm’s systems and/or assets
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Warehouse security
Depositing cash daily
Use safe deposit box, night box, lock cash drawers and safes
Accounting records
 Removal of an account from books
 Unauthorized shipments of goods using blank sales orders
 Removal of cash, covered by adjustments to cash account
 Theft of products/inventory, covered by adjustments to inventory or
cash accounts
 Testing access controls – heart of accounting information integrity
 Absence thereof allows manipulation of invoices (i.e., fraud)
 Access controls are system-wide and application-specific
 Access controls are dependent on effective controls in O/S, networks,
and databases
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PHYSICAL CONTROLS
 Segregation of duties
 Rule 1: Transaction authorization separate from
transaction processing
 Rule 2: Asset custody separate from record-keeping
tasks
 Rule 3: Organization structured such that fraud
requires collusion between two or more people
 Supervision
 Necessary for employees who perform incompatible
functions
 Compensates for inherent exposure from incompatible
functions
 Can be supplement when duties are properly
segregated
 Prevention vs. detection of fraud and crime is objective:
supervision can be effective preventive control
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PHYSICAL CONTROLS
 Independent verification
 Review the work of others at critical points in business processes
 Purpose: Identify errors or possible fraud
 Examples:
 Shipping dept. verifies goods sent from warehouse dept. are correct in
type and quantity
 Billing dept. reconciles shipping notice with sales notice to ensure
customers billed correctly
 Testing physical controls
 Review organizational structure for incompatible tasks
 Tasks normally segregated in manual systems get consolidated in
DP systems.
 Duties of design, maintenance, and operations for computers need
to be separated
 Programmers should not be responsible for subsequent program
changes.
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OUTPUT CONTROLS
 PURPOSE: Information is not lost, misdirected, or corrupted; that the
system output processes function properly
 Controls are designed to identify potential problems
 Reconciling GL to subsidiary ledgers
 Maintenance of the audit trail – that is the primary way to trace the source
of detected errors
 Details of transactions processed at intermediate points
 AR change report
 Transaction logs: permanent record of valid transactions
 Transaction listings – successfully posted transactions
 Log of automatic transactions
 Unique transaction identifiers
 Error listings
 Testing output controls
 Reviewing summary reports for accuracy, completeness,timeliness, and
relevance for decisions
 Trace sample transactions through audit trails; including transaction
listings, error logs, and logs of resubmitted records
 ACL is very helpful in this process
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SUBSTANTIVE TESTS OF REVENUE
CYCLE ACCOUNTS
 PURPOSE: Determine the nature, timing, and extent of substantive tests
using auditor’s assessment of inherent risk, unmitigated control risk,
materiality considerations, and efficiency of the audit.
 Concern: Overstatement or understatement of revenues?
 Focus on large and unusual transactions, especially near period-end
 Recognizing revenues from sales that did not occur
 Recognizing revenues BEFORE they are realized
 Failing to recognize cutoff points
 Underestimating allowance for doubtful accounts
 Shipping unsolicited products to customers, subsequently returned
 Billings customers for products held by seller
 Tests of controls and substantive tests
Credit limit logic may be effective but cut-off of AR may be error
Substantive testing of AR may give assurance about accuracy of
total AR but does not offer assurance about collectibility
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SUBSTANTIVE TESTS OF REVENUE
CYCLE ACCOUNTS
 Understanding data
 VERIFY data used in CAATTs (e.g., ACL) is accurate
 VERIFY adequate setup of files from originals
(e.g., ACL and Profilecommand)
 Relationships and data from [see Figure 9-10]:
Customer file
Sales Invoice file
Line item file
Inventory file
Shipping log file
 File preparation procedures
IT Auditing & Assurance, 2e, Hall & Singleton
SUBSTANTIVE TESTS OF REVENUE
CYCLE ACCOUNTS
Accuracy/completeness assertion
 Analytical review of account balances
Overall perspective for trends in sales, cash
receipts, sales returns, and AR
Provides first-level assurance that amounts are
reasonably stated and reasonably complete
If so, may reduce the extent of substantive testing
 Review sales invoices for unusual trends and
exceptions
Scanning data files using CAAT
(e.g., ACL and stratify and possibly filters - see
Figure 9-11)
• Reveals all errors or raises questions?
IT Auditing & Assurance, 2e, Hall & Singleton
SUBSTANTIVE TESTS OF REVENUE
CYCLE ACCOUNTS
 Accuracy/completeness assertion
 Review sales invoice and shipping log files
 Missing and duplicate transactions [see Table 9-2]
 Questions/survey:
• Are procedures in place to document and approve voided
invoices?
• How are gaps in sales invoice numbers communicated to
management?
• What physical controls exist over access to sales invoice source
documents?
• If applicable, are batch totals used to control batch transactions
during each processing step?
• Are transaction listings reconciled and reviewed by management?
 Review line item and inventory files for pricing accuracy
 ACL allows auditor to compare prices on invoices with inventory –
using JOIN [see example on page 413]
 Testing unmatched records (complement)
IT Auditing & Assurance, 2e, Hall & Singleton
SUBSTANTIVE TESTS OF REVENUE
CYCLE
ACCOUNTS
 Existence assertion
 Confirmation of AR – SAS #67
 Not required if:
• AR is immaterial
• Assessed Control Risk is low
• Confirmation process will be ineffective
 CAATTs to use for this function?
• Steps:
• Select accounts to confirm
• Consolidate invoices (not AR subsidiary) using CLASSIFY (filter) and
SUMMARIZE (amount) [see Tables 9-3 and 9-4]
• Why?
• JOIN the CUSTOMER file with the new consolidated invoice file
 Prepare confirmation requests [see Figure 9-12]
• Positive and Negative Confirmations (ACL, EXPORT)
 Evaluating and controlling responses
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Retain custody of the confirmation letters until mailed
The letters should be addressed to the auditor, not client org.
The replies should be mailed to the auditor, not client org.
Discrepancies should be investigated.
Non responses to POSITIVE confirmation should be investigated
IT Auditing & Assurance, 2e, Hall & Singleton
SUBSTANTIVE TESTS OF REVENUE
CYCLE ACCOUNTS
 Valuation/allocation assertion
 Corroborate or refute AR is stated at reasonable Net
Realizable Value
AGING AR
• ACL, AGE [see Table 9-7]
Is allowance for doubtful accounts reasonable compared to
prior years and based on composition of AR portfolio
• Confirmation process will be ineffective
Review past-due balances
• Conference with credit manager to determine collectibility
• Determine if methods used to estimate allowance for doubtful
accounts is adequate, not the collectibility of each account
• Determine if overall allowance is, therefore, reasonable
IT Auditing & Assurance, 2e, Hall & Singleton
Chapter 9:
Auditing the Revenue Cycle
IT Auditing & Assurance, 2e, Hall &
IT Auditing & Assurance,
Singleton 2e, Hall & Singleton